KOREAN AIR LINES CO., LTD. AND SUBSIDIARIES

Transcription

1 KOREAN AIR LINES CO., LTD. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 AND INDEPENDENT AUDITORS REPORT

2 Deloitte Anjin LLC 9Fl., One IFC, 10, Gukjegeumyung-ro, Youngdeungpo-gu, Seoul , Korea Tel : +82 (2) Fax: +82 (2) Independent Auditors Report English Translation of a Report Originally Issued in Korean To the Shareholders and Board of Directors of Korean Air Lines Co., Ltd.: We have audited the accompanying consolidated financial statements of Korean Air Lines Co., Ltd. and subsidiaries (the Group ). The financial statements consist of the consolidated statement of financial position as of December 31, 2013 and the related consolidated statement of comprehensive (loss) income, consolidated statement of changes in shareholders equity and consolidated statement of cash flows, all expressed in Korean won, for the year ended December 31, The Company s management is responsible for the preparation and fair presentation of the consolidated financial statements and our responsibility is to express an opinion on these consolidated financial statements based on our audit. The comparative consolidated financial statements as of and for the year ended December 31, 2012, which were audited by KPMG Samjong Accounting Corp. and whose report is dated March 11, 2013, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and its subsidiaries as of December 31, 2013, and the results of its operations, changes in its retained earnings and shareholders equity, and its cash flows for the year then ended December 31, 2013, in conformity with Korean International Financial Reporting Standards ( K-IFRS ). Our audit also comprehended the translation of amounts into U.S. dollar amounts and, in our opinion, such translation has been made in conformity with the basis in Note 2. Such U.S. dollar amounts are presented solely for the convenience of readers outside of Korea. March 13, 2014 Notice to Readers This report is effective as of March 13, 2014, the auditors report date. Certain subsequent events or circumstances may have occurred between the auditors report date and the time the auditors report is read. Such events or circumstances could significantly affect the accompanying consolidated financial statements and may result in modifications to the auditors report. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see t for a more detailed description of DTTL and its member firms. Member of Deloitte Touche Tohmatsu Limited

3 KOREAN AIR LINES CO., LTD. AND SUBSIDIARIES (the Group ) CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 The accompanying consolidated financial statements including all footnote disclosures were prepared by, and are the responsibility of, the Group. Ji, Chang Hoon Chief Executive Officer Korean Air Lines Co., Ltd.

4 KOREAN AIR LINES CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS OF DECEMBER 31, 2013 AND 2012 ASSETS NOTES CURRENT ASSETS: Cash and cash equivalents 5,6,42 1,126,825 1,465,499 $ 1,067,777 $ 1,388,704 Short-term financial instruments 42 53, ,171 50, ,188 Current portion of investment in direct financing leases 11,42 7,730-7,325 - Trade and other receivables 7,42,44 1,157, ,708 1,096, ,408 Current portion of AFS financial assets 8,16,42,43 3,000-2,843 - Current portion of held-to-maturity investments 3,9,16,42 9,374 8,574 8,882 8,124 Inventories , , , ,776 Income tax refunded 3,697 7,730 3,504 7,325 Current portion of financial derivative assets 28,42,43 4,893 45,593 4,637 43,204 Other current assets 20,23 309, , , ,249 Assets held for sale 21-1,904-1,805 Total current assets 3,139,832 3,365,122 2,975,299 3,188,783 NON-CURRENT ASSETS: Long-term financial instruments 6,42 1,256 1,963 1,190 1,860 Long-term trade and other receivables 7,42, AFS financial assets 8,16,42,43 213, , , ,484 Held-to-maturity investments 3,9,16, , ,632 Investment in direct financing leases 11,42 73,490-69,639 - Investment in associates and jointly controlled entities 13,16,44 2,407,496 2,557,390 2,281,338 2,423,377 Property, aircraft and equipment 15,16 15,503,889 14,880,090 14,691,452 14,100,341 Investment properties 16,17 68, ,717 64, ,291 Intangible assets 16,18 349, , , ,123 Financial derivative assets 28,42,43 2,976 3,255 2,820 3,084 Other financial assets 19,23,42 251, , , ,377 Deferred tax assets , , , ,359 Other non-current assets , , , ,372 Total non-current assets 19,780,606 19,608,279 18,744,059 18,580,762 (Continued) Total assets 22,920,438 22,973,401 $ 21,719,358 $ 21,769,545

