Opinion ID: 211643
Heading Depth: 2
Heading Rank: 2

Heading: Research & Development

Text: 15 We turn next to Commerce's treatment of Hynix's R&D expenses, which requires a clarification of 19 U.S.C. § 1677b(f)(1)(A), which, in pertinent part, states that, Costs shall normally be calculated based on the records of the exporter or producer of the merchandise, if such records are kept in accordance with the generally accepted accounting principles of the exporting country (or the producing country, where appropriate) and reasonably reflect the costs associated with the production and sale of the merchandise. We have interpreted this statute in several previous cases. For example, in Thai Pineapple, 187 F.3d at 1366, we held that [a]s a general rule, an agency may either accept financial records kept according to generally accepted accounting principles in the country of exportation, or reject the records if accepting them would distort the company's true costs. See also Am. Silicon Techs. v. United States, 261 F.3d 1371, 1377 (Fed.Cir.2001); NTN Bearing Corp. v. United States, 74 F.3d 1204, 1206 (Fed.Cir.1995) ([The government] may accept [a company's] records, but it also may reject those records if accepting them would distort the company's true costs.). The statute and our prior pronouncements are clear. The company has the responsibility of showing that its records are kept in accordance with its home country's GAAP. If the company meets this burden, Commerce may counter with substantial evidence that the records do not comply with the home country's GAAP. If the records withstand this scrutiny, Commerce may show, by substantial evidence, that the costs do not reasonably reflect the costs of production and should not, therefore, be used. See Thai Pineapple, 187 F.3d at 1367 (If the records are not reasonably reflective of cost, Commerce may appropriately deviate from them.). This case presents three scenarios which help to clarify the application of section 1677b(f) further.
16 During the less-than-fair value investigation, Hynix amortized its R&D expenses. 8 See Dynamic Random Access Memory Semiconductors of One Megabit or Above from the Republic of Korea, 58 Fed. Reg. 27,520 (May 10, 1993). Hynix switched methods, however, in the first review, and began expensing its R&D costs. 9 In the year that Hynix changed from amortizing to expensing, its R&D costs were unusually high. As a result, the Court of International Trade cautioned Commerce not to include all expenses reported in that year in the dumping calculation because it would not fairly represent the cost of production. Micron Tech., Inc. v. United States, 44 F.Supp.2d 216, 221 (Ct. Int'l Trade 1999). In the fifth review, Hynix reverted to amortizing. To avoid the effect of changing methods, Commerce expensed Hynix's R&D for all reviews, including the fifth, sixth, and final reviews. Hynix did not challenge this practice until the final review, however. Now it claims that its choice to amortize (as well as its choice to switch methods) complies with Korean GAAP and that Commerce verified its records; therefore Commerce is required by section 1677b(f) to accept its amortized R&D expenses. 17 Commerce acknowledges that Hynix's decision to change accounting methods complies with Korean GAAP. Nevertheless, Commerce argues that it need not accept a company's records pursuant to section 1677b(f) if they do not represent the costs of producing the merchandise. In this case, Commerce argues that the change between methods has resulted in the underreporting of R&D expenses. As Commerce explained, underreporting occurs when a company switches from expensing to amortizing. Instead of recognizing one-fifth of the current year's R&D costs in addition to one-fifth from the previous four years, Hynix only recognized one-fifth during this POR because the prior years' costs had been expensed. Commerce also noted that Hynix was unable to show that it had used the questioned accounting methods historically. See Am. Silicon, 261 F.3d at 1379 (19 U.S.C. § 1677b(f)(1)(A) states that Commerce shall consider the exporter's or producer's records on allocation of costs only if the records of the exporter or producer have been historically used by the exporter or producer.); Statement of Administrative Action, Uruguay Round Agreements Act, Pub. L. No. 103-465, 103rd Cong.2d Sess., H. Doc. 103-316, vol. I, at 834 (1994) (The exporter or producer will be expected to demonstrate that it has historically utilized such allocations, particularly with regard to the establishment of appropriate amortization and depreciation periods and allowances for capital expenditures and other development costs.). 18 While Hynix was able to show that its records comply with Korean GAAP, Commerce showed by substantial evidence that Hynix's reported R&D expenses fail to reflect the costs of production. It is facially apparent that a fraction of costs does not accurately capture full costs. Even if the inadequacy of this method were not transparent, it would be appropriate for us to defer to Commerce's judgment that Hynix's change from amortizing to expensing and back again results in underreporting. See Thai Pineapple, 187 F.3d at 1367 (Antidumping investigations are complex and complicated matters in which Commerce has particular expertise and thus, Commerce's determinations are entitled to deference.). Further, Hynix was not able to demonstrate that it historically used this accounting methodology, which undermines the assumption that its bookkeeping was not influenced by a desire to minimize costs during the review. The court's judgment requiring Commerce to accept Hynix's amortized R&D expenses is reversed. The case is remanded to the court with instructions to remand to Commerce, which shall recalculate the duty by expensing Hynix's R&D costs as in the Final Results.
