The Bottom of a Large Company Does a Good Job - Chapter 332



Only Noblemtl

Episode 332. Judgment (1)

Chae Kyung-jun’s face was very stiff.

He put down the materials, stood up, and nodded to Chae In-ha.

Chae In-ha, who was picking out materials while rustling around, put down what he was doing and stood up.

Chae Kyung-jun said to the director.

“Can we go somewhere and talk privately?”

The director has never revealed his title until now.

Instead of going to his seat and sitting down, he continued to lean against the doorway.

So you wouldn’t know who the director is.

Still, Chae Kyung-jun knew that he was the person in charge of this place.

No, it’s not just this place.

The middle-aged man who had made the security team retreat with a wink on the first floor earlier was the director.

Even though I don’t know his exact title, I at least know that he had the most important decision-making authority in this company, second only to the president.

Especially since it was him that the employees turned their heads to find earlier, not knowing what to do.

He was the one who gave permission to show it to me.

The manager nodded and guided us to a conference room on one side of the office.

-Whew!

As soon as he entered, the manager lowered the blinds and locked the door.

What I was going to say from now on was something that no one other than the three people in the conference room should know.

I entered the conference room, but no one was sitting down.

Before Chae Kyung-jun, who was being chased, sat down, he had no intention of sitting down and the director did not feel like sitting down.

Because my mind was not at peace.

But it seems like the same thing happened to Chae Kyung-jun.

As soon as Chae Kyung-jun entered, he looked out the window and pressed his hand to his forehead.

And then he roughly swept back her hair and placed his hands on her waist.

I was surprised by the other meaning of the chain.

Although I’ve only been working with Chae Kyung-jun for about a year, it’s been quite an incredible experience.

I can confidently say that this is definitely not an ordinary experience.

Chae Kyung-jun was embarrassed.

‘Confused? No, rather… … .’

I felt a sense of frustration in the back of his head as he looked out the window.

Chae Kyung-jun, who had been gathering his thoughts for a moment, suddenly turned around.

“Let me ask you something first. Are you the person in charge of this matter?”

“If you are asking if I am the right person to talk to, then yes, I am Choi Byeong-in, the head of the financial management office. You can talk to me.”

Chae Kyung-jun took a deep breath and said.

“Let me first check if what I thought was correct.”

“yes.”

The director listened to Chae Kyung-jun’s story with a determined expression.

“You did some creative accounting, right?”

The manager sighed deeply.

Chae Kyung-jun’s expression was firm.

It seemed like he already had everything figured out.

The director nodded his head, barely visible.

Chae In-ha understood why Chae Kyung-jun reacted that way.

What do you mean, creative accounting?

Even I, who don’t know much about accounting or management, know how serious this is.

It’s not the kind of thing that just ends with disciplinary action within the company.

It’s a crime.

Chae Kyung-jun sat down on the table instead of the chair.

And he explained how he arrived at the process of creative accounting.

“First of all, Taesung Bio, which had been in the red every year, recorded a surplus last year. There’s nothing strange about being in the red every year. It’s normal for a bio company to run a deficit until it starts producing results.”

The manager didn’t respond at all.

I just silently listened to Chae Kyung-jun’s words.

“There is nothing strange about turning a profit. It would be nice if it turned a profit by achieving results, but even if it doesn’t, there are many cases where there is a profit only in the numbers on the books. Things like the recapture of reserves, the valuation gains on tangible assets, foreign currency translation gains, interest income, and valuation gains on available-for-sale assets, etc., don’t affect actual cash flow at all, but they are profits on the books.”

It was a basic story.

And it was essential to the story that would follow.

“That may be the reason, so I compared the financial statements from the year before last and last year to see what changed the most. There was a profit of 2.5 trillion won in investments in subsidiaries.”

Subsidiary company.

Taesung Bio had one more company under its wing.

Taesung Cellophia

It is a company created to develop new drugs.

However, since Taesung Bio had only been established for a short time, it did not have any special technology to develop new drugs.

So, we asked for collaboration from a pharmaceutical company called Quintris, which was making a name for itself as an industry leader.