5 KOREAN AIR LINES CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (CONTINUED) AS OF DECEMBER 31, 2013 AND 2012 LIABILITIES AND SHAREHOLDERS EQUITY NOTES CURRENT LIABILITIES: Trade and other payables 22,42,44 841, ,522 $ 797,153 $ 920,612 Short-term borrowings 16,23,42 817,466 1,265, ,629 1,199,295 Current portion of long-term borrowings 16,23,42 4,076,268 1,930,330 3,862,662 1,829,177 Obligation under finance leases 16,24,42 871, , , ,034 Current income tax liabilities 1,262 10,980 1,196 10,404 Current portion of financial derivative liabilities 28,42,43 32,561 31,666 30,855 30,007 Other current liabilities 27,30 1,118,595 1,078,879 1,059,979 1,022,344 Total current liabilities 7,758,835 6,207,140 7,352,256 5,881,873 NON-CURRENT LIABILITIES: Long-term trade and other payables 22,42,44 174, , , ,872 Long-term borrowings 16,23,42 1,220,865 2,039,203 1,156,889 1,932,344 Debentures 23,42,44 2,361,382 3,702,003 2,237,640 3,508,010 Asset-backed securitization ( ABS ) 23,42,44 loans 916, , , ,694 Guaranteed loans 16,23,42,44 35,899 53,785 34,018 50,966 Obligation under finance leases 16,24,42 5,019,925 4,709,967 4,756,870 4,463,154 Net defined benefit obligation 3,25 879, , , ,393 Provisions ,686 88, ,314 83,560 Deferred revenue 27 1,558,787 1,476,695 1,477,103 1,399,313 Financial derivative liabilities 28,42, , ,068 Other financial liabilities 29,42-20,526-19,450 Deferred tax liabilities 39 82, ,083 77, ,904 Other non-current liabilities 30 30,968 21,904 29,345 20,757 Total non-current liabilities 12,421,390 13,861,878 11,770,482 13,135,485 Total liabilities 20,180,225 20,069,018 19,122,738 19,017,358 SHAREHOLDERS EQUITY: Capital stock , , , ,535 Other capital surplus 32 52, ,357 49, ,692 Other capital components ,164 (6,481) 310,967 (6,142) Retained earnings 33 1,967,197 2,095,970 1,864,111 1,986,137 NON-CONTROLLING INTERESTS: 93, ,783 88, ,965 Total shareholders equity 2,740,213 2,904,383 2,596,620 2,752,187 Total liabilities and shareholders equity 22,920,438 22,973,401 $ 21,719,358 $ 21,769,545 (Concluded) See accompanying notes to consolidated financial statements.

6 KOREAN AIR LINES CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 NOTES (In millions except for (loss) earnings per share) (In thousands except for (loss) earnings per share) SALES 4,35,44 11,848,708 12,341,790 $ 11,227,810 $ 11,695,054 COST OF SALES 40,44 10,753,626 11,011,325 10,190,113 10,434,308 GROSS PROFIT 1,095,082 1,330,465 1,037,697 1,260,746 Selling and administrative expenses 36,40 1,114,644 1,101,898 1,056,234 1,044,156 OPERATING (LOSS) INCOME 4 (19,562) 228,567 (18,537) 216,590 Financial income 37,42 105, , , ,953 Financial expenses 37,42 526, , , ,316 Gain on equity method valuation 13 32,243 82,267 30,553 77,956 Other non-operating income ,087 1,171, ,671 1,110,333 Other non-operating expenses , , , ,910 (LOSS) INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE 39 (392,661) 346,778 (372,085) 328,606 INCOME TAX (BENEFIT) EXPENSE 39 (137,092) 162,309 (129,908) 153,803 NET (LOSS) INCOME FROM CONTINUING OPERATIONS (255,569) 184,469 (242,177) 174,803 NET (LOSS) INCOME FROM DISCONTINUED OPERATIONS 47 (127,986) 71,902 (121,279) 68,134 NET (LOSS) INCOME (383,555) 256,371 $ (363,456) $ 242,937 OTHER COMPREHENSIVE (LOSS) INCOME AFTER INCOME TAX: Items not to be reclassified subsequent to income or loss: Remeasurement of the net defined benefit liabilities 25 47,156 (94,074) $ 44,685 $ (89,144) Change in retained earnings equity method accounted 13 investments 1,751 (1,715) 1,659 (1,626) Revaluation surplus , , ,703 (95,789) 351,277 (90,770) (Continued)

7 KOREAN AIR LINES CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 NOTES (In millions except for (loss) earnings per share) (In thousands except for (loss) earnings per share) Items to be reclassified subsequent to income or loss: Gain on AFS financial assets, net 34 40,496 19,066 $ 38,374 $ 18,067 Change in capital adjustments equity method accounted investments 13 (53,876) (6,361) (51,053) (6,027) Gain (loss) on financial derivatives, net 28,34 7,479 (1,096) 7,088 (1,039) Loss on foreign operation translation (5,114) (2,544) (4,846) (2,411) (11,015) 9,065 (10,437) 8,590 COMPREHENSIVE (LOSS) INCOME (23,867) 169,647 $ (22,616) $ 160,757 NET (LOSS) INCOME ATTRIBUTABLE TO: Owners of the Company (224,995) 246,413 $ (213,204) $ 233,501 Non-controlling interests (158,560) 9,958 (150,252) 9,436 COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO: Owners of the Company 155, , , ,314 Non-controlling interests (179,641) 6,799 (170,227) 6,443 (LOSS) EARNINGS PER SHARE: 41 Continuing and discontinued operations Basic (loss) earnings per share (3,517) 3,649 (3) 3 Diluted (loss) earnings per share (3,517) 3,649 (3) 3 Continuing operations Basic (loss) earnings per share (3,851) 2,691 (4) 3 Diluted (loss) earnings per share (3,851) 2,691 (4) 3 (Concluded) See accompanying notes to consolidated financial statements.

