ACCOUNTING STANDARD

FOR

MERCHANT BANKING INDUSTRY

Accounting Standard for Merchant Banking Industry

CONTENTS

I.	General Provisions

1.	Purpose

2.	Scope of Application

3.	Definitions of Terms

4.	Grouping and Classification of Accounts for Financial Statement Presentation

II.	Balance sheet

5.	Preparation of Balance Sheet

6.	Grouping and Classification of Assets

7.	Cash and Due from Banks

8.	Loans

9.	Cash Management Account Assets

10.	Trading securities

11.	Investment Securities

12.	Reclassification of Securities

13.	Fixed assets

14.	Other Assets

15.	Classification of Liabilities

16.	Deposits

17.	Borrowings

18.	Other Liabilities

III.	Income Statement

19.	Revenue Recognition

20.	Preparation of Income Statement

21.	Operating Revenues

22.	Operating Expenses

23.	Non-Operating Revenues and Expenses

24.	Extraordinary Gains and Losses

IV.	Measurement of Assets and Liabilities

25.	Valuation of Trading Securities

26.	Valuation of Investment Securities

27.	Establishment of Allowance for Bad Debts

28.	Establishment of Provision for Loss on Guarantees and Acceptances

29.	Accounting for Restructuring of Receivables

V.	Notes to Financial Statements

30.	Notes to Financial Statements

31.	Other Implementation Details

Addenda

Enacted on March 24, 1999

Amended on December 8, 1999

Amended on December 20, 2001

CHAPTER Ⅰ

GENERAL PROVISIONS

1. Purpose

In accordance with Article 90 of the Financial Accounting standards for Business Enterprises (hereinafter referred to as "the FAS"), this Standard prescribes the standards for accounting and reporting by business enterprises operating in the merchant banking industry. This Standard provides guidance on the matters for which there are no relevant provisions in the FAS or which need different accounting treatment because of the industrial peculiarities of the merchant banking business.

2. Scope of Application

Merchant banking companies operating in the merchant banking industry on a regular basis are required to apply this Standard when preparing financial statements for general purpose external financial reporting.

(2-1) Merchant banking refers to the business prescribed in Article 7 paragraph (1) of the Merchant Banking Corporation Act (hereinafter referred to as "the Act").

(2-2) A merchant banking company refers to the business enterprise prescribed in Article 2 subparagraph 1 of the Act.

(2-3) Merchant banking companies are required to apply this Standard, FAS and the Interpretations of FAS in preparing financial statements to be audited by an independent auditor under the Act on External Audit of Corporations (hereinafter referred to as "the External Audit Act"). In the case of the businesses prescribed in Article 7 paragraph (2) of the Act, the industry-specific accounting standards should be applied. For the matters that are not covered in this Standard, FAS and the Interpretations of FAS, generally accepted industry accounting conventions may be applied to the extent that they are consistent with Article 2 and Article 3 of FAS.

(2-4) Merchant banking companies established under the Act but not subject to external audit under the External Audit Act and other business enterprises conducting similar operations may adopt the relevant provisions of this Standard, depending upon the characteristics of their operations.

3. Definitions of Terms

A. A Financial institution refers to a corporation which engages in financial businesses such as banking, securities business, insurance, etc., as its main business.

B. Securities mean the securities and financial options provided in Article 2 of the Securities and Exchange Act. However, in case the corporate bonds issued by a method other than public offering and notes issued for the purpose of fund-raising are purchased directly from the issuer, those corporate bonds and notes are not included in the securities in this Standard. In addition, financial options inseparable from the underlying assets are not included in the securities in this Standard.

C. Standardized transaction is a transaction through the securities market where fulfillment of contract is guaranteed by a standardized clearing system.

(3-1) Financial options refer to the options whose underlying assets are stock index, exchange rate, or interest rate, etc.

(3-2) Privately placed bonds and commercial papers (CP) which are excluded from the definition of securities should be classified as loans.

4. Grouping and Classification of Accounts for Financial Statement Presentation

A. Accounts prescribed in this Standard should be used to enhance comparability of accounting information unless there is a special reason to do otherwise. However, accounts that are not material in nature or amount may be combined with similar accounts.

B. Accounts not prescribed in this Standard but material in nature or amount should be presented separately in a manner that best represents their content.

CHAPTER II

BALANCE SHEET

5. Preparation of Balance Sheet

A. The balance sheet should present fairly all assets, liabilities, and stockholders' equity as of the balance sheet date in order to show clearly the financial position of the entity.

