Decision on Samsung BiolLogics Hinges on Interpretation of IFRS

Financial Services Commission (FSC) Chairman Choi Jong-ku said on May 18 that he would actively take the International Financial Reporting Standards (IFRS) into account at the second meeting of the Accounting Oversight Deliberation Committee (AODC) regarding the accounting fraud allegations against Samsung BioLogics.

“It has already been eight years since the IFRS was adopted in South Korea, but local companies still have a hard time adapting to it as they don’t fully understand the principle-centeredness of the IFRS,” Choi said at the Korean Institute of Certified Public Accountants (KICPA).

Referring to the upcoming AODC meeting on Samsung BioLogics, Choi said the FSC would refrain from judging that a company violated the law when its accounting details are not clear, in view of the principles-based nature of the IFRS.

Choi’s remark led many accounting experts to wonder what conclusion it would reach with regard to the allegations against Samsung BioLogics.

The scandal started when Samsung BioLogics changed its valuation method for Samsung Bioepis, a joint venture with US company Biogen. Three years ago, Samsung Bioepis’ biosimilar product was allowed to be sold, boosting its market value. Then, Samsung BioLogics judged that Biogen would exercise its call option as it would gain huge profits by doing so.

Samsung BioLogics then changed the status of Samsung Bioepis from a subsidiary to an affiliate as it would not have a full control over the joint venture. The status change allowed Samsung BioLogics to use a market value approach to assessing the value of Samsung Bioepis instead of a book value method. As a result, the enterprise value of Samsung Bioepis jumped, allowing Samsung BioLogics to post profits.

The status change for Samsung Bioepis was based on the fact that Biogen had the right to acquire 50% minus one Samsung Bioepis shares. This means if Biogen exercised its call option, neither of the two joint venture partners would have control over Samsung Bioepis, as the minimum shareholding required to make decisions is set at 52 percent.

Samsung Biologics notes that it violated no accounting principle at all in the course of changing the status of Samsung Bioepis. It says it fully reflected the views of major accounting firms and took into consideration the cases of other biotechnology companies including Celltrion and Lonza.

An accountant said that the FSC chairman’s remark could act in favor of Samsung BioLogics at the second AODC meeting, reminding that the company has consistently claimed that it had observed the IFRS. Another accountant, meanwhile, said that his remark was nothing but a theoretical explanation that the FSC would shift the focus of financial supervision from ex-post regulation to prior restraint.

The second AODC meeting takes place on March 25 on an adversarial basis. There, the Financial Supervisory Service and Samsung BioLogics are likely to have a heated argument over whether the latter observed the IFRS.