8 KOREAN AIR LINES CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 Owners of the Company Capital stock Other capital surplus Additional paid-in capital Others Other capital components Retained earnings Subtotal Non-controlling interests Total January 1, , ,806 (21,263) (13,880) 1,938,824 2,460, ,712 2,768,953 Dividends (10,869) (10,869) Net income , ,413 9, ,371 Other comprehensive income (loss) ,399 (90,964) (83,565) (3,159) (86,724) Incorporation and disposal of subsidiaries ,215 3,215 (20,593) (17,378) Change in retained earnings of subsidiaries (1,518) (1,518) (1,266) (2,784) Others - (389) (2,797) - - (3,186) - (3,186) December 31, , ,417 (24,060) (6,481) 2,095,970 2,621, ,783 2,904,383 January 1, , ,417 (24,060) (6,481) 2,095,970 2,621, ,783 2,904,383 Dividends (4,371) (4,371) Net loss (224,995) (224,995) (158,560) (383,555) Other comprehensive income (loss) ,645 46, ,769 (21,081) 359,688 Increase (decrease) due to merger 4,403 28,896 (8,926) ,373 (24,373) - Decrease due to spin-off (72,226) (43,406) (298,082) - - (413,714) - (413,714) Substitution of revaluation surplus ,847 12,847 13,023 25,870 Issuance of hybrid securities , , ,860 Dividend from hybrid securities (6,758) (6,758) - (6,758) Change in retained earningsof investment in associates and subsidiaries ,136 37,136 8,439 45,575 Others ,873 6,873 (2,638) 4,235 December 31, , ,907 (122,208) 328,164 1,967,197 2,646,991 93,222 2,740,213 (Continued)

9 KOREAN AIR LINES CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 Owners of the Company Capital stock Other capital surplus Additional paid-in capital Others Other capital components Retained earnings Subtotal Non-controlling interests Total January 1, 2012 $ 347,535 $ 179,860 $ (20,149) $ (13,153) $ 1,837,225 $ 2,331,318 $ 292,535 $ 2,623,853 Dividends (10,300) (10,300) Net income , ,501 9, ,937 Other comprehensive income (loss) ,011 (86,198) (79,187) (2,993) (82,180) Incorporation and disposal of subsidiaries ,047 3,047 (19,514) (16,467) Change in retained earnings of subsidiaries (1,438) (1,438) (1,199) (2,637) Others - (369) (2,650) - - (3,019) - (3,019) December 31, 2012 $ 347,535 $ 179,491 $ (22,799) $ (6,142) $ 1,986,137 $ 2,484,222 $ 267,965 $ 2,752,187 January 1, 2013 $ 347,535 $ 179,491 $ (22,799) $ (6,142) $ 1,986,137 $ 2,484,222 $ 267,965 $ 2,752,187 Dividends (4,142) (4,142) Net loss (213,204) (213,204) (150,252) (363,456) Other comprehensive income (loss) ,109 43, ,815 (19,975) 340,840 Increase (decrease) due to merger 4,173 27,382 (8,458) ,097 (23,096) 1 Decrease due to spin-off (68,441) (41,131) (282,462) - - (392,034) - (392,034) Substitution of revaluation surplus ,173 12,173 12,340 24,513 Issuance of hybrid securities , , ,915 Dividend from hybrid securities (6,404) (6,404) - (6,404) Change in retained earnings of investment in associates and subsidiaries ,190 35,190 7,996 43,186 Others ,513 6,513 (2,499) 4,014 December 31, 2013 $ 283,267 $ 165,742 $ (115,804) $ 310,967 $ 1,864,111 $ 2,508,283 $ 88,337 $ 2,596,620 (Concluded) See accompanying notes to consolidated financial statements.

