The controversy started in March 2018 after Korea’s Financial Supervisory Service (FSS) accused Samsung BioLogics of accounting fraud. Many in the industry thought that this accusation came as a result of a conflict created from the FSS transition to categorizing R & D expenses as part of companies’ accounting.

Previously, many biopharmaceutical companies recorded their R & D costs as assets, which raised the company’s operating profits in their performance reports, leading to higher share prices. The ambiguity in accounting regulations was considered to be misleading to investors.

The FSS announced at the end of 2017 it planned to inspect the expenses of drugs in unclear stages of R & D, saying that companies count them as tangible assets too often, creating the potential for accounting fraud. It had apparently conducted inspections of the expenses of 10 biologicals companies, including Samsung Bioepis and rumoured to include biosimilars major Celltrion. The biologicals companies claimed that they had done nothing wrong and that they were following international standards when claiming R & D expenses as assets.

To the relief of the biologicals companies, the FSS seems to have had a change of heart. In September 2018, the authority issued guidelines that said that drug companies could capitalize their research spending after regulatory approval of phase III trials and for biosimilars makers the news is even better, with the FSS saying that they can capitalize their research spending from the phase I stage. In addition, the capitalization of research expenses for generics is possible after regulatory approval of bioequivalence testing and for diagnostic reagents after the product validation process.

The only caveat is that when capitalizing their R & D expenses, companies are required to submit objective data to help financial authorities judge their technological feasibility.

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