Slip Op. 99-12 (January 28, 1999)
The Department of Commerce (the Department) has prepared these final results of redetermination pursuant to a remand from the Court of International Trade (the Court) in Micron Technology v. United States and LG Semicon Co., Ltd., and LG Semicon America, Inc. (Slip Op. 99-12, January 28, 1999). This remand covers one issue in the final results of the administrative review of the antidumping duty (AD) order on dynamic random access memory semiconductors of one megabit and above (DRAMS) from the Republic of Korea covering the period October 29, 1992 through April 30, 1994. In accordance with the Court's instructions, we have clarified our methodology for calculating total research and development (R&D) expenses for LG Semicon Co., Ltd. (LGS), and consistent with that clarification, recalculated LGS's margin of dumping in this review segment. These changes did not affect LGS's margin of dumping which remains at 0.00 percent for this review period.
On May 6, 1996, the Department published in the Federal Register a notice of final results of antidumping duty administrative review on DRAMs from Korea. See Notice of Final Results of Antidumping Administrative Review: Dynamic Random Access Memory Semiconductors of One Megabit or Above from the Republic of Korea, 61 FR 20216 (May 6, 1996) (Final Results). In these final results, the Department stated that " [ * * * ]n these calculations, the Department relied on LGS's accounting system to determine the total R&D figure applicable to the analysis: it amortized any R&D expenses that LGS amortized in its own books and records and it expensed any R&D expenses that LGS expensed." Final Results at 20219. The Court, in its remand, ordered the Department to clarify the meaning of this sentence, and in doing so, clarify the precise methodology it has used to calculate total R&D expenses. Slip-Op 99-12 at 10-11.
On March 25, 1999, we released our Draft Results of Redetermination Pursuant to Court Remand for comment. On March 26, 1999, we received comments on the Draft Results from LGS and the petitioner, Micron Technology, Inc. (Micron). Upon consideration of the comments, our Final Results remain unchanged from our Draft Results.
Comment 6: LGS asserts that the Department should accept amortization of purchased R&D amounts over the relevant contract period. LGS argues that the Department's decision in the preliminary determination to expense purchased R&D in the year incurred is inconsistent with the CIT decision in the less-than-fair-value investigation. See Micron Technology, Inc. v. United States, 19 CIT 829, 893 F. Supp. 21 (1995) (Micron I). LGS asserts that the Micron decision requires the Department to amortize R&D expenses over the life cycle of the product.
The petitioner argues that LGS's own financial statements expensed the purchased R&D in the year incurred. Therefore, all payments related to the purchased R&D should be acknowledged in the year in which they were incurred, since this is how the expenses were recorded in the company's books and records.
DOC Position: We agree with the petitioner that LGS's purchased R&D expenses should be acknowledged in the year in which they were incurred, since this is how the expenses were recorded in the company's books and records. See LGS COP/CV Verification Report of July 26, 1995 at page 8. Moreover, the (Micron I) [ * * * ] decision requires the Department to allow the allocation of R&D expenses over time, when the allocation is made in accordance with the generally accepted accounting practices in effect in the home country, and when Commerce is satisfied that those principles reasonably reflect all of the costs associated with the production of the subject merchandise. In this case, although the Korean GAAP may allow LGS to amortize its purchased R&D over a given period, LGS did not do so. Rather, LGS expensed purchased R&D for its financial statements, and amortized it over a longer period for the antidumping response. In these calculations, the Department relied on LGS's accounting system to determine the total R&D figure applicable to the analysis: it amortized any R&D expenses that LGS amortized in its own books and records and it expensed any R&D expenses that LGS expensed. As a result, the Department is not taking a position contrary to the CIT decision, nor is it rejecting the Korean GAAP which allows parties the option of expensing or allocating such costs. Due to the proprietary nature of LGS's internal accounting system, see the LGS COP/CV Verification Report for further information.
Final Results at 20219.
Purchased and non-purchased R&D costs make up the total R&D figure that the Department attributed to LGS. However, the Department intended the statement at issue to explain the methodology for calculating only purchased R&D expenses. By this statement, the Department essentially meant that it accepted how LGS accounted for purchased R&D in its records during this review period.