10 KOREAN AIR LINES CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2013 AND CASH FLOWS FROM OPERATING ACTIVITIES: Cash flows from operations: Net (loss) income (383,555) 256,371 $ (363,456) $ 242,937 Adjustments to reconcile net loss to net cash provided by operating activities: Maintenance material cost 5,056-4,791 - Provision for leased aircraft maintenance 27,869 37,113 26,409 35,168 Retirement benefit costs 159, , , ,814 Depreciation 1,629,729 1,493,146 1,544,328 1,414,902 Amortization 33,065 22,966 31,333 21,763 Bad debt expenses Interest expense 507, , , ,086 Loss on valuation of derivatives 25,689 22,433 24,343 21,257 Impairment loss on AFS securities 1,685-1,596 - Loss on disposal of AFS securities 2, , Impairment loss on investments in associates and jointly controlled entities 1,500 3,443 1,421 3,263 Loss on disposal of investments in associates and jointly controlled entities 2,496-2,365 - Other bad debt expenses 453 6, ,212 Loss on foreign currency translation 57, ,220 54, ,833 Loss on disposal of property, aircraft and equipment 89, ,659 85, ,183 Impairment loss on property, aircraft and equipment 35,101 43,692 33,262 41,403 Loss on disposal of intangible assets Impairment loss on intangible assets Loss on revaluation of assets 52,530-49,777 - Loss on disposal of discontinued operations 171, ,451 - Miscellaneous loss 149, ,482 - Income tax expense - 180, ,877 Others 3, , (Continued)

11 KOREAN AIR LINES CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2013 AND Interest income (32,160) (42,672) $ (30,474) $ (40,436) Dividend income (3,274) (2,303) (3,102) (2,183) Gain on valuation of derivatives (56,511) (59,039) (53,550) (55,946) Gain on valuation of equity method (32,982) (81,733) (31,254) (77,450) Gain on foreign currency translation (425,088) (824,180) (402,813) (780,991) Reversal of allowance for doubtful accounts (397) (870) (377) (825) Gain on disposal of property, aircraft and equipment (33,983) (29,784) (32,202) (28,224) Gain on disposal of investments in associates and subsidiaries (359) - (340) - Income tax benefit (138,155) - (130,915) - Others (16,438) (9,848) (15,576) (9,332) 2,217,380 1,827,277 2,101,185 1,731,520 Changes in assets and liabilities resulting from operations: Decrease in trade receivables 50,969 89,284 48,298 84,606 Decrease in other receivables 9,403 7,295 8,910 6,913 Decrease (increase) in inventories 26,005 (57,344) 24,642 (54,339) Decrease in financial derivative assets 99,108 5,457 93,914 5,171 Increase in advance payments (23,923) (90,798) (22,670) (86,040) Decrease (increase) in prepaid expenses 2,917 (13,168) 2,765 (12,478) Increase in prepaid value-added tax (1,112) (1,287) (1,053) (1,220) Increase in other current assets (10,097) (2,511) (9,568) (2,379) Decrease in long-term advance payments (344) - (326) - Increase in long-term prepaid expenses , ,256 Decrease in trade payables (42,650) (39,056) (40,415) (37,010) Increase (decrease) in other payables (54,554) 26,498 (51,695) 25,109 Increase (decrease) in accrued expenses (136,708) 62,389 (129,544) 59,119 Increase in advances from customers 88,726 68,672 84,076 65,074 Increase (decrease) in unearned revenue 169 (13,119) 160 (12,431) Increase (decrease) in financial derivative liabilities (20,356) 4,051 (19,289) 3,839 Increase (decrease) in other current liabilities 163 (10,732) 154 (10,169) Decrease (increase) in plan assets 10,987 (10,874) 10,411 (10,304) Payment of severance benefit (80,735) (83,276) (76,504) (78,912) Decrease in provisions for leased aircraft maintenance (2,676) (57,357) (2,536) (54,352) Increase (decrease) in other financial liabilities (274) 64 (259) 61 Increase in deferred revenue 82, ,057 77, ,080 Increase in other non-current liabilities 5,335 18,405 5,055 17,441 2,581 35,915 2,445 34,035 (Continued)

12 KOREAN AIR LINES CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2013 AND Interest received 33,109 46,523 $ 31,374 $ 44,085 Dividends received 95, ,629 90, ,575 Income taxes refunded (paid) (15,209) 4,778 (14,412) 4,528 Net cash provided by operating activities 1,949,345 2,305,493 1,847,195 2,184,680 CASH FLOWS FROM INVESTING ACTIVITIES: Decrease in short-term financial instruments 58, ,026 55, ,221 Disposal of current portion of held-to-maturity investments 857 1, ,665 Decrease in short-term loans Decrease in long-term financial instruments 3 1, ,845 Disposal of AFS financial assets 2,382 1,609 2,257 1,524 Disposal of investments in associates 8,265-7,832 - Disposal of investments in subsidiaries - 37,065-35,123 Disposal of property, aircraft and equipment 146, , , ,681 Disposal of intangible assets 1, , Decrease in guarantee deposits 143, , , ,278 Cash inflows from others 10,578-10,023 - Increase in short-term loans (250,039) (6,898) (236,937) (6,536) Increase in short-term financial instruments (132,010) (106,206) (125,092) (100,641) Increase in long-term financial instruments (1,320) (7,675) (1,251) (7,273) Purchase of AFS financial assets (2,866) (785) (2,715) (743) Purchase of held-to-maturity investments (1,435) - (1,360) - Purchase of investment in associates (3,905) (8,630) (3,700) (8,178) Purchase of investment in direct financing leases (12,684) - (12,019) - Acquisition of property, aircraft and equipment (1,242,378) (905,989) (1,177,275) (858,513) Acquisition of intangible assets (1,231) (1,396) (1,166) (1,322) Acquisition of investment properties (428) - (405) - Increase in guarantee deposits (78,764) (267,860) (74,636) (253,824) Cash outflows for others (21) (29,935) (21) (28,366) Net cash used in investing activities (1,354,765) (657,352) (1,283,772) (622,905) (Continued)

