Finda's Deficit of 133.1 Billion vs 24.3 Billion, Reasons for the Difference [1mm Financial Talk]

Difference in Deficit Margin Due to Different Accounting Methods
Under K-IFRS, 'Redeemable Convertible Preferred Stock = Liability'
"Loss Increased Due to Valuation Gains/Losses and Interest Expenses"
Fintech Companies Improve Profitability with New Product Launches

A heated debate arose over the scale of losses at Finda, a loan brokerage fintech (finance + technology) company. The deficit gap widened by more than 100 billion KRW depending on how externally invested funds were accounted for. Even when evaluating the loss margin as smaller, there is an urgent need for profitability improvement measures such as launching new products and easing regulations. This is because various performance indicators have been declining amid a challenging market environment.

According to Finda’s audit report on the 15th, the company posted a net loss of 24.33326 billion KRW last year. About two weeks earlier, JB Financial Group announced Finda’s net loss as 133.124 billion KRW. JB Financial Group acquired shares in Finda last August for strategic partnership purposes and disclosed Finda’s summarized financial information through a business report on the 28th of last month.

The reason for the loss gap exceeding 100 billion KRW lies in the accounting treatment of investment funds. Since 2011, all listed companies and financial firms have adopted the Korean International Financial Reporting Standards (K-IFRS), and JB Financial Group also adopted K-IFRS. Finda, a fintech startup just beginning its business, still applies the Korean Generally Accepted Accounting Principles (K-GAAP). External investments raised in the form of Redeemable Convertible Preferred Shares (RCPS) are recorded as liabilities under the substance-over-form principle of K-IFRS, whereas under the form-over-substance principle of K-GAAP, they are recognized as equity. Redeemable Convertible Preferred Shares refer to preferred shares that have both the right to repayment (debt characteristic) and the right to convert into common shares (equity characteristic). A Finda official stated, “During the process of converting the K-GAAP format books received from Finda into K-IFRS, JB Financial Group re-evaluated the redeemable convertible preferred shares as liabilities.”

Actual capital and liability figures also showed differences between the two companies. According to Finda’s audit report, Finda’s capital and liabilities were 34.7 billion KRW and 6.5 billion KRW, respectively. In contrast, JB Financial Group’s business report evaluated Finda as a company with capital erosion (-90.9 billion KRW). Liabilities were recorded at about 133 billion KRW, roughly 20 times higher than Finda’s valuation.

If redeemable convertible preferred shares remain classified as liabilities, it results in a decrease in net income. Accountant Lee Gi-won explained, “When redeemable convertible preferred shares are converted into liabilities, a fair value assessment is conducted, and losses can be significant due to valuation gains or losses. Also, dividends on cumulative preferred shares are treated as interest expenses, so the amount is recorded as financial costs in the income statement.” Cumulative preferred shares are preferred shares where unpaid dividends accumulate over the years. Lee added, “Both companies’ accounting treatments have their rationale. However, since Finda is a startup without plans for listing yet, it would be reasonable to accept the performance calculated under K-GAAP.”

Even if the loss margin is viewed as around 20 billion KRW, the business environment is not entirely comfortable. Loan brokerage fintech companies, including Finda, have seen their businesses freeze as loan demand declined due to high interest rates. Finda’s revenue last year was 28.3 billion KRW, about 35% lower than 43.4 billion KRW in 2022. The situation is similar for financial holding subsidiaries. Fink, which mainly operates financial product brokerage services, posted revenue of 4.4 billion KRW last year, shrinking about 43% compared to 7.8 billion KRW in 2022.

These companies plan to improve profitability by launching new products within regulatory limits. Finda plans to introduce new remittance and transfer services after acquiring a comprehensive financial business license. Lee Hye-min, CEO of Finda, said, “We are also preparing AI-based data models and solutions as well as Banking as a Service (BaaS).” Fink announced it will launch digital seal certification and virtual asset wallets that do not require secret key storage this year.

If fintech-related regulations are eased within this year, the market situation is expected to improve compared to before. The Ministry of Economy and Finance recently expanded the number of foreign exchange service sectors that fintech can operate from three to five in its ‘Regulatory Innovation Plan for New Industries.’ Financial authorities such as the Financial Services Commission and the Financial Supervisory Service have also held ‘visiting financial regulatory sandbox’ meetings this year to listen to difficulties and discover demands for designation as innovative financial services.