1. Overview
The Korean Institute of Certified Public Accountants (“KICPA”) has announced in advance four accounting issues that will be the focus of its reviews of non-listed companies’ financial statements for fiscal year 2026. It also provided examples of common errors and points to note for each issue. Since 2019, KICPA has selected focus review issues as part of its preventive oversight policy. After the 2026 financial statements are disclosed, KICPA plans to select companies for review on each issue and conduct the reviews in 2027. Most foreign-invested companies subject to statutory audit are non-listed and may therefore be subject to KICPA’s reviews. Companies are advised to review these issues before the 2026 year-end closing.
2. Key Issues
A. Revenue Recognition for Long-term Construction Contracts (Order-based Industries)
This issue was selected because errors are common in determining whether to apply the percentage-of-completion method, along with overstated progress rates and overstated revenue. Companies will be selected for review based on indicators such as the ratio of trade receivables to contract liabilities and the relationship between operating profit and operating cash flow.
B. Equity Method Accounting
This issue was selected because errors frequently occur in determining whether the equity method applies and in applying it. Companies should pay close attention to the assessment of significant influence, alignment of accounting policies with the investee, elimination of unrealized gains and losses on intercompany transactions, and cases where consolidated financial statements must be used.
C. Accounting for and Disclosure of Provisions and Contingent Liabilities
This issue was selected because there are incentives to understate provisions and many contingent liabilities go undisclosed. Companies should identify obligations that may arise from recurring and non-recurring business relationships, contracts and litigation, and should review existing provisions and disclosed contingent liabilities again at each reporting date.
D. Disclosure of Related Party Transactions
This issue was selected because there are incentives to conceal or understate related party transactions, and errors in identifying related parties and in accounting and disclosure are common. Whether a party is related should be assessed based on the substance of the relationship as well as its legal form. Financial liabilities arising from arrangements in investment agreements should also be properly classified and disclosed in the notes.
3. Practical Considerations
(Re-examining the scope of related parties) Foreign-invested companies typically have a high volume of transactions with their overseas parent, ultimate parent and overseas affiliates. Companies should update their list of related parties to reflect any changes in group structure. They should also confirm that all transactions, including sales and purchases of goods and services, management fees, royalties, financing transactions and guarantees, are fully disclosed in the notes.
(Reviewing provisions and contingent liabilities) Companies should review warranties, restoration obligations, pending litigation and contractual obligations to their headquarters. This review should confirm whether the recognition criteria for provisions are met and whether any contingent liabilities have been left undisclosed.
(Documenting the basis for equity method and revenue recognition) Companies with investments in Korean subsidiaries or associates, or with long-term construction contracts, are advised to document the basis for their assessment of significant influence and for their progress rate calculations. A company selected for a focused review must submit explanations and supporting materials. If violations are identified, KICPA may recommend corrections to the financial statements or the matter may proceed to an accounting investigation. Please note that it may therefore be necessary to review these matters with accounting professionals before the external audit.
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