19 We turn next to that part of the court's judgment requiring Commerce to use Hynix's verified, product-specific R&D costs. In the Final Results, Commerce rejected Hynix's product-specific R&D costs in favor of a method that allocated all semiconductor R&D expenses over the total number of semiconductors sold. Commerce claimed that this approach more accurately captures R&D expenses attributable to the subject merchandise because, according to the theory of cross-fertilization, other semiconductor R&D benefits DRAMs. Commerce was able to offer only two pieces of support for this assertion. First, it relied on the expertise of Dr. Murzy Jhabvala, a semiconductor engineer, who conducted a study showing that R&D for one type of semiconductor influenced the development of SRAMs. Dr. Jhabvala extrapolated from this study, without assessing Hynix's operations specifically, that all of Hynix's semiconductor research benefits DRAMs. Second, aside from this theoretical assessment of Hynix's R&D environment, Commerce relied on Exhibit 20 of the Department's verification report, which listed R&D projects in Hynix's non-memory labs. 10 The list contained names that appeared to indicate that Hynix's non-memory labs were being used for memory research, even research on DRAMs specifically. Hynix, on the other hand, argues that Commerce must accept its verified, product-specific R&D costs pursuant to section 1677b(f), and, further, that section 1677b(e)(2)(A) 11 requires Commerce to use actual values, such as those provided by Hynix, when available. 20 This precise issue was presented to the court in a prior review of the same merchandise. In Micron Technology, Inc. v. United States, 893 F.Supp. 21, 27 (Ct. Int'l Trade 1995), aff'd, 117 F.3d 1386 (Fed.Cir.1997), the court required Commerce to accept the product-specific R&D expenses reported by Hynix. In so doing, it noted that the validity of Commerce's methodology cannot rest on intuitive appeal alone; rather, the factual premise upon which Commerce bases its choice of methodology must be supported by substantial evidence on the record. 893 F.Supp. at 27. We agree with this assessment and adopt it as our own. Dr. Jhabvala's opinion, while probative of the company he investigated or potentially SRAMs generally, bears little relation to either Hynix or DRAMs. And, as noted by Hynix, the list of projects cited by Commerce is paltry evidence of cross-fertilization, because project names, without proof of the underlying activities, do little to show that all semiconductor R&D has impacted the development of DRAMs. 21 Commerce has failed to offer such relevant evidence as a reasonable mind might accept as adequate to support the proposition that Hynix's product-specific R&D costs are not representative. NTN Bearing, 74 F.3d at 1206 (internal quotation marks and citation omitted). The court's judgment requiring the use of Hynix's product-specific R&D expenses is affirmed.
22 In the Final Results, Commerce refused to allow the indefinite deferral of certain R&D expenses. Hynix argues that this violated section 1677b(f) because its records were verified and deferral is allowed under Korean GAAP and International Accounting Standard 9 (IAS). 12 According to Hynix, the matching principle 13 requires the indefinite deferral of these expenses because associated revenues will not be realized until some time in the future. As evidence, it cites to a single document that notes, almost illegibly, that certain projects will mature sometime in 2001 or 2002. 23 Commerce argues that the matching principle does not apply because there is no objective evidence or reasonable expectation that deferred R&D costs will result in future benefits as required by both Korean GAAP and IAS 9. Remand I at 9. According to Commerce, [a]ccountants defer recognition of an expense to the future only when there is reasonable evidence that the expenditure will, in fact, benefit future operations. If this evidence is not available, or is not convincing, accountants do not attempt to apply the matching principle; rather they charge the expenditure immediately to expense. Id. at 8 (quoting Robert F. Meigs & Walter B. Meigs, Financial Accounting 734 (7th ed.1992)). Pursuant to this approach, Commerce claims that the documentation offered by Hynix is insufficient and, therefore, conservatism mandates expensing these costs. 24 While both Korean GAAP and IAS 9 allow the deferral of R&D expenses, neither standard allows deferral unless certain conditions are satisfied, namely that there be a reasonable expectation of future benefit. Commerce concluded, and we accept, that Hynix offered insufficient evidence that its R&D costs will result in future revenues. See Am. Silicon, 261 F.3d at 1380 (This court `accords deference to the determinations of the agency that turn on complex economic and accounting inquiries.' We hold that determining whether a depreciation practice comports with Brazilian GAAP is one such complex economic and accounting inquiry. (citation omitted)). Because Hynix's records do not comport with the requirements of its home country's GAAP, Commerce need not use them to calculate the duty. The court's decision affirming the disallowance of the indefinite deferral of certain R&D costs is affirmed.