13 KOREAN AIR LINES CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2013 AND CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of short-term borrowings 1,423,121 1,453,389 $ 1,348,547 $ 1,377,228 Proceeds from issuance of debentures 531,709 1,971, ,846 1,867,978 Proceeds from issuance of long-term borrowings 1,516, ,119 1,436, ,457 Proceeds from ABS loans 910, ,454 - Proceeds from issuance of hybrid securities 208, ,915 - Paid in capital increase Increase in guarantee deposits Cash inflows from others Repayments of short-term borrowings (1,768,208) (1,230,352) (1,675,550) (1,165,878) Repayment of current portion of long-term borrowings (2,108,467) (2,697,075) (1,997,979) (2,555,743) Repayments of current portion of obligations under finance leases (957,279) (996,222) (907,115) (944,018) Repayments of long-term borrowings (19,262) (68,979) (18,253) (65,365) Interest on hybrid securities paid (6,720) - (6,368) - Interest paid (489,783) (561,382) (464,117) (531,965) Dividends paid (4,371) (10,869) (4,142) (10,300) Cash outflows due to spin-off (165,016) - (156,369) - Cash outflows for others (180) (35,637) (170) (33,769) Net cash used in financing activities (927,483) (1,590,579) (878,881) (1,507,231) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (332,903) 57,562 (315,458) 54,544 CASH AND CASH EQUIVALENTS, AT THE BEGINNING OF THE YEAR 1,465,499 1,465,748 1,388,704 1,388,940 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (5,771) (57,811) (5,469) (54,780) CASH AND CASH EQUIVALENTS, AT THE END OF THE YEAR 1,126,825 1,465,499 $ 1,067,777 $ 1,388,704 (Concluded) See accompanying notes to consolidated financial statements.

14 KOREAN AIR LINES CO., LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND GENERAL: Korean Air Lines Co., Ltd. (the Company ), which is the controlling entity in accordance with Korean International Financial Reporting Standards ( K-IFRS ) 1110, Consolidated Financial Statements, was established on June 19, 1962, under the Investment Promotion Law of the Republic of Korea and is engaged in the business of domestic and international airline services, manufacture of aircraft parts, maintenance of aircraft and catering of in-flight meals. The Company has been a publicly traded company upon listing its common stock on the Korea Exchange since Total capital stock of the Company as of December 31, 2013, amounted to 298,931 million in par value (including 5,554 million of preferred stock). The principal shareholders of the Company s common shares are Hanjin Transportation Co., Ltd., and Hanjin Kal Co., Ltd., and its affiliates who collectively own 32.08% of outstanding common shares. Meanwhile, the Company spun the investment business unit off as of August 1, 2013 (Note 47). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Financial Statement Presentation The Company and its subsidiaries (the Group ) maintain its official accounting records in and prepare consolidated financial statements in conformity with Korean statutory requirements and K-IFRS, in Korean language (Hangul). Accordingly, these consolidated financial statements are intended for use by those who are informed about K-IFRS and Korean practices. Certain information included in the Korean language financial statements, but not required for a fair presentation of the Group s financial position, operating results, changes in shareholders equity or cash flows is not presented in the accompanying consolidated financial statements. The accompanying consolidated financial statements are stated in, the currency of the country in which the Group is incorporated and operated. The translation of amounts into U.S. dollar amounts is included solely for the convenience of readers outside the Republic of Korea and has been made at the rate of 1, to USD 1.00 on December 31, 2013, the base rate announced by Seoul Money Brokerage Services, Ltd. Such translations should not be interpreted as representations that the amounts could be converted into U.S. dollars at that or any other rate. (1) Basis of Preparation The Group has prepared the consolidated financial statements in accordance with the K-IFRS for the annual period beginning on January 1, The Group s accounting policies applied for the accompanying consolidated financial statements are the same as the policies applied for the preparation of consolidated financial statements as of and for the year ended December 31, 2012, except for the effects from the introduction of new and revised accounting standards of interpretation as described below. The accompanying consolidated financial statements have been prepared on the historical cost basis, except for certain non-current assets and financial instruments that are measured at revalued amounts or fair values, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given.

