With the appeals court upholding the first-trial not-guilty verdict in the Ananti false disclosure case, accounting and disclosure risks in the development, construction, and resort industries are drawing renewed scrutiny.
The court found that a lack of supporting documents alone does not mean on-site expenditures must immediately be recorded as an expense, nor can disclosures recognizing them as an asset be deemed false outright. However, the ruling also showed that corporations must be able to later explain the business relevance of expenditures and the basis for their account classification.
On Apr. 18, the Seoul Central District Court Criminal Appeals Division 4-1 dismissed all of the prosecutor's appeals in the appellate case involving Ananti, its former and current executives, and alleged violations of the Financial Investment Services and Capital Markets Act. Prosecutors argued that in 2015–2016 Ananti falsely filed periodic disclosures including financial statements by recognizing company funds lacking support as assets such as advances rather than recording them as an expense.
◇ Expenditures lacking support in the 2 billion won range… The issue is "expense or asset"
The amounts challenged by prosecutors were 1.859 billion won for fiscal 2015 based on settlement of account, 2.028 billion won in the first quarter of 2016, 2.076 billion won in the second quarter, and 2.082 billion won in the third quarter. Prosecutors viewed that the funds were withdrawn and used at the discretion of the representative director's side, processed under the advance payment account, and then reflected during settlement as "trade receivables and other current receivables," an asset account that includes advances.
Advance payments are funds the company pays in advance to employees for on-site work and later settles, and advances are funds paid before receiving goods, services, or assets. The issue in this case was whether the funds were expenditures that should be treated as a current-period expense, or expenditures that could later be organized as development project assets.
What the court focused on was the nature of the expenditure rather than the lack of supporting documents itself. In development projects, money may go out first for land purchases, permits and approvals, civil complaints, compensation, and construction, and later be organized as land acquisition costs or assets such as buildings. The court found it difficult to rule out the possibility that the amounts in question were expenditures related to permits and approvals, civil complaints, compensation, and construction incurred during the development of the Namhae resort, penthouses, and golf course.
However, the court did not actively deem Ananti's accounting treatment appropriate. The bench found that prosecutors failed to prove beyond a reasonable doubt the nature of the disputed expenditures, the need for expense recognition, the falsity of asset recognition, and the defendants' intent. The point is that having questions about accounting treatment is different from proving false disclosure in a criminal trial.
◇ "Receipts alone do not determine asset nature"
Sim Pil-seon, an attorney at DR&AJU who represented Ananti in this case, said, "What the court saw as most important was that one cannot conclude, based solely on the appearance of 'no supporting documents,' that the amounts should immediately have been recognized as an expense."
He noted, "K-IFRS is principles-based accounting, requiring transactions to be treated according to their economic substance rather than legal form," and explained, "Expenditures related to permits and approvals and civil complaints during resort and golf course construction are the type of expenditures that may be recorded as advances or construction-in-progress assets and then reclassified to property, plant, and equipment after completion."
Sim also emphasized that the absence of receipts alone cannot negate asset nature. He said, "The key legal principle is that even without receipts, asset nature may be recognized through reasonable materials such as transfer records, expenditure approval forms, and internal documents."
◇ Industries with many on-site expenditures… "A record system that allows explanation is needed"
The practical significance of this ruling for corporations is not that expenditures lacking supporting documents can be treated as assets at any time. For corporations in development, construction, and resort businesses that have many on-site expenditures, the key is being able to later explain why the money was spent, how it relates to the business, and why it was classified not as an expense but under advances or an asset account.
Sim also said, "This ruling by no means says supporting documents are unnecessary," adding, "At the time of expenditure, it is most important to secure transfer records, expenditure approval forms, and internal documents showing business relevance."
He continued, "Do not leave items in temporary accounts such as advances and advance payments for a long period; standardize a settlement process to reclassify them into appropriate accounts such as property, plant, and equipment at the point when their nature is determined, for example upon construction completion."