FSS to Focus on Accounting for Investor Agreements and CB Issuance

#1. Company A entered into a shareholder agreement with Company B, which had acquired convertible preferred shares issued by A’s subsidiary, and granted a conditional put option that would allow B to require A to repurchase the convertible preferred shares in the event of a breach. However, this fact was omitted from the notes to the financial statements.

#2. Company C issued unsecured convertible bonds and, despite providing its deposits, shares, and other assets as collateral so that the bond subscribers could obtain acquisition funds from a savings bank, did not disclose this in the notes to the financial statements.

On June 23, the Financial Supervisory Service announced that, in order to prevent such accounting violations, it will focus on four key accounting issues during the 2025 financial statement review: accounting for investor agreements, accounting for the issuance and investment in convertible bonds (CB), disclosure of supplier financing agreements, and impairment of investments in subsidiaries and associates.

The Financial Supervisory Service annually announces in advance, every June, the accounting issues that will be the focus of review in the following year, so that companies and auditors can pay attention when preparing financial statements and conducting external audits. After the completion of the preparation and external audit of the 2025 financial statements, an intensive review of the selected accounting issues will be conducted in 2026.

First, the Financial Supervisory Service advised that when various covenants are attached to investment agreements with shareholders or creditors, companies must determine whether an obligation exists that requires classification as a financial liability and must fully disclose related details in the notes.

Additionally, regarding convertible bonds, the agency requested that companies pay special attention to accounting for derivatives in cases where call or put options are granted, and thoroughly disclose related-party transactions and collateral provisions in the notes. This measure takes into account cases where unfair trading entities have violated accounting standards while seeking illicit gains by using listed companies’ convertible bonds.

Furthermore, the Financial Supervisory Service emphasized that companies purchasing goods from multiple suppliers and utilizing supplier financing agreements must provide detailed note disclosures regarding the terms of such agreements and the related book amounts. Supplier financing agreements refer to cases where a company, purchasing goods from multiple suppliers, becomes a party to a financing arrangement for payment of transaction amounts and is highly involved. Specifically, bank usance letters of credit, procurement cards, purchase money loans, accounts receivable collateralized loans, purchase loans, and win-win payment systems may fall under this category.

Lastly, the Financial Supervisory Service urged companies to conduct thorough impairment reviews for subsidiaries and associates with deteriorating performance, such as ongoing net losses, by calculating recoverable amounts based on reasonable assumptions. It has been found that, in the past, there have been frequent cases where impairment indicators existed for subsidiaries or associates, but impairment reviews were not performed or were conducted without reasonable grounds, resulting in the understatement of losses.

A representative from the Financial Supervisory Service stated, "We plan to effectively guide companies and auditors so that they can clearly recognize the key accounting issues to be reviewed during the preparation and external audit of the 2025 financial statements," and added, "We urge companies and auditors to refer to the precautions for each accounting issue and diligently carry out the preparation and external audit of the 2025 financial statements."