15 - 2-1) Accounting standards and interpretations that were newly applied for the year ended December 31, 2013 and changes in the Group s accounting policies are as follows: Amendments to K-IFRS 1001 Presentation of Financial Statements The amendments to K-IFRS 1001 require items of other comprehensive income to be grouped into two categories in the other comprehensive income section: (a) items that will not be reclassified subsequently to profit or loss and (b) items that may be reclassified subsequently to profit or loss when specific conditions are met. Other than this presentation change, the application of the amendments to K-IFRS 1001 does not result in any impact on the Group s financial position and financial performance. The amendments have been applied retrospectively for the comparative period, and hence, the presentation of items of other comprehensive income has been modified to reflect the changes. Amendments to K-IFRS 1019 Employee Benefits The amendments to K-IFRS 1019 require the recognition of changes in defined benefit obligations and in fair value of plan assets when they occur and, hence, eliminate the corridor approach permitted under the previous version of K-IFRS 1019 and accelerate the recognition of past service costs. All actuarial gains and losses are recognized immediately through other comprehensive income (the option to recognize actuarial gains and losses in profit or loss has also been removed). Furthermore, the interest cost and expected return on plan assets used in the previous version of K-IFRS 1019 are replaced with a net interest amount under K-IFRS 1019 (as revised in 2011), which is calculated by applying the discount rate to the net defined benefit liability or asset. The amendments to K-IFRS 1019 also require the recognition of past service cost as an expense at the earlier date of (a) when the plan amendment or curtailment occurs and (b) when the Group recognizes related restructuring costs or termination benefits. The application of K-IFRS 1019 has had no material impact on the Group s consolidated financial statements. Amendments to K-IFRS 1107 Financial Instruments: Disclosures The amendments to K-IFRS 1107 are mainly focusing on presentation of the offset between financial assets and financial liabilities and require entities to disclose information about rights of offset and related arrangements (such as collateral agreements) for financial instruments under an enforceable master netting agreement or similar arrangement, irrespective of whether they would meet the offsetting criteria under K-IFRS 1032, Financial Instruments: Presentation. As the Group has neither any offsetting financial instruments under K- IFRS 1032 nor any rights of offset or related arrangements in place, the application of the amendments has had no material impact on the disclosures or on the amounts recognized in the Group s consolidated financial statements. Enactment to K-IFRS 1110 Consolidated Financial Statements K-IFRS 1110 replaces the parts of K-IFRS 1027, Consolidated and Separate Financial Statements, that deal with consolidated financial statements and K-IFRS 2012, Consolidation Special Purpose Entities, and establishes a single basis for consolidation for all entities, including structured entities (the term from K-IFRS 2012, Special-Purpose Entities is no longer used). Under K-IFRS 1110, an investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The application of K-IFRS 1110 has had no material impact on the Group s consolidated financial statements. Enactment to K-IFRS 1111 Joint Arrangement K-IFRS 1111 deals with how a joint arrangement where two or more parties have joint control should be classified either as a joint operation or a joint venture. The classification of joint arrangements under K-IFRS 1111 is determined based on the rights and obligations of parties to the joint arrangements by considering the structure; the legal form of the arrangements; the contractual terms agreed by the parties to the arrangement; and, when relevant, other facts and circumstances. A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement (i.e., joint operators) have rights to the assets, and obligations for the liabilities, relating to the arrangement. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement (i.e., joint venturers) have rights to the net assets of the arrangement. If the Group is a joint operator, the Group is to recognize assets, liabilities, revenues and expenses in relation to its interest in a joint operation, and if the Group is joint ventures, the Group is to account for that investment using the equity method. The application of K-IFRS 1111 has had no material impact on the Group s consolidated financial statements.