With respect to non-purchased R&D, the Department used a different methodology than LGS employed to account for these expenditures in its records during the review period. While LGS expensed all non-purchased R&D costs incurred in the review period, as well as a deferred portion from prior years, the Department expensed only those non-purchased R&D costs that LGS expensed in its records and actually incurred that same year. This excluded from the calculation of non-purchased R&D those costs that LGS expensed in the current year, but incurred in prior years. (1) Said another way, the Department excluded from its calculations the unamortized amounts of R&D incurred and capitalized in prior years.
Upon reviewing the methodology for calculating purchased R&D costs, we have determined that the Department should have used the same methodology for calculating non-purchased R&D costs. In other words, the Department should have expensed any non-purchased R&D that LGS expensed in the current year, regardless of when it was incurred. To do otherwise would result in the preponderance of amortized R&D expenses not being included in any period's production costs for dumping purposes. The only portion that would be picked up in the company's costs for dumping purposes would be the portion expensed in the year in which the outlay actually occurred. The remaining amount, capitalized and amortized over time, would not be accounted for in the production costs used for our dumping analyses. The failure to capture these amortized costs is the error that Micron charges the Department made in its calculations during this review period.
The Court has expressed its concern that the conflation of amortization and expensing methodologies would lead to double counting of R&D expenses, thereby improperly distorting the calculation of this expense. Slip Op. 99-12 at 11. As a result, the Court held that the Department could not include in its R&D calculations costs expensed in 1993 but incurred prior to this time period when this methodology would result in double counting these R&D costs. Slip Op. 99-12 at 11. However, the inclusion of the deferred charges in the calculation of LGS's non-purchased R&D expenses does not constitute double counting because the Department has never before included these particular R&D expenses in LGS's costs. The costs will be counted only once in LGS's 1993 costs. This approach is consistent with LGS's treatment of this type of R&D in its books and records and the Court's holding in Micron I. 893 F. Supp. 21 (1995).
The following example, using hypothetical figures, illustrates the Department's methodology and makes clear that no double counting of R&D expenses occurs.
Assume Company A amortizes R&D (over 5 years) in years 1&2, and expenses R&D in year 3.
(from current year)
(from prior years)
|Total Amount Expensed||10||18||92||120|
|* 62 = 30(50-20 = remaining from year1) +32(40-8 = remaining from year 2)|
In year 2, the Department would capture R&D expenses of 18, 10 of which were expensed but incurred in a prior period. This amount has not been included in the costs for a prior period, nor will it be used for costs in a subsequent time period. The same is true of year 3. Year 3 represents the year in which Company A changed its accounting methodology for R&D. Company A decided to expense in full the unamortized portion of R&D outlays that it had incurred in prior years. Once again, there is no double counting of these expenses in the Department's dumping calculations as these expenditures will not be included in R&D costs expensed in prior or subsequent review periods. The Department is simply including in its cost calculations the amortized portion of any capitalized R&D which the company expenses during the year in question.
While double counting of R&D does not take place, distortions in production costs can be introduced when a company continually changes the methodologies used to account for such cost elements as R&D. Although changing accounting methodologies for R&D might be consistent with the Korean GAAP, these accounting principles are concerned with the overall financial performance of the company as a whole and not product-specific cost allocations for antidumping (AD) purposes. Consequently, the Department does not rely on a cost methodology, even when it is consistent with a company's books and records and kept in accordance with local GAAP, when that methodology is distortive.
LGS changed its accounting methodology for R&D during the review period by deciding to expense all R&D costs in 1993. As a result, LGS expensed in full the unamortized portion of the capitalized R&D outlays that LGS had incurred in prior years. This shift in methodology increased 1993 R&D expenditures from [ * * * ] to [ * * * ] won and was the result of the respondent's decisions concerning the accounting treatment for R&D in its books and records. In other words, when LGS changed its R&D accounting practice, it created a situation in which it would have to currently recognize R&D expenses incurred and capitalized in prior years. The only way to avoid including prior period R&D expenditures in costs, and yet fully capture product costs for AD purposes, is to consistently expense R&D costs in full in the period in which they are incurred. However, because LGS only began in 1993 to expense its R&D costs in the year incurred, we have included in our AD calculations those R&D expenses incurred and capitalized in prior years. This appreciably increases total R&D expenses. With respect to the methodology, we note that given the facts of this case, failure to include the prior year expenses in the instant review would mean that these costs are not accounted for in any review period for AD purposes. Under these circumstances, the costs would not reasonably reflect and accurately capture all of the actual costs in producing the merchandise under review. Therefore, we have included them in our R&D calculations for this review period.
