The Financial Supervisory Service (FSS) and Samsung BioLogics Co. clashed once again over accounting standards at a Securities & Futures Commission (SFC) meeting on Oct. 31.
The FSS tried to persuade SFC members with a changed logic but failed to convince them. As a result, the SFC decided to reach a conclusion on the prolonged dispute on Nov. 14.
Previously, the FSS argued that Samsung BioLogics should have treated Samsung Bioepis as a subsidiary. However, it has changed its stance this time arguing that Samsung BioLogics should have treated Samsung Bioepis as an affiliate from the beginning. The point of the FSS’ logic is that there are no grounds to change accounting standards whether Samsung BioLogic treated Samsung Bioepis either as a subsidiary or an affiliate.
In response, Samsung BioLogics emphasized that there is no problem with its accounting standards regardless of the FSS’ changed logic. The company argued that it was right to change the status of Samsung Bioepis from a subsidiary between 2012 and 2014 to an affiliate in 2015 as there were factors that justified such a change, including the Korean government's approval of biosimilars from Samsung Bioepis.
Samsung BioLogics’ argument is based on the equity structure at the time of the establishment of Samsung Bioepis. Samsung BioLogics suggested that U.S.-based Biogen Inc. makes a 50:50 equity investment to establish Samsung Bioepis. However, Biogen decided to set up the 15:85 joint venture with Samsung BioLogics in consideration of business risk. Since Biogen didn’t have an intention to co-manage the company, it was right to consider Samsung Bioepis as a subsidiary firm at the time of the contract, according to Samsung BioLogics. The fact that Biogen didn’t participate in the two paid-in capital increase in 2014 was also largely due to uncertainty of the bio business.
On the other hand, the FSS claims that it cannot gauge the control over the company simply with the equity structure alone. Moreover, the FSS argues that Samsung BioLogics have had to handle the accounting on Samsung Bioepis as an affiliated company instead of a subsidiary from 2012 because the Biogen’s stock value following the exercise of call option was higher than the cost for the call option. The claim is valid only when there is a strong conviction that the equity value would increase from the call option. However, there is a general consensus in the industry that this is realistically impossible considering the nature of the bio industry. Samsung BioLogics also stresses that it is hardly in the state of in-the-money from 2012 considering uncertainty of the bio business.
In addition, regarding to the conversion into an affiliated company in 2015, the FSS say that the success of one to two clinical trials and domestic marketing approval in 2015 are not so special and they have been continuously achieved in accordance with the initial business plan of the company. In this regard, Samsung BioLogics refutes that it shows how much the FSS cannot fully understand the nature of the bio industry.
The company also points out that there is a problem with the FSS’ change in logic. If Samsung Bioepis has been an affiliated firm from 2012 as the FSS claims, changing in accounting standards in 2015 is the correction of errors. Therefore, it is improper to consider it as intentional irregularities. This is why some say that the FSS will not be able to prove Samsung BioLogics’ intentionality by changing its logic while admitting Samsung Bioepis as an affiliated company from 2012. An official from the industry said, “The FSS changed its logic through the re-audit. According to this, it is hard to say it’s intentional because Samsung BioLogics actually corrected errors in 2015.”