B. The balance sheet should comprise sections of assets, liabilities, and stockholders' equity. Assets and liabilities should be presented in the order of their liquidity, but operating characteristics of the entity should be also considered.

C. A sample format of balance sheet is provided in annexed Form 1, and it may be prepared in the account format, if necessary.

(5-1) Temporary accounts, such as suspense payments or suspense receipts, should be replaced with relevant account headings that accurately describe their nature.

(5-2) Memorandum accounts should not be presented as assets or liabilities in the balance sheet because they do not meet the criteria for being assets or liabilities. If material, they should be presented in a note to the financial statements.

(5-3) Major categories of assets and liabilities should be presented in the order of their liquidity. The order of accounts within each category should be determined on the basis of business characteristics and relative importance of accounts. The rationale for such presentation is that the usefulness of accounting information can be enhanced by presenting assets and liabilities in terms of business characteristics because most assets and liabilities of financial institutions are to be collected or redeemed in the near future.

(5-4) When securities are traded through a standardized transaction, the date of contracting should be used as a transaction date.

(5-5) In case a balance sheet is prepared in the condensed format provided in FAS, detailed information, which would be reported if Form 1 were used, should be disclosed in the accompanying notes.

6. Grouping and Classification of Assets

Assets should be classified into cash and due from banks, loans, cash management account, trading securities, investment securities, lease assets, fixed assets, and other assets.

7. Cash and Due from Banks

Cash and due from banks include cash, due from banks and money trust (excluding special money trust).

(7-1) Due from banks refers to money deposited in other financial institutions.

(7-2) Special money trust refers to a money trust for which management of trust assets should be based on the instruction of the truster. In the case of a special money trust, the trust assets (such as stocks, government and municipal bonds, corporate bonds, etc.) should be accounted for in the same manner as for the regular assets that the company holds.

8. Loans

A. Irrespective of the form of transaction, funds lent with the intention of receiving interests and with an agreement of paying back the principal and interests should be treated as loans. Indemnity receivables arising from payments on guarantees should also be classified as loans.

B. Loans include the following:

- Call loans;

- Loans;

- Notes discounted and purchased;

- Payments on guarantees;

- Securities purchased under resale agreements

- Other loans

(8-1) Call loans refer to loans through call brokers.

(8-2) Loans include loans made to customers in won or foreign currency.

(8-3) Notes discounted and purchased include loans made in a form of purchasing commercial papers and trade notes. In case a note is sold directly without issuing a cover note (a new note restructured and issued by a financial institution), the sold note should be subtracted directly from the account of notes discounted and purchased. However, if a note is sold on a recourse basis, contingent liabilities therefrom should be disclosed in the accompanying note, in addition to subtracting the note amount from the account of notes discounted and purchased. In the case a note becomes dishonored and the seller financial institution pays its amount, the payment should be accounted for as a payment on guarantees.

(8-4) Payments on guarantees include receivables that arise as a merchant banking company pays a debt on behalf of its customers under the payment guarantee contract.

(8-5) Securities purchased under resale agreements include loans made in a way of purchasing securities with an agreement to resell the securities after a specified period.

(8-6) Other loans include all other loans which do not belong to any of the above classifications and the substance of transactions is lending of funds.

9. Cash Management Account Assets

A. Cash management account assets refer to assets put into cash management accounts.

B. Cash management account assets include deposits, notes discounted and purchased, government and municipal bonds, and corporate bonds.

10. Trading Securities

A. Trading securities include those securities which have been acquired for short-term capital gains. In this case, equity securities such as stocks and investment in capital should be marketable securities. However, stocks issued by parties having a special relationship with a merchant banking company and debt securities purchased with the intention of holding to their maturity date ("held-to-maturity debt securities") should not be included in trading securities.

B. Trading securities encompass stocks, government and public bonds, corporate bonds and beneficiary certificates.

11. Investment Securities

A. Investment securities refer to those securities which no not belong to trading securities.

B. Investment securities include stocks, investment in capital, government and municipal bonds, corporate bonds and beneficiary certificates.

(11-1) Investment in capital includes investments in the Securities Market Stabilization Fund ("SMSF").

12. Reclassification of Securities

Classification of trading versus investment securities should be made at the time of acquisition and they should be accounted for accordingly. Trading securities may be reclassified later to investment securities, but reclassification of investment securities is not allowed.