Based on the above, the Department recalculated LGS non-purchased R&D costs, including all non-purchased R&D recognized by LGS in its financial statements for 1993. This changes the total R&D figure in the Department's calculations from [ * * * ] won to [ * * * ]won, and increases the R&D percentage used in our calculations from [ * * * ] to [ * * * ] percent. Taking these adjustments into account, LGS's dumping margin for the period October 29, 1992 through April 30, 1994 remains unchanged at 0.00 percent.
INTERESTED PARTY COMMENTS
LGS argues that the Department's new methodology of calculating R&D is distortive and punitive. LGS states that the Department's principal reason for reversing course on the issue of R&D, to include costs which will be lost in subsequent reviews, belies the fact that many other past expenses, including past R&D expenses and other past production costs, will not be captured in this first review. LGS also states that there is no basis for the Department to distort fully inclusive, current period costs by adding to them prior period costs that happened to be expensed in the current period solely due to a transitional change in accounting methodology. LGS further argues that the Department's proposed revised methodology is contrary to the explicit direction of the Court, which ordered the Department to ensure that its clarified methodology was non-distortive and that it accurately and reasonably reflected costs. Although LGS agrees that the Department's methodology does not literally double count R&D costs, LGS argues that the Court required that the calculation of R&D costs did not effectively double count.
We disagree with LGS on all points. The R&D expenses at issue are expenses that LGS itself expensed in its books and records during the current review period in accordance with Korean GAAP. As noted by the petitioner (see Comment 2), it is the Department's longstanding practice to base its cost calculations on the costs reflected in a respondent's financial records, provided such costs are calculated in accordance with the home country GAAP and are not distortive. We do not find LGS's normal accounting treatment of expensing R&D costs in full in the year incurred distortive. In fact, this is the same method which the Department advocated in the less than fair value (LTFV) investigation of this case. The R&D costs at issue is that portion incurred but capitalized in previous years in accordance with LGS's prior treatment of R&D. The R&D expense on LGS's financial statements reflect the sum of the currently incurred R&D and the amount deferred for previous years. LGS does not provide any reasons why it is unreasonable to include R&D expenses taken directly from LGS's financial statement in the Department's calculations.
Furthermore, the Department's revised methodology is not contrary to the explicit direction of the Court. The Department, pursuant to the Court's direction, ensured that its clarified methodology is non-distortive, and that it accurately and reasonably reflects LGS's R&D costs. As we note in our redetermination, failure to include the expenses incurred in prior years, but deferred to future periods would mean that these costs are not accounted for in any period for AD purposes. In effect, the Department would be allowing the respondent to eliminate certain costs simply by changing its accounting method for R&D. Under these circumstances, it would be unreasonable to completely exclude certain expenses from the Department's cost calculations, particularly where LGS itself included these costs in its own books and records. If such expenses are excluded, the resulting calculation would not reasonably reflect and accurately capture all of the actual costs in producing the merchandise under review.
The Department, as it explained in its redetermination, is not either literally or "effectively" double counting any costs. The R&D costs brought forward were originally deferred by LGS and will be counted only once, in this case, in the current period of review, as recorded by LGS in its 1993 books and records. Previously, in the original LTFV investigation of DRAMs from Korea, the Department, pursuant to the Court's instructions in the Micron I decision, did not include in LGS's cost calculations those R&D expenses that were incurred during the period of investigation, but that LGS capitalized for amortization in subsequent years. In 1993, LGS included all of the remaining, unamortized portion of its capitalized R&D incurred prior to 1993 in its books and records for the first time. The Department, following LGS's books and records, will count these costs in its calculations for the first (and only) time during this period of review.