-I’ll pay. You provide the technology.

Of course, Quintress refused.

-Why us? There are many people who want to invest besides you. Try offering good conditions.

Taesung Bio made this suggestion.

-If the new drug development is successful and the company does well, I will sell you shares. Of course, at a price agreed upon in advance. At that time, we will have 50-50 shares. Even if it doesn’t work out, you won’t lose anything, right?

For example, initially, Taesung Bio will invest 85% and Quintris will invest 15%.

Then, when the company does well, Taesung Bio sells a 35% stake to Quintris.

Of course, at a pre-arranged low price.

Then both sides could each get 50%.

Taesung Bio is suffering losses, but it doesn’t matter.

Once you succeed, you will more than make up for the loss.

The right of Quintris to purchase shares later when the conditions are met is called a call option.

Quintris accepted this proposal and Taesung Celophia was founded.

So far so good.

“I can understand up to this point. Investment profits in a subsidiary can occur. I looked up the notes and found that it said that profits occurred when a subsidiary was reclassified as an affiliate. So I looked up the reason.”

A company that had been running at a loss all year long made a huge profit in just one year.

It’s definitely worth a look.

Chae Kyung-jun was steadily walking towards the correct answer.

“I heard that the new drug is in the final stages of clinical trials. Then, Quintris will soon exercise its call option and its stake will drop to 50%. Then, it will be impossible to secure management rights, so it will be a justification for changing from a subsidiary to an affiliate.”

There is a parent company and there is a child company.

When a parent company has control over a subsidiary and can exercise control over it, it is called a subsidiary.

In this case, the two companies are effectively considered as one, and their financial statements are combined and presented through consolidated accounting.

On the other hand, if a parent company owns shares in a subsidiary but cannot exercise control over it, it is called an affiliate.

In this case, the two companies are considered separately, but a portion of the profits and losses generated by the subsidiary are reflected in the parent company.

This is called the equity method of accounting.

There is no rule that says the relationship will always be constant, so a parent company can lose control of its subsidiary at any time.

This was the case with Taesung Cellophia.

If Quintris exercises her call option soon, the stakes will become equal, meaning she will no longer be able to do as she pleases with Celopia.

In a stock company, the percentage of shares equals control.

The moment you lose your stake, you lose control.

In this case, it can be changed from a subsidiary to an affiliated company.

This was the problem.

As relationships change, the company’s values ​​are recalibrated and reflected.

It is a method of valuing a company based on its market value, which was originally expressed in book value.

Usually the cigar is higher.

The profit that comes out at this time is the remeasurement profit.

This was the subsidiary investment profit reflected in the financial statements.

The profit from this subsidiary investment is reflected in net income for the period.

In short, with just one corporate valuation evaluation, Taesung Bio went from being a company with a perennial deficit to one that was making a huge profit.

In reality, I haven’t earned any money.

“… … I can understand up to this point. It’s a gray area, so to speak. Overall, it’s strange, but it’s an item that can be explained. Well, that’s why the director handled it this way.”

The manager bit his lip.

Chae Kyung-jun’s words were accurate.

The company turned a profit because it changed its classification from a subsidiary to an affiliate.

It may seem strange at first glance, but it’s not that hard to understand once you explain it.

There is room for excuses.

The director thought that it would be enough to satisfy the Financial Supervisory Service.

The judgment of experts who have reviewed it so far has been the same.

That’s possible.

But Chae Kyung-jun’s words did not end here.

“But why was Celopia reclassified from a subsidiary to an affiliate at this point in time? There is no indication of Quintris’ intention to exercise the call option, nor is there any market trend.”

From here on out, it’s internal affairs.

I deliberately didn’t leave any records.

The president and the director put their heads together and thought about it for several days.

Chae Kyung-jun was retracing the process of that agony.

“I thought there must be a reason to make a profit now. So I looked through all the correspondence I had with Quintris. There was this request last year: to reflect the profit and loss of the call option to Taesung Bio.”

To be precise, that is correct.

Up until now, we have not evaluated the call option separately because the probability was not certain, but financial statements are reports and performance reports to be shown to corporate officials.