16 - 3 - Enactment to K-IFRS 1112 Disclosure of Interest in Other Entities K-IFRS 1112 is a disclosure standard and is applicable to entities that have interests in subsidiaries, joint arrangements, associates or unconsolidated structured entities. This standard requires an entity to disclose the nature of, and risks associated with, its interests in other entities and the effects of those interests on its financial position, financial performance and cash flows. Enactment to K-IFRS 1113 Fair Value Measurement K-IFRS 1113 establishes a single source of guidance for fair value measurements and disclosure about fair value measurements. The standard defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. K-IFRS 1113 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is measured by taking into account the characteristics of the asset or liability that market participants would take when pricing the asset or liability at the measurement date. A fair value measurement under K-IFRS 1113 requires an entity to determine the particular asset or liability that is the subject of measurement, the principal (or most advantageous) market for the asset or liability and the valuation technique appropriate for the measurement. In addition, K-IFRS 1113 requires extensive disclosures about fair value measurements. The application of K-IFRS 1113 has had no material impact on the Group s financial statements. There are some other amendments made to K-IFRS as part of the Annual Improvements to K-IFRS , such as the tax effect of distribution to holders of equity instruments (the amendments to K-IFRS 1032), which has not resulted in material effects on the Group s consolidated financial statements. 2) The Group has not applied or adopted earlier the following new and revised K-IFRS that have been issued, but are not yet effective: Amendments to K-IFRS 1032 Financial Instruments: Presentation The amendments to K-IFRS 1032 clarify existing application issue relating to the offset of financial assets and financial liabilities requirements. Specifically, the amendments clarify the meaning of currently has a legally enforceable right of setoff and simultaneous realization and settlement. The Group s right to offset must not be conditional on the occurrence of future events, but enforceable anytime during the contract periods, during the ordinary course of business with counterparty, a default of counterparty and master netting agreement or in some forms of non-recourse debt. The amendments to K-IFRS 1032 are effective for annual periods beginning on or after January 1, Amendments to K-IFRS 1039 Financial Instruments: Recognition and Measurement The amendments to K-IFRS 1039 allows the continuation of hedge accounting when a derivative is novated to a clearing counterparty or entity acting in a similar capacity and certain conditions are met. The amendment to K-IFRS 1039 is effective for annual periods beginning on or after January 1, Enactment to K-IFRS 2121 Levies K-IFRS 2121 defines a levy as a payment to a government for which an entity receives no specific goods or services. The interpretation requires that a liability is recognized when the obligating event occurs. The obligating event is the activity that triggers payment of the levy and is typically specified in the legislation that imposes the levy. The interpretation is effective for annual periods beginning on or after January 1, The list above does not include some other amendments, such as the Amendments to K-IFRS 1036, Impairment of Assets, relating to recoverable amount disclosures for non-financial assets that are effective from January 1, 2014, with earlier application permitted. The Group does not anticipate that the application of these new and revised K-IFRS that have been issued, but not effective will have any impact on the Group s consolidated financial statements.

17 - 4 - (2) Basis of Consolidation The consolidated financial statements incorporate the financial statements of the Company and entities (including structured entities) controlled by the Company (and its subsidiaries). Control is achieved where the Company 1) has the power over the investee; 2) is exposed, or has rights, to variable returns from its involvement with the investee; and 3) has the ability to use its power to affect its returns. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. Income and expenses of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the date the Company gains control until the date when the Company ceases to control the subsidiary. Profit or loss and each component of other comprehensive income are attributed to the owners of the Company and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Group s accounting policies. All intragroup transactions and related assets, liabilities, income and expenses are eliminated in full on consolidation. Changes in the Group s ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Group s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to owners of the Company. When the Group loses control of a subsidiary, a gain or loss on disposal is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill) and liabilities of the subsidiary and any noncontrolling interests. When assets of the subsidiary are carried at revalued amounts or fair values and the related cumulative gain or loss has been recognized in other comprehensive income and accumulated in equity, the amounts previously recognized in other comprehensive income and accumulated in equity are accounted for as if the Company had directly disposed of the relevant assets (i.e., reclassified to profit or loss or transferred directly to retained earnings). The fair value of any investment retained in the former subsidiary at the date when control is lost is recognized as the fair value on initial recognition for subsequent accounting under K- IFRS 1039 or, when applicable, the cost on initial recognition of an investment in an associate or a joint venture. (3) Business Combination Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the fair values of the assets transferred by the Group [Company], liabilities incurred by the Group [Company] to the former owners of the acquiree and the equity interests issued by the Group [Company] in exchange for control of the acquiree. Acquisition-related costs are generally recognized in profit or loss as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognized at their fair value at the acquisition date, except that: deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements are recognized and measured in accordance with K-IFRS 1012, Income Taxes, and K-IFRS 1019, respectively; liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of the Group [Company] entered into to replace share-based payment arrangements of the acquiree are measured in accordance with K-IFRS 1102, Share-Based Payment, at the acquisition date; and

18 - 5 - assets (or disposal groups) that are classified as held for sale in accordance with K-IFRS 1105, Non-current Assets Held for Sale and Discontinued Operations, are measured in accordance with that standard. Goodwill is measured as the excess of the sum of a) the consideration transferred, b) the amount of any noncontrolling interests in the acquiree and c) the fair value of the acquirer's previously held equity interest in the acquiree (if any), over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of a) the consideration transferred, b) the amount of any noncontrolling interests in the acquiree and c) the fair value of the acquirer's previously held interest in the acquiree (if any), the excess is recognized immediately in profit or loss as a bargain purchase gain. Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity's net assets in the event of liquidation may be initially measured either at fair value or at the noncontrolling interests' proportionate share of the recognized amounts of the acquiree's identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis. Other types of non-controlling interests are measured at fair value or, when applicable, on the basis specified in another K-IFRS. When the consideration transferred by the Group in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement-period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement-period adjustments are adjustments that arise from additional information obtained during the measurement period (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement-period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with K-IFRS 1039 or K-IFRS 1037, Provisions, Contingent Liabilities and Contingent Assets, as appropriate, with the corresponding gain or loss being recognized in profit or loss. When a business combination is achieved in stages, the Group's previously held equity interest in the acquiree is remeasured to fair value at the acquisition date and the resulting gain or loss, if any, is recognized in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognized in other comprehensive income are reclassified to profit or loss where such treatment would be appropriate if that interest was disposed of. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see above), or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognized at that date. (4) Investments in jointly controlled entities and associates An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.

