The South Korean government announced a relaxed accounting guideline on R&D by pharmaceutical and biotech companies on September 19. The purpose of the new guideline is to accelerate the growth of local companies, which are small in size compared with their foreign counterparts.
At present, as many as 163 pharmaceutical and biotech companies are listed on the South Korean stock market, but most of them are small firms competing in the small domestic market. As of 2016, the South Korean drug market was 21 trillion won (US$18.9 billion) in size, equivalent to no more than 1.7% of the global market.
Capitalization criteria applied to such companies’ R&D costs, which are indispensable for new product release, have been unclear and excessively high. Under the circumstances, those companies have had a hard time managing uncertainties and risks. In this regard, the new guideline provides set stages allowing capitalization of R&D expenses.
With the new guidelines, the companies are expected to become free from at least some restriction risks. In addition, new measures in the guidelines related to cost measurement reliability enhancement are expected to help alleviate uncertainties. According to the guidelines, project-specific input costs should be reliably measured and only the portions directly related to development activities should be regarded as assets. When development and research expenses are mixed and cannot be distinguished with ease, the total should be regarded as expenses.
“Local pharmaceutical and biotech companies still have a hard time understanding and applying the principle-based IFRS and this is because they have produced generic drugs for a long time and accounting practices have solidified based on the situation,” the financial authorities explained, adding, “The same accounting methods are being used for recently started new drug development activities as well, yet no severe penalty will be given to those firms supervised from April in view of the special situation they are in.”
The companies are welcoming the news in that controversy surrounding R&D cost capitalization has been stopped. “The new guidelines and clear accounting standards that guarantee our autonomy to the maximum extent are expected to help us boost our global competitiveness,” said a local bio venture firm CEO, adding, “Also, the industry will be able to attract more investment beyond the recent accounting scandal involving Samsung BioLogics.”