- Measures will reflect payments owed to the companies
- Changes follow huge losses on delayed or cancelled projects
South Korea will draw up measures to increase transparency to the accounting methods used by construction and shipbuilding companies to prevent them from running up huge losses when projects are delayed.
The changes will be implemented from the fourth quarter, according to a joint statement Wednesday by the Financial Services Commission and the Financial Supervisory Service. The plan will require companies to provide details every quarter on payments they haven’t received for projects underway and how much of that amount has been written off as potential losses, they said.
The latest measures come after Daewoo Shipbuilding & Marine Engineering Co., the world’s second-largest shipbuilder, posted its biggest-ever quarterly loss earlier this year because of canceled orders and delays in delivering offshore rigs. A slump in oil prices since last year has made it difficult for shipyards and builders to get paid for projects they’re working on.
“While this could help in the short term, the fundamental problem is that clients aren’t paying and projects are delayed,” said Park Moo Hyun, an analyst at Hana Daetoo Securities Co. in Seoul. “Shipyards and construction companies also need to do a better job of making sure the contracts they sign can be delivered and on time.”
Companies will be required to disclose the progress of projects under way and use accounting methods reflecting that progress in their earnings, the regulators said.
“There have been too many uncertainties in the contract business because there was no transparent way to reflect construction works as they are built,” the agencies said in the statement. “The measures are aimed at helping more companies practice more transparency in their accounting.”
Daewoo Shipbuilding posted a combined 3.65 trillion won ($3.2 billion) in losses in the second and third quarters because of delivery delays and late payments from customers. The shipyard’s creditors are expected to provide funding to help ease the cash-flow problems.
Hyundai Heavy Industries Co., the world’s largest shipyard, posted a third-quarter loss after a customer canceled an order for a semi-submersible rig.
Construction companies, such as GS Engineering & Construction Corp., reported losses in 2013 because of delays in completing plant projects they had won.