According to LGS's logic, in future reviews, if a respondent were to at first amortize R&D expenses incurred in one year, and then, in the following year, change its accounting methodology, and expense the entirety of those amortized costs, as well as currently incurred R&D expenses, the Department would effectively be disallowed from ever including the amortized costs expensed that year. This would be due to the fact, according to LGS, that those costs would "effectively" cause double counting to occur. However, as explained above, allowing these costs to disappear would be distortive and would result in the Department not including some costs in its calculations even once.
The Department's approach to non-purchased R&D, like our approach to purchased R&D, is also consistent with the Court's direction in the Micron I decision. As we stated in the Final Results, the Micron I decision requires the Department to allow the allocation of R&D expenses over time, when the allocation is made in accordance with the generally accepted accounting principles in effect in the home country, and when Commerce is satisfied that those principles reasonably reflect all of the costs associated with the production of the subject merchandise. In this case, although the Korean GAAP may allow LGS to amortize its non-purchased R&D over a given period, LGS did not fully do so. Rather, LGS only amortized its non-purchased R&D incurred in past years, and expensed all of the remaining amounts of such expenses, as well as the non-purchased R&D expenses incurred in 1993, in 1993. In these remand calculations, the Department relied on LGS's accounting system to determine the total non-purchased R&D figure applicable to the analysis: it amortized any non-purchased R&D expenses that LGS amortized in its own books and records and it expensed any non-purchased R&D expenses that LGS expensed. As a result, the Department is not taking a position contrary to the CIT decision, nor is it rejecting the Korean GAAP which allows parties the option of expensing or allocating such costs.
Micron agrees with the Department's proposed recalculation of LGS's R&D expenses and believes that certain fundamental principles should be reflected in the remand results, namely: 1) that a respondent's costs as reported in its books and records should not be followed when the resulting cost calculation is distortive; 2) that all costs incurred by a respondent must be captured within the framework of a case, and cannot be allowed to disappear unaccounted for; and 3) that the U.S. GAAP provides an appropriate benchmark for determining the reasonableness of cost calculations methodologies, particularly when the producer's accounting methodologies are constantly changing. Micron further notes that U.S. GAAP is clear that R&D expenses are to be recognized and expensed in the year incurred, and when a respondent changes its accounting methodology to more closely conform to U.S. GAAP, that decision to come closer to U.S. GAAP should be accepted.
Micron recommends that the Department affirm that its longstanding practice has been to base its cost calculations on the costs as reflected in the financial statements of the respondent provided that the financial statements are kept in accordance with local GAAP and that the recorded financial statement costs reasonably reflect the cost of producing the subject merchandise, i.e., the recorded cost is not distortive. Micron further recommends that the Department note that although this review was initiated before the effective date of the Uruguay Round Agreements Act ("URAA"), the URAA's Statement of Administrative Action ("SAA") fairly reflects the ITA's practice at the time of this review. See SAA at 834.
We agree with the petitioner. As we state in our redetermination, the Department does not rely on a cost methodology, even when it is consistent with a company's books and records and kept in accordance with local GAAP, when that methodology is distortive. Furthermore, as we also state in our redetermination, failure to include the prior year expenses which LGS had capitalized for amortization in the instant review would mean that these costs are not accounted for in any review period for AD purposes. This would clearly be a distortion of a respondent's costs.
With regard to U.S. GAAP, we agree that the Department's practice, expressly recognized and approved in the SAA, has been to look to U.S. GAAP as a benchmark for determining whether a company's records reasonably reflect costs. See SAA at 834. U.S. GAAP requires that R&D expenses are to be recognized and expensed in the year incurred. See Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 2. LGS, consistent with U.S. GAAP, began to recognize and expense its R&D costs in the year incurred in this review period rather than capitalizing them for amortization as it had in prior periods.
RESULTS OF REMAND DETERMINATION
As a result of this redetermination, LGS's dumping margin for the period October 29, 1992 through April 30, 1994 is 0.00 percent. This rate is unchanged from the rate announced in the final results of the first review.
Robert S. LaRussa
for Import Administration
Date: March 31, 1999
(1) The Department did not exclude any purchased R&D expenses from its calculations for this review period because, as the Department explained in the Final Results, LGS expensed all of its purchased R&D costs in the year in which they were incurred.