SEOUL, South Korea – SM Entertainment, one of South Korea’s leading entertainment agencies, has reported a significant decline in its earnings, largely attributed to a change in the classification of its key subsidiary, SM Brand Marketing.

The company’s consolidated third-quarter net profit plunged 81.8% year-on-year to 249 billion won ($185 million), primarily due to a sharp decrease in equity method earnings. Equity method accounting is used when a company has significant influence over another company but does not have complete control.

SM Entertainment’s third-quarter equity method earnings plummeted 89.8% to 5.2 billion won from 566 billion won in the same period last year. This decline was mainly attributed to the reclassification of SM Brand Marketing as a subsidiary from an associate.

In August 2022, SM Entertainment acquired a controlling stake in SM Brand Marketing, increasing its ownership from 42.36% to 84.4%. Consequently, SM Brand Marketing was reclassified as a subsidiary, meaning its financial performance is now consolidated into SM Entertainment’s financial statements.

Prior to the reclassification, the earnings of SM Brand Marketing were accounted for using the equity method. However, since the change, these earnings have been consolidated into SM Entertainment’s overall results.

SM Brand Marketing is a crucial subsidiary of SM Entertainment, overseeing the company’s global merchandise business, including licensing, branding, and retail operations. It also manages fan clubs and online platforms.

The decline in SM Entertainment’s earnings was further exacerbated by the overall slowdown in the entertainment industry. The company’s third-quarter operating profit decreased 48.7% year-on-year to 536 billion won.

SM Entertainment attributed the significant drop in equity method earnings to the base effect from the reclassification of SM Brand Marketing. In 2022, SM Brand Marketing contributed 80.7% of SM Entertainment’s total equity method earnings, amounting to 446 billion won.

Despite the challenges, SM Brand Marketing continues to play a vital role in SM Entertainment’s business. The subsidiary recently celebrated the second anniversary of “KWANGYA@SEOUL,” a popular K-pop entertainment complex, and launched a pop-up exhibition to commemorate the film “Pamyo.”

While the reclassification of SM Brand Marketing has had a substantial impact on SM Entertainment’s earnings, the company remains optimistic about its long-term growth prospects.