Supporting Venture Investment Recovery... 'Impairment Loss Guidelines' Revised After 5 Years

Reflecting VC Industry Opinions
Applied from 2024 Financial Audits

The government has stipulated an exception to prevent the reduction of management fees when a company temporarily experiences capital impairment due to changes in accounting standards during the listing process.

Minister Oh Young-joo of the Ministry of SMEs and Startups is explaining the ministry's key policies at the 2024 Policy Direction Briefing held on the 11th at the Korea Federation of SMEs in Yeouido, Yeongdeungpo-gu, Seoul. Photo by Jo Yong-jun jun21@

On the 14th, the Ministry of SMEs and Startups announced that it has completely revised the "Impairment Loss Guidelines," which serve as the basis for calculating management fees for sub-funds of the Korea Fund of Funds, for the first time in five years. This guideline reflects industry opinions to enable venture capital (VC) to recover venture investments.

First, even if a company that received venture investment in the form of Redeemable Convertible Preferred Stock (RCPS) temporarily remains in a state of capital impairment, management fees will not be reduced. RCPS, a representative type of venture investment, is recognized as equity under the accounting standards (K-GAAP) applied to unlisted companies, but is recognized as a liability under the accounting standards (K-IFRS) applied to listed companies. Therefore, when a company that received venture investment through RCPS goes public, the change in accounting standards may temporarily increase liabilities, resulting in a state of capital impairment.

If a company with capital impairment has attracted significant follow-up investment, management fees will be restored based on the value of the follow-up investment. The investment balance, which serves as the basis for paying management fees, will be calculated using the follow-up investment price. Previously, the level of management fee recovery was uniformly defined as "net asset value × equity ratio," so even if there was follow-up investment considering future corporate value growth, only a minimal level of management fee recovery was achieved.

The criteria and timing for reducing and restoring management fees have been clarified. The previous guidelines were sometimes interpreted and applied differently by accounting firms, but the reduction and restoration criteria have been specified and the reflection timing set at the year-end.

In addition, the entire post-management system has been reorganized to operate transparently through close communication with private experts and the venture investment industry during the post-management phase of the Korea Fund of Funds. If there are objections to the management fee calculation results according to the guidelines or if interpretation is needed for matters not specified in the guidelines, objections can be filed through the "Korea Fund of Funds Post-Management Committee," composed of private experts.

The revised guidelines will be fully applied starting from the "2024 Korea Fund of Funds Sub-Fund Audit." For the 2023 audit, either the existing guidelines or the revised guidelines may be applied.

Lee Eun-cheong, Director of Venture Policy at the Ministry of SMEs and Startups, said, "Startups often temporarily fall into capital impairment during the process of aggressively pursuing research and development (R&D) and business expansion through investment attraction, even if they do not generate sales. If follow-up investments in such companies are reasonably reflected in venture capital management fees, it is expected that the venture capital industry will be able to invest more actively in startups."