Abstract

Samsung BioLogics, South-Korea based biopharmaceutical company, was established in 2011, as a future growth engine of Korean conglomerate Samsung Group. The company, one of the largest contract manufacturers in the country, operated through three plants located in South Korea. The case is about the accounting of Bioepis, a joint venture between BioLogics and US-based biotechnology company Biogen that was started in 2012 as an 85:15 joint venture. Biogen was not interested in co-managing the company and stopped investing in it after the first year. Bioepis was considered as a subsidiary in the books of BioLogics, and with BioLogics making more investments, the share of Biogen further fell to 7% by 2015. Since its inception till 2014, BioLogics had posted a net loss. In 2015, the company posted a net profit of KRW 1.9 trillion. The profit was recorded after the way BioLogics changed the status of Bioepis from subsidiary to an affiliate. This change was carried out as Biogen had the right to exercise a call option to increase its share in Bioepis to 50% minus one share. And this option could be exercised within a specified time or if Bioepis became profitable. In the wake of Bioepis obtaining approvals for blockbuster drugs, it was assumed that Biogen would exercise its option. This made BioLogics change Bioepis from a subsidiary to affiliate in which BioLogics owned 50% and a onetime gain of KRW 4543 billion was recorded as gain on disposal of the subsidiary. Bioepis was recognized at market value instead of book value. Analysts expressed doubts over the transaction itself and the fact that it had taken place just a few months before the IPO by BioLogics. They also asked why the existence of the call option had not been revealed earlier. This led to an investigation by the finance regulator in South Korea, which investigated the matter and concluded that the company had not conformed with accounting standards and had overstated the value of Bioepis deliberately. It barred the auditors from auditing the company and also asked that trading in the stock be suspended. But BioLogics contested the stance taken by the regulator, claiming that what it had done was not unethical.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• Understand the effects of the investments in associates on the financial position and operating results of a company.
• Debate whether changing the accounting methods to enhance the value of a subsidiary is ethical or not
• Examine the role of the accountants and auditors in ensuring a company’s practices are ethical

Keywords

joint venture; accounting; IPO; valuation; subsidiary; affiliate; call option; market value; book value; investigation; ethics in accounting; accounting standards; role of auditor