South Korea’s financial regulators are planning to look into the financial statements of contract drug manufacturer Samsung BioLogics prior to 2015, the fiscal year at which the company posted a controversial 1.9 trillion won ($1.77 billion) in net profit by switching its accounting standards.  

It signals a shift in the investigative direction of the Securities and Futures Commission, the auditing unit of the Financial Services Commission, which appears to be seeking a midway solution that can be accepted by both the financial regulator and Samsung BioLogics, according to market insiders.

The SFC said Wednesday that the accounting oversight panel is moving to examine Samsung BioLogics’ fiscal records prior to 2015 — the year with the problematic accounting change — to gain a more holistic understanding of the firm’s bookkeeping and to make an accurate judgment.

The move could lead the FSC to conclude that Samsung BioLogics did not commit deliberate accounting fraud in 2015, but merely committed accounting processing errors when forming a joint venture in 2012. 

To summarize, Samsung BioLogics and US-based Biogen formed a 85:15 joint venture called Samsung Bioepis in 2012. Biogen held the right to a call option to raise its stake in the JV to 50 percent minus one share, effective until June 2018.

At first, BioLogics categorized Bioepis as a subsidiary, given its majority shareholder status. But at the end of 2015, Samsung BioLogics changed its accounting standards to view Bioepis as an affiliate, on grounds that Biogen became highly likely to exercise its call option as the value of Bioepis had hiked after the approval of two of its high-value biosimilar drugs in end-2015.

The call option would weaken Samsung BioLogics’ control over Bioepis, and BioLogics said it was thus advised by accounting experts to view Bioepis as an affiliate, in line with International Financial Reporting Standards. However, it was only in early 2018 that Biogen formally confirmed its plans to exercise the call option.

After the accounting shift, Samsung BioLogics logged a one-time net profit of 1.9 trillion won ($1.77 billion) in 2015, after posting four straight years of deficits.

Local regulators have asserted that BioLogics had no reason to make the change, considering the call option was not exercised at the time. They viewed the move as a deliberate accounting violation aimed at inflating its profit ahead of it initial public offering in 2016.

So far, the review of the case has hinged on the legitimacy and motives behind the accounting change in 2015. But now, the SFC is taking a new angle by viewing Samsung BioLogics accounting practices prior to 2015, to suggest other interpretations.

The SFC is perusing the idea that BioLogics should have viewed Bioepis as an affiliate, rather than a subsidiary, and applied the fair market valuation structure from the JV’s start in 2012.

In this case, BioLogics would still be at fault, but its wrongdoing would amount to failing to correctly categorize Bioepis as an affiliate from the 2012.

Under this logic, the controversial 2015 change would be considered a legitimate accounting method. Rather, BioLogics’ accounting records for the years 2012-2014 would have to be corrected to reflect gains from Bioepis, an affiliate, under the fair market valuation rules.

The level of punishment would also change in this case. Samsung BioLogics’ actions may constitute an accounting processing error, rather than a deliberate accounting violation, which could result in a maximum fine of 6 billion won and the removal of the company’s incumbent CEO Kim Tae-han.

“In adopting this new approach, the SFC seems to be moving to strike a midway solution that can be acceptable to both sides. It’s a possible ‘exit plan’ of sorts for the SFC,” said an official with knowledge of the matter.

The SFC is slated to hold its third meeting on the Samsung BioLogics case on June 20. The fourth session, if required, will take place on July 4.

By Sohn Ji-young (jys@heraldcorp.com)