(12-1) The reason for not allowing investment securities to be reclassified later is that gains or losses on valuation of trading securities are reported in the income statement, while gains or losses on valuation of investment securities are reported as capital adjustments in the balance sheet. Thus, reclassification of investment securities is not allowed to prevent possibility of earnings manipulation.

(12-2) Securities received in the liquidating process of the SMSF should be treated as acquisition of new securities and should be classified as either trading securities or investment securities depending on the intention of holding them.

13. Fixed Assets

Fixed assets encompass investment assets, tangible assets, intangible assets, and non-operating assets.

(13-1) Investment assets include those assets which have been acquired for investment purposes such as investment properties and other investment assets, but do not include investment securities.

(13-2) Non-operating assets include non-operating real estate and personal properties which have been acquired by exercising rights on collateral assets.

14. Other Assets

Other assets are those assets which do not belong to any of the above classifications. These assets include the following:

- Guarantee deposits (leasehold rights, telex and telephone subscription rights, leasehold deposits and operation guarantee deposits, etc.)

- Other receivables

- Accrued revenues

- Prepaid expenses

- Deferred income tax debit.

15. Classification of Liabilities

Liabilities should be classified into deposits, borrowings, bonds payable, and other liabilities.

16. Deposits

A. When a merchant banking company receives funds from customers by issuing notes or trust certificates, these funds should be classified as deposits.

B. Deposits include issuing notes deposits, cover notes deposits, and cash management accounts trust money.

(16-1) Issuing notes deposits refer to the funds received by issuing promissory notes.

(16-2) Cover notes deposits refer to the funds received by issuing cover notes.

(16-3) Cash management accounts trust money refers to the funds trusted to cash management accounts.

17. Borrowings

A. Irrespective of the form of transaction, funds borrowed under an agreement of paying back the principal at the end of a specified period and interests over a specified period should be treated as borrowings.

B. Borrowings include the following:

- Call money;

- Securities sold under repurchase agreements;

- General borrowing.

(17-1) Call money refers to funds borrowed through call brokers.

(17-2) Securities sold under repurchase agreements refer to the financial obligation incurred when borrowing funds by selling securities on condition that they will be repurchased after a specified time period.

(16-3) General borrowings are the financial obligation arising from borrowing funds in won or foreign currency.

18. Other Liabilities

Other liabilities refer to all other liabilities that do not belong to any of the above classifications. The following should be included in other liabilities:

- Provision for accrued retirement benefits

- Provision for losses on guarantees and acceptances

- Other accounts payable

- Accrued expenses

- Unearned revenues

- Deposits received

- Deferred income tax credit

(18-1) Provision for losses on guarantees and acceptances refers to the estimated amount of loss to be incurred by fulfilling the guarantee obligations as a result of defaults on the part of principal debtors. The rationale for recognizing such estimated liabilities before actual payments on guarantees occur is as follows. Payments on guarantees are directly related to insolvency of principal debtors and deterioration of paying ability of principal debtors usually occurs over a long period of time. Thus, even if actual payments on guarantees are made in the future, recognition of estimated loss is necessary for proper matching of revenues and expense if paying ability of principal debtors has deteriorated as indicated by a change in credit rating and deterioration of profitability.

CHAPTER III

INCOME STATEMENT

19. Revenue Recognition

A. In principle, interest revenues earned on due from banks, loans, cash management account assets, and securities should be recognized as time passes. However, depending on the degree of collectibility, different methods of revenue recognition may be employed.

B. Gain or loss on disposition of securities arising from a standardized transaction should be recognized at the time of trade contracting.

(19-1) In the case that different methods of revenue recognition are employed because of the collectibility problem, recognition of interest revenue should be done as follows: Interest revenue accrued from collectible receivables prescribed in (27-1) may be recognized as accrued interest revenue because it is realizable. However, interest revenue accrued from uncollectable receivables should not be recognized as accrued interest revenue because realization is unlikely. For other receivables, past experience and industry practice should be the basis for deciding whether to recognize interest revenue, and this rule should be applied consistently in subsequent periods.

(19-2) In recognizing interest revenue arising from held-to-maturity bonds, the difference between the acquisition cost and the face value should be amortized over the remaining term using the effective interest method. The amortization of premium or discount should be added to or deducted from the acquisition cost and interest revenue should be recognized accordingly.

(19-3) Gain or loss on disposition of securities arising from a standardized transaction should be recognized at the time of trade contracting since benefits and risks of the securities are transferred at that time.

20. Preparation of Income Statement

A. In order to present fairly the results of business operations, the income statement should present all revenues earned in the current accounting period, and all matching expenses incurred in generating the revenues.

B. The income statement should be divided into the following sections: operating income (operating loss), ordinary income (ordinary loss), income before income taxes (loss before income taxes), income tax expense, and net income (net loss) for the period.

C. Operating income (operating loss) should be presented by subtracting operating expenses from operating revenues.

D. Ordinary income (ordinary loss) should be presented by adding non-operating income to, and deducting non-operating expenses from operating income (operating loss).

E. Income before income taxes (loss before income taxes) should be presented by adding extraordinary gains to, and deducting extraordinary losses from ordinary income (ordinary loss).

F. Net income (net loss) for the period should be presented by deducting income tax expense from income before income taxes (loss before income taxes).

G. A sample format of the income statement is presented in annexed From 2.

(20-1) In case an income statement is prepared in the condensed format provided in FAS, detailed information, which would be reported if Form 2 were used, should be disclosed in the accompanying notes.

21. Operating Revenues

A. Operating revenues are revenues earned from main operating activities of a merchant banking corporation. Operating revenues encompass interest revenues, fees and commissions, and other operating revenues.

B. Interest revenues include the following:

- Interest on due from banks

- Interest on loans;

- Interest on cash management accounts;

- Interest on trading securities;

- Interest on investment securities;

- Interest on lease;

- Other interest revenues.

C. Other operating revenues include the following:

- Gain on notes trading;

- Gain on disposition of trading securities;

- Gain on valuation of trading securities;

- Dividend income;

- Gain on foreign currency transactions;

- Gain on foreign currency translations;

- Recovery of provision for acceptances and guarantees loss.

(21-1) Interest on due from banks refers to interest revenue earned on due from banks, an asset account in the balance sheet.

(21-2) Interest on loans refers to interest revenue earned on loans, an asset account in the balance sheet.

(21-3) Interest on cash management accounts refers to interest revenue earned on cash management account assets in the balance sheet.

(21-4) Interest on trading securities refers to interest revenue earned on trading securities, an asset account in the balance sheet.

(21-5) Interest on investment securities refers to interest revenue earned on investment securities, an asset account in the balance sheet.

(21-6) Interest on lease refers to interest revenue earned on lease receivables and terminated financial lease.

(21-7) Other interest revenues include interest revenues which do not belong to any of the above.

(21-8) Fees and commissions are fees and commissions that a merchant banking corporation receives in return for services rendered in conjunction with its ordinary operating activities.

22. Operating Expenses

A. Operating expenses are expenses incurred from main operating activities of a merchant banking corporation. They should be classified into interest expenses, fees and commissions expense, other operating expenses, and selling and administrative expenses.

B. Interest expenses include the following:

- Interest on deposits;

- Interest on borrowings;

- Interest on bonds payable;

- Other interest expenses.

C. Other operating expenses include the following:

- Loss on notes trading;

- Loss on disposition of trading securities;

- Loss on valuation of trading securities;

- Loss on foreign currency transactions;

- Loss on foreign currency translations;

- Bad debt expense;

- Current accrual of provision for loss on guarantees and acceptances;

- Fee and commissions.

D. Selling and administrative expenses refer to various expenses incurred from conducting revenue generating activities and administrative activities, and include the following:

- Salaries (officers' salaries, employees' salaries, wages and various allowances);

- Retirement allowance;

- Other employee benefits;

- Rent expense;

- Promotion expense;

- Depreciation expense;

- Amortization of intangible assets;

- Taxes and dues;

- Advertising expense;

- Research expense;

- Ordinary development expense.

In case only the total amount of selling and administrative expenses is presented in the income statement, a supplementary schedule showing the detailed accounts should be presented in a note to the income statement.

(22-1) Interest on deposits includes interest expense incurred on deposits, a liability account in the balance sheet.

(22-2) Interest on borrowings refers to interest expense incurred on borrowings, a liability account in the balance sheet.

(22-3) Interest on bonds payable refers to interest expense incurred on bonds payable, a liability account in the balance sheet.

(22-4) Other interest expenses include interest expenses that do not belong to any of the above.

23. Non-Operating Revenues and Expenses

A. Non-operating revenues include the following:

- Gain on disposition of tangible assets;

- Rental income;

- Gain on valuation of investments using the equity method of accounting;

- Gain on disposition of investment securities;

- Restoration of investment securities impairment loss;

- Gain on valuation of investments in the SMSF;

- Other non-operating revenues.

B. Non-operating expenses include the following:

- Loss on disposition of tangible assets;

- Loss on valuation of investments using the equity method of accounting

- Loss on disposition of investment securities;

- Investment stocks impairment loss;

- Investment bonds impairment loss;

- Loss on valuation of investments in the SMSF;

- Other non-operating expenses.

(23-1) Special severance pay to voluntary retirees should be accounted for as an expense in the current period and should not be written off against provision for accrued severance and retirement benefits.

(23-2) In the case that a tangible asset or non-operating asset is sold through a long-term installment transaction, the total gain or loss on disposition of the asset should be recognized in the current period. In addition, the amount of interest computed using the effective interest method should be recognized as interest revenue over the period of installment transaction.

24. Extraordinary Gains and Losses

A. Extraordinary gains should include unusual and non-recurring gains, gain from assets contributed, gain on exemption of debts, gain on insurance settlements and other extraordinary gains.

B. Extraordinary losses should include unusual and non-recurring losses, casualty losses and other extraordinary losses.

CHAPTER IV

MEASUREMENT OF ASSETS AND LIABILITIES

25. Valuation of Trading Securities

A. For equity securities classified as trading securities, acquisition cost should be determined by adding incidental costs to the purchase price, and applying the weighted average or moving average method. These securities should be reported at fair value in the balance sheet.

B. For debt securities (bonds) classified as trading securities, acquisition cost should be determined by adding incidental costs to the purchase price, and applying the specific identification method, weighted average or moving average method. These securities should be reported at fair value in the balance sheet.

C. In determining the unit cost of trading securities, the weighted average or moving average method should be applied by each class of securities.

D. For debt securities (bonds), information about face value, acquisition cost, carrying amount adjusted by applying the effective interest method and fair value should be disclosed in the accompanying notes. Such information should be presented by category of the method of measuring fair value.

(25-1) The fair value of trading securities should be measured as follows:

1.	For trading securities other than bonds, fair value should be the closing market price as of the balance sheet date. In the case that no closing price exits at the balance sheet date, the most recent closing price before the balance sheet date should be used.

2.	Fair value of bonds shall be measured on the basis of an objective and reasonable price selected from the following:

- Closing market price as of the date of balance sheet;

- Closing market price on the most recent transaction day quoted by a generally accepted price survey;

- Value estimated from the yield for valuation of bonds disclosed by bond dealers.

- Value estimated from the yield for valuation of bonds disclosed by authorized independent securities rating agencies.

Authorized independent rating agencies include the agencies designated as bond price rating agencies by the Governor pursuant to Article 12-2 of the Rules on Enforcement of Securities Investment Trust Business Act.

26. Valuation of Investment Securities

A. The acquisition cost of equity securities classified as investment securities should be determined by adding incidental purchase expenditures to the purchase price, and applying the weighted-average or moving-average method to each class of securities.

B. Marketable equity securities classified as investment securities should be reported at fair value in the balance sheet.

C. Notwithstanding [26B], for the investment in equity securities which gives the investor company the ability to exercise significant influence over the investee company, the investment amount evaluated under the equity method should be used as the balance sheet amount. The difference between the carrying value and the restated balance sheet amount should be accounted for as follows. The difference due to the investee's net income or loss should be recognized as gain or loss on valuation using the equity method of accounting in the income statement. The difference due to changes in the investee's retained earnings should be reported as the increase or decrease in the investor's retained earnings. When the difference results from changes in the investee's capital surplus or capital adjustments, it should be reported as the increase or decrease in the investor's capital adjustments.

D. In the case that the fair value of investment in equity securities (excluding equity securities subject to valuation by the equity method) has declined and the decline is not restorable, the difference between the previous book value and the fair value should be reported as investment stocks impairment loss in the income statement. If equity securities are not marketable securities, the net asset value of the investee company is used as fair value.

E. The acquisition cost of debt securities (bonds) classified as investment securities should be determined by adding incidental purchase expenditures to the purchase price, and applying the specific identification method, weighted average or moving average method to each class of securities.

F. For investment in bonds whose face value differs form the acquisition cost, the difference should be amortized using the effective interest method, and the unamortized cost should be reported in the balance sheet. However, when the acquisition cost of bonds other than held-to-maturity bonds ("available-for-sale bonds") differs from their fair value, the fair value should be reported in the balance sheet. (For bonds whose acquisition cost and face value differ, fair value should be compared with the unamortized cost.)

G. Gain on valuation of investment securities (excluding gain on valuation using the equity method and gain on valuation of investment in the SMSF) should be offset against loss on valuation of investment securities (excluding loss on valuation using the equity method and loss on valuation of investment in the SMSF), and the net gain or loss should be reported as a capital adjustment in the balance sheet.

H. In the case that the fair value of investment in bonds has declined and the decline is not restorable, the difference between the previous book value and the fair value should be reported as investment bonds impairment loss in the income statement.

I. In the case of reclassification of trading securities to investment securities, investment securities should be reported at fair value as of the balance sheet date. The difference between the carrying value of previous trading securities and the balance sheet amount of investment securities should be recognized as gain or loss on valuation of trading securities in the income statement.

J. Fair value of investment securities should be determined in accordance with (25-1). Net asset value of investment securities should be measured as the net assets presented on the most recent balance sheet of the stock issuing company.

K. For investment in equity securities, a note disclosure should be made on the following: the investee company name, number of stocks owned, holding ratio, acquisition cost, fair value or net asset value, investment value evaluated by the equity method (only for investment in stocks accounted for by the equity method), and book value. For investment in held-to-maturity and available-for-sale bonds, a note disclosure for each of them should be made on the following: face value, acquisition cost, unamortized cost obtained by applying the effective interest method, fair value, and measurement method for fair value.

L. Investment in the SMSF should be reported in the balance sheet at the investor's share of fair value of the SMSF net assets (the amount determined by measuring assets and liabilities at fair value). The difference between the new balance sheet amount and the carrying amount before adjustment should be recognized as gain or loss on valuation of investment in the SMSF in the income statement.

(26-1) Investment in bonds should be classified as either held-to-maturity bonds or available-for-sale bonds at the time of their acquisition, depending on management's intention. In the following cases, however, held-to-maturity bonds should be reclassified into available-for-sale bonds:

1.	When a portion of held-to-maturity bonds are sold, the remaining bonds;

2.	Bonds that have to be sold before maturity by law;

3.	Bonds on which an impairment loss is to be recognized in accordance with [26H].

(26-2) Gain or loss on valuation of investment securities reported as a capital adjustment should be netted against additional valuation gain or loss arising in subsequent periods. Information on such netting should be disclosed in a note to the financial statements. Gain or loss on valuation of investment securities should be deducted from or added to the gain or loss on disposition of investment securities when the investment securities are disposed. In the case that the carrying value of investment securities is written down and an impairment loss is recognized, the previously recognized valuation gain or loss should be deducted from or added to the investment securities impairment loss.

(26-3) In the case that investment in bonds is measured in accordance with [26F], the amortization should be added to or deducted from the bonds' interest revenue. In the case of measuring at fair value pursuant to the proviso of [26F], the difference between amortized cost and fair value should be reported as a capital adjustment.

(26-4) For investment securities whose carrying amounts were written down in previous periods in accordance with [26D] and [26H], fair value at fiscal-year end should be reported in the balance sheet if the fair value is greater than the book value and the restoration of fair value is deemed permanent. In this case, the difference between the previous book value and the fair value should be accounted for as follows:

1.	If the fair value at fiscal-year end is less than the acquisition cost, the difference should be recognized as restoration of investment stocks impairment loss or restoration of investment bonds impairment loss in the income statement. (For bonds whose acquisition cost and face value differ, fair value should be compared to amortized cost obtained by applying the effective interest method.); or

2.	If the fair value at fiscal-year end is greater than the acquisition cost, the difference between the acquisition cost and the book value should be accounted for in the same way as item 1 above, and the difference between the fair value and the acquisition cost should be reported as a capital adjustment.

(26-5) Stocks received from the SMSF should be valued at fair value at the time of distribution and presented as trading securities or investment securities. The fair value of these securities should be accounted for as a return of investment. In the case of cash dividend from the SMSF, it should also be treated as a return of investment.

27. Establishment of Allowance for Bad Debts

A. For loans (including accrued interest revenues thereof) whose collectibility is doubtful, allowance for bad debts should be established based on percentage of bad debts estimated on a reasonable and objective basis. Different percentages uncollectable may be applied to loans with different probabilities of collectibility, but the estimated percentages should be applied consistently in subsequent periods unless there is no special reason to change.

B. Uncollectable loans should first be written off against the allowance for bad debts, and, if the allowance is not sufficient to absorb uncollectable loans, the amount in excess of the allowance should be accounted for as bad debt expense.

C. Allowance for bad debts may be presented as a deduction from the related loan account or the aggregate amount may be presented as a single deduction from the total of loans and other assets. In the latter case, details of allowance for bad debts should be disclosed in the accompanying note.

D. A note disclosure should be provided on the following items:

1.	Criteria used to classify debtors' credit rating;

2.	Amounts of collectible loans, doubtful loans and uncollectible loans, and criteria used to classify them;

3.	Estimates of bed debts and percentage uncollectible, and bases for estimation;

4.	Details of uncollectible loans for which legal expiration dates have not arrived or claims are still effective;

5.	Ratio of allowance for doubtful accounts to total loans outstanding over the past three years;

6.	Other significant accounting policies related to uncollectible loans.

(27-1) Classification of loans into collectible loans, doubtful loans and uncollectible loans should be made as follows:

1.	Based upon the debtor's financial position, debtors should be classified into normal debtors, debtors under observation, and delinquent debtors;

2.	Of the loans made to normal debtors, loans on which principal and interests are not in arrears should be classified as collectible loans. The remaining loans should be classified as either collectible loans or doubtful loans in accordance with item 3 below;

3.	Of the loans made to debtors under observation, loans, whose collectivity is deemed certain considering the value of collateral assets and the guarantor's ability to pay, should be classified as collectible loans, and all other loans should be classified as doubtful loans. (Even if loans have not been secured, the fair value of debtor's assets in excess of debtor's obligations to the senior creditors may be included in collateral assets.

4.	Of the loans to delinquent debtors, loans, whose collectivity is deemed certain considering the value of collateral assets and the guarantor's ability to pay, should be classified as collectible loans, and all other loans should be classified as uncollectible loans.

(27-2) Classification of debtors into normal debtors, debtors under observation or delinquent debtors may be done based upon past experience or industry practices. Debtors under observation can be further divided. The criteria used to classify debtors should be applied consistently in subsequent periods unless there is a special reason to do otherwise. Debtors belonging to the following categories should be classified as delinquent debtors:

1.	A debtor with payments in arrears for more than six (6) months;

2.	A debtor classified as a red-rated customer (a customer with the lowest credit rating) by the credit information exchange of merchant banking corporations;

3.	A corporate debtor that is in the process of (or has applied for) a reorganization under the Company Reorganization Act;

4.	A corporate debtor that is in the process of (or has applied for) a composition under the Composition Act;

5.	A debtor whose business has been closed for more than six (6) months;

6.	A corporate debtor that has been issued a disclaimer of CPA audit opinion on its most recent financial statements.

(27-3) In establishing allowance for bad debts, if industry practices regarding debtor classification and evaluation of collectibility of loans are not materially different from the provisions in this Standard, the industry practices may be applied.

28. Establishment of Provision for Loss on Guarantees and Acceptances

A. Provision for loss on guarantees and acceptances should be established in accordance with [27] for the guarantees and acceptances for which payments on guarantees have not occurred.

B. In recording provision for loss, different loss rates may by used depending upon types of guarantees and acceptances.

(28-1) In the case that principal debtor has gone bankrupt but payments on guarantees have not been made, provision for loss should be recorded based on the extent of principal debtor's insolvency. This also applies to other guarantees and acceptances even though no such events has occurred.

29. Accounting for Restructuring of Receivables

A. In case the carrying value of receivables has become different from their present value due to a restructuring of receivables caused by the commencement of reorganization or composition procedures or by a mutual agreement between the parties involved, the receivables should be reported at present value in the balance sheet. The difference between the carrying value before adjustment and the new balance sheet amount should be written off against the allowance for bad debts, and if the allowance is not sufficient to absorb the difference, the amount in excess of the allowance should be accounted for as bad debt expense.

B. The difference between the carrying value before adjustment and the present value described in [A] should be reported as present value discount and directly deducted from the carrying value of the related receivable. Present value discount should be amortized by applying the effective interest method, and the amortized amount should be reported as interest revenue.

C. The discount rate to be used in measuring the present value of restructured receivables should be an appropriate interest rate prevailing at the time of initial transaction for the receivable (historical effective interest rate). However, in the case that the original interest was a variable interest rate, the discount rate for present value measurement should be an appropriate interest rate prevailing at the time of restructuring.

D. A note disclosure should be made regarding details of restructuring including interest rate and repayment period.

(29-1) Restructuring of receivables refers to modifications of contractual terms to alleviate debtor's burden by lowering interest rates or granting an extension of maturity date.

(29-2) Present value measurement for restructured receivables is related to bad debt expense but does not reflect additional loan risk after restructuring. Thus, [27] should be applied to restructured receivables.

CHAPTER V

NOTES TO FINANCIAL STATEMENTS

30. Notes to Financial Statements

The following should be disclosed in notes to the financial statements.

1.	Significant accounting policies;

2.	Detailed information on loans by nature of loans;

3.	The following information useful in understanding the company's relationship with other financial institutions:

- Due from other financial institutions;

- Deposits received from other financial institutions;

- Other deposits received.

4.	The nature of contingent liabilities (guarantees and acceptances, etc.) including the following items and the amount of obligation by class of commitments should be disclosed. Contingent liabilities should be divided into those with determined principal obligation and those with undetermined principal obligation:

- General guarantees of indebtedness;

- Contingent liability arising from accepting bills of exchange issued in conjunction with exports;

- Obligations on sales and repurchase that are not recognized in the balance sheet;

- Obligations concerning financial derivatives;

- Limit on note issuance, limit on new stock acceptance, and other commitments.

5.	A schedule of assets (cash, due from banks, loans and lease assets, etc.) and liabilities (deposits, borrowings and bonds payable, etc.) with respect to the remaining period as of the balance sheet date

6.	The percentage composition of loans, cash management account assets, securities, lease assets, and acceptances and guarantees, broken down by major countries, customers, and industries;

7.	Material foreign currency assets and liabilities denominated in the currency concerned, and their amounts converted into U.S. dollars;

8.	Class of assets provided as collateral, their carrying value, and the related liability amounts;

9.	Names of the persons/companies having a special relationship with the reporting entity, description of major transactions with them (beginning balance, increase or decrease during the accounting period, ending balance, etc.), policies in making loans and details of loans made to them (amount, interest rate, maturity date, etc.);

10.	Bases for recording provision for loss on guarantees and acceptances and amounts of provision;

11.	Types and amounts of securities lent;

12.	Details of off-shore foreign currency assets and liabilities by type, including acquisition cost, book value and fair value;

13.	Acquisition cost, book value and fair value of cash management account assets by type; and

14.	Other items which have significant influence on the financial statements, and items which need disclosure for understanding the financial statements.

31. Other Implementation Details

Other details necessary in implementing this Standard may be separately provided by the Chairman of the SFC.

Addenda

(March 24, 1999)

1. Effective Date

This Standard shall be effective on March 25, 1999.

2. Applicability General

This Standard should be applied from the first fiscal year beginning on or after the effective date.

3. Interim Measure on Valuation of Investment Securities

In application of [26F], the previous accounting standards may be applied to adjust the difference between the acquisition cost and the face value of investment bonds acquired before the end of the fiscal year to which the effective date of this Standard belongs.

4. Applicability to Investment in SMSF

In application of [26L], in case the carrying amount of the investment in the SMSF at the end of the fiscal year to which the effective date of this Standard belongs is different from the investor's proportionate share of fair value of the fund's net assets (the amount determined by valuing assets and liabilities at fair market value), the difference should be accounted for as an addition to, or a deduction from, the beginning retained earnings of the first fiscal year beginning on or after the effective date, shown as gain or loss on valuation of investment in the SMSF.

5. Applicability to Valuation Using Equity Method

As for investment stocks subject to valuation using the equity method of accounting but acquired before the end of the fiscal year to which the effective date of this Standard belongs, [26C] may be applied assuming the stocks are acquired on the first day of the fiscal year of initial application.

6. Applicability to Provision for Loss on Guarantees and Acceptances

In application of [28], accrual of provision for loss on guarantees and acceptances contracts which were undertaken before the end of the fiscal year to which the effective date of this Standard belongs and for which payments on guarantees have not been made, should be accounted for as a reduction of retained earnings in the fiscal year of initial application of this Standard.

7. Applicability to Accounting for Restructuring of Receivables

As for receivables restructured before the end of the fiscal year to which the effective date of this Standard belongs, [29] should be applied as of the beginning date of the fiscal year of initial application of this Standard. Gain or loss attributable to prior years should be accounted for as an increase or a decrease in the beginning retained earnings of the fiscal year of initial application.

8. Interim Measure on Comparative Presentation

For the fiscal year of initial application of this Standard, financial statements for previous fiscal years may be omitted.

Addendum

(December 9, 1999)

1. Effective Date

This Standard shall be effective on December 9, 1999.

Addendum

(December 31, 2001)

This Regulation shall be effective on December 31, 2001. This Regulation shall be applied from the first fiscal year from which this Standard becomes effective. This Regulation may also be applied toward the fiscal year in which the effective date of this Regulation belongs.