From Quintrees’ perspective, she would have wanted to see financial statements that accurately reflected her profits and losses.

The ledger reflects only what is likely to happen.

Until now, it was unclear whether the call option would be exercised or not, so it was not reflected.

The fact that Quintress had requested it meant that the call option was more likely to be exercised, so it had to be recorded in the books.

Above all, Taesung Bio is taking on the role of ‘providing money.’

“This was the problem. Taesung Bio must have evaluated the value of Cellophia’s stocks. However, the amount they initially promised to sell was much smaller. Taesung Bio also wrote a report on this. I saw the calculation results. There was a loss of 1.6 trillion won.”

To be exact, it’s debt.

Because we promised to sell it in the future.

Net worth is the amount of assets minus liabilities, so the greater the liabilities, the lower the net worth.

The sea I had prepared for from the beginning.

Anyway, if the development of a new drug is successful, the company’s value will skyrocket.

If it is listed in that state, the stock price of Cellopia held by Taesung Bio will rise beyond comparison to now.

A loss of 1.6 trillion won is more than enough to cover it.

“But there’s a problem. Oops, if it’s a loss of 1.6 trillion won, it’s capital erosion.”

This was the part that the director was particularly worried about, pulling out his hair.

If a company that has been in the red for years suddenly reflects a debt of 1.6 trillion won, it will end up eroding its capital.

Capital erosion.

This refers to a situation where net assets decrease and capital is eaten up.

“This alone was not enough. So I looked through the contract with Quintress one by one. There was this clause.”

Chae Kyung-jun clapped his hands together.

“If Taesung Bio faces capital erosion, Quintris will terminate the contract and recover the investment and research team.”

From Queen Tris’ perspective, it was a safety measure that should have been included, but for Taesung Bio, it was a bolt from the blue.

If I were to fail and have the contract broken, I wouldn’t feel so wronged.

Capital impairment occurs in the process of reflecting the accounting information requested by Quintrees, and this affects the contract with Quintrees.

Capital erosion did not occur because of cash outflows or accumulated deficits.

This happens because of future liabilities that exist only in numbers and on paper.

Still, capital erosion is capital erosion.

“That’s why we decided to avoid it. In order to avoid capital erosion, we need to increase assets or reduce liabilities. There must have been many ways to do this. Of all the ways, this is the one we found that seemed the safest. Increase profits.”

The circumstances behind the sudden reclassification of the subsidiary were revealed.

It was accurate from the reason to the result.

As if there was a milestone, Chae Kyung-jun walked in a straight line to the correct answer.

The director swallowed dry saliva.

With this level of analytical ability, he was definitely not someone to be taken lightly.

There was nothing I could do but admit it.

What difference would it make if you deny it when everything has already been figured out?

If there was one miscalculation, it was the speed.

I thought the strategy room staff down there would figure it out.

I didn’t know that the two of us, no, practically speaking, alone, would get to the heart of the matter in such a short period of time.

The director barely opened his mouth.

The voice he had squeezed out cracked and cracked uncomfortably.

“As you said, it’s a gray area. Even if you get caught, you can get over it. You can explain yourself.”

“Yes, I know. I asked Quintrees to reflect the call option evaluation because they had the intention to exercise the call option, and they reclassified it because they judged that there was a high probability that the call option would be exercised. You could argue that.”

“Then there’s no problem.”

Chae Kyung-jun let out a long sigh.

If you think about it that far, Chae Kyung-jun’s flustered look doesn’t really suit you.

It’s clear there’s a problem.

Chae In-ha blankly looked at Chae Kyung-jun’s side profile.

Rather than confusion, the emotion was closer to frustration.

“It’s the intention. The intention is the problem. It was not reclassified because it was appropriate to reclassify, but to prevent capital erosion.”

That’s what a gray area is.

Whether it is intentional or not can determine the outcome.

Like judging whether it was murder or bodily harm.

In the case of Taesung Bio, there was a clear intention.

“This case is indeed creative accounting.”

It was a quiet voice, but it felt like something was falling.