19 - 6 - The results and assets and liabilities of associates or joint ventures are incorporated in these consolidated financial statements using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for in accordance with K-IFRS Under the equity method, an investment in an associate or a joint venture is initially recognized in the consolidated statement of financial position at cost and adjusted thereafter to recognize the Group's share of the profit or loss and other comprehensive income of the associate or joint venture. When the Group's share of losses of an associate or a joint venture exceeds the Group's interest in that associate or joint venture (which includes any long-term interests that, in substance, form part of the Group's net investment in the associate or joint venture), the Group discontinues recognizing its share of further losses. Additional losses are recognized only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture. Any excess of the cost of acquisition over the Group's share of the net fair value of the identifiable assets, liabilities and contingent liabilities of an associate or a joint venture recognized at the date of acquisition is recognized as goodwill, which is included within the carrying amount of the investment. Any excess of the Group s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognized immediately in profit or loss. Upon disposal of an associate or a joint venture that results in the Group losing significant influence over that associate or joint venture, any retained investment is measured at fair value at that date and the fair value is regarded as its fair value on initial recognition as a financial asset in accordance with K-IFRS The difference between the previous carrying amount of the associate or joint venture attributable to the retained interest and its fair value is included in the determination of the gain or loss on disposal of the associate or joint venture. In addition, the Group accounts for all amounts previously recognized in other comprehensive income in relation to that associate or joint venture on the same basis it would be required if that associate or joint venture had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognized in other comprehensive income by that associate or joint venture would be reclassified to profit or loss on the disposal of the related assets or liabilities, the Group reclassifies the gain or loss from equity to profit or loss (as reclassification adjustment) when it loses significant influence over that associate or joint venture. When the Group reduces its ownership interest in an associate or a joint venture, but the Group continues to use the equity method, the Group reclassifies to profit or loss the proportion of the gain or loss that had previously been recognized in other comprehensive income relating to that reduction in ownership interest if that gain or loss would be reclassified to profit or loss on the disposal of the related assets or liabilities. In addition, the Group applies K-IFRS 1105 to a portion of investment in an associate or a joint venture that meets the criteria to be classified as held for sale. The requirements of K-IFRS 1039 are applied to determine whether it is necessary to recognize any impairment loss with respect to the Group s investment in an associate or a joint venture. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with K-IFRS 1036 by comparing its recoverable amount (higher of value in use or fair value, less costs to sell) with its carrying amount, any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized in accordance with K-IFRS 1036 to the extent that the recoverable amount of the investment subsequently increases. The Group continues to use the equity method when an investment in an associate becomes an investment in a joint venture or an investment in a joint venture becomes an investment in an associate. There is no remeasurement to fair value upon such changes in ownership interests. When a Group entity transacts with an associate or a joint venture of the Group, profits and losses resulting from the transactions with the associate or joint venture are recognized in the Group's consolidated financial statements only to the extent of interests in the associate or joint venture that are not related to the Group.

20 - 7 - (5) Interests in joint operations A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. When the Group undertakes its activities under joint operations, the Group as a joint operator recognizes in relation to its interest in a joint operation: its assets, including its share of any assets held jointly; its liabilities, including its share of any liabilities incurred jointly; its revenue from the sale of its share of the output arising from the joint operation; its share of the revenue from the sale of the output by the joint operation; and its expenses, including its share of any expenses incurred jointly. The Group accounts for the assets, liabilities, revenues and expenses relating to its interest in a joint operation in accordance with the K-IFRS applicable to the particular assets, liabilities, revenues and expenses. When the Group transacts in a joint operation in which the Group is a joint operator (such as a sale or contribution of assets), the Group is considered to be conducting the transaction with the other parties to the joint operation, and gains and losses resulting from the transactions are recognized in the Group's consolidated financial statements only to the extent of other parties' interests in the joint operation. When the Group transacts in a joint operation in which the Group is a joint operator (such as a purchase of assets), the Group does not recognize its share of the gains and losses until it resells those assets to a third party. (6) Goodwill Goodwill arising on the acquisition of a business is carried at cost, as established at the date of acquisition of the business, less accumulated impairment losses, if any. For the purpose of impairment testing, goodwill is allocated to each of the Group s cash-generating units (or groups of cash-generating units) that is expected to benefit from the synergies of the combination. A cash-generating unit to which goodwill has been allocated is tested for impairment annually or more frequently when there is indication that the unit may be impaired. If the recoverable amount of the cashgenerating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit on a pro rata basis based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognized directly in profit or loss. An impairment loss recognized for goodwill is not reversed in subsequent periods. On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. The Group s policy for goodwill arising on the acquisition of an associate is described in Note 2. (4). (7) Non-current assets held for sale Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continued use. This condition is regarded as met only when the sale is highly probable and the non-current asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification.