LG HOUSEHOLD & HEALTH CARE, LTD. AND SUBSIDIARIES. Consolidated Financial Statements

Transcription

1 LG HOUSEHOLD & HEALTH CARE, LTD. AND SUBSIDIARIES Consolidated Financial Statements December 31, 2010 and 2009 (With Independent Auditors Report Thereon)

2 Contents Page Independent Auditors Report 1 Consolidated Statements of Financial Position 3 Consolidated Statements of Comprehensive Income 5 Consolidated Statements of Changes in Equity 6 Consolidated Statements of Cash Flows 7 9

3 Independent Auditors Report Based on a report originally issued in Korean The Board of Directors and Stockholders LG Household & Health Care, Ltd.: We have audited the accompanying consolidated statements of financial position of LG Household & Health Care, Ltd. and its subsidiaries (the Group ) as of December 31, 2010, December 31, 2009 and January 1, 2009, and the related consolidated statements of comprehensive income and changes in equity and cash flows for the years ended December 31, 2010 and These consolidated financial statements are the responsibility of the Company s management. Our responsibility is to issue a report on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide 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 LG Household & Health Care, Ltd. and its subsidiaries as of December 31, 2010, December 31, 2009 and January 1, 2009 and the results of its operations and its cash flows for the years ended December 31, 2010 and 209 in conformity with Korean International Financial Reporting Standards. Accounting principles and auditing standards and their application in practice vary among countries. The accompanying consolidated financial statements are not intended to present the financial position, results of operations, changes in equity and cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to audit such consolidated financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying consolidated financial statements are for use by those knowledgeable about Korean International Financial Reporting Standards and their application in practice.

4 KPMG Samjong Accounting Corp. Seoul, Korea February 28, 2011 This report is effective as of February 28, 2011, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any. 2

5 Consolidated Statements of Financial Position As of (In millions of won) Note December 31, 2010 December 31, 2009 January 1, 2009 Assets Cash and cash equivalents 7,8,40 W 44,402 34,172 40,844 Short-term financial deposits 7,40 3, Trade and other receivables 7,9,35,36,37,40 284, , ,808 Inventories 10,31 232, , ,445 Other current assets 11 14,181 8,625 11,932 Total current assets 579, , ,029 Long-term financial deposits 7,37, Other long-term receivables 7,12,40 40,699 27,553 14,248 Available-for-sale financial assets 7,13,40 3,535 3,413 3,257 Held-to-maturity financial assets 7, Investments in associates 14 22,619 18,554 16,182 Deferred tax assets ,030 17,523 Property, plant and equipment, net , , ,091 Investment in properties 15,16 23,002 55,684 9,033 Goodwill ,442 28,747 28,551 Intangible assets, net , , ,151 Other non-current assets 11 4,689 8,457 7,064 Total non-current assets 1,366, , ,118 Total assets W 1,945,003 1,298,744 1,258,147 See accompanying notes to consolidated financial statements. 3

6 Consolidated Statements of Financial Position, Continued As of (In millions of won, except share data) Note December 31, 2010 December 31, 2009 January 1, 2009 Liabilities Trade and other payables 7,35,36,40 W 322, , ,938 Short-term borrowings 7,9,15,18,40 155,292 71, ,478 Current portion of long-term borrowings 7,19, Current portion of long-term debentures, net of debt issuance cost 7,19,40-119,857 79,897 Income taxes payable 33 39,753 13,437 44,111 Provision for sales return 4,714 3,438 4,632 Deferred revenue 22 12,479 18,232 14,212 Other current liabilities 21 82,001 63,421 59,907 Total current liabilities 617, , ,370 Long-term borrowings 7,19, , Long-term debentures, net of debentures issuance cost 7,19,40 348,984 49, ,688 Deposit received 7,40 11,644 3,079 3,865 Post-employment benefit liabilities 20 53,408 39,466 41,950 Deferred tax liabilities 33 59,920 4,269 - Other non-current liabilities 21 8,671 6,472 6,220 Total non-current liabilities 482, , ,698 Total liabilities 1,100, , ,068 Stockholders equity Common stock of W 5,000 par value Authorized - 70,000,000 shares Issued and outstanding - 15,618,197 shares 23 78,091 78,091 78,091 Preferred stock of W 5,000 par value Issued and outstanding - 2,099,697 shares 23 10,498 10,498 10,498 Capital surplus 24 97,326 97,326 97,326 Retained earnings 25,26 675, , ,180 Accumulated other comprehensive income (loss) 27,33 (1,257) (1,740) (356) Other components of equity 28 (71,910) (71,910) (71,910) Non-controlling interests 56,547 51,049 46,250 Total stockholders equity 844, , ,079 Total liabilities and stockholders equity W 1,945,003 1,298,744 1,258,147 See accompanying notes to consolidated financial statements. 4

7 Consolidated Statements of Comprehensive Income For the years ended December 31, 2010 and 2009 (In millions of won, except earnings per share) Note Sales 6,29,35,36 W 2,826,483 2,216,465 Cost of sales 10,31,35,36,37 (1,333,774) (1,087,354) Gross profit 1,492,709 1,129,111 Selling, general and administrative expenses 30,31 (1,165,233) (886,978) Impairment losses 16 (1,958) - Other operating income 30 29,800 7,762 Other operating expense 30 (8,501) (21,751) Operating income 6 346, ,144 Finance income 32 1,471 1,028 Finance expense 32 (29,756) (17,350) Other, net (4,777) (2,606) Gain on valuation of equity method accounted investments 14 4,849 3,591 Profit before income tax 318, ,807 Income taxes 33 (81,652) (54,833) Profit for the year 6 W 236, ,974 Other comprehensive income : 27,33 Actuarial gains and losses on defined benefit pension plans (7,072) (2,611) Available-for-sale financial assets Share of other comprehensive income of associates (44) (537) Exchange differences on translating foreign operations 277 (2,220) Tax effects 2, Other comprehensive income (loss), net of tax (4,408) (4,587) Total comprehensive income W 232, ,387 Total comprehensive income attributable to: -Owners of the parent 226, ,537 -Non-controlling interests 5,847 3,850 Profit attributable to: -Owners of the parent 230, ,383 -Non-controlling interests 6,332 4,591 Earnings per share in won Basic earnings per share 34 W 13,743 9,139 See accompanying notes to consolidated financial statements. 5

8 Consolidated Statements of Changes in Equity For the years ended December 31, 2010 and 2009 (In millions of won) Capital stock Capital surplus Balance at January 1, 2010 W 88,589 97, ,067 (1,740) (71,910) 603,332 51, ,381 Profit for the year , ,620 6, ,952 Dividends - - (41,995) - - (41,995) (466) (42,461) Change in non-controlling interest Actuarial gains and losses on defined benefit pension plans - - (4,405) - - (4,405) (338) (4,743) Change in fair value of available-for-sale financial assets Share of other comprehensive income of associates (34) - (34) - (34) Exchange differences on translating foreign operations (148) 280 Others Balance at December 31, 2010 W 88,589 97, ,386 (1,257) (71,910) 788,134 56, ,681 See accompanying notes to consolidated financial statements. Retained earnings Accumulated other comprehensive income (loss) Other components of equity Equity of the owners of parent Non-controlling interests Total stockholders equity Balance at January 1, 2009 W 88,589 97, ,180 (356) (71,910) 487,829 46, ,079 Profit for the year , ,383 4, ,974 Dividends - - (33,617) - - (33,617) (464) (34,081) Change in non-controlling interest ,402 1,402 Actuarial gains and losses on defined benefit pension plans - - (2,462) - - (2,462) - (2,462) Change in fair value of available-for-sale financial assets Share of other comprehensive income of associates (419) - (419) - (419) Exchange differences on translating foreign operations (1,093) - (1,093) (742) (1,835) Others - - (417) (1) - (418) 12 (406) Balance at December 31, 2009 W 88,589 97, ,067 (1,740) (71,910) 603,332 51, ,381 6

9 Consolidated Statements of Cash Flows For the years ended December 31, 2010 and 2009 (In millions of won) Cash flows from operating activities Profit for the period W 236, ,974 Adjustments for : Depreciation 72,929 67,119 Amortization 6,873 4,361 Post-employment benefits 19,759 17,626 Bad debt expense 86 3,641 Interest expense 29,756 17,350 Income taxes 81,652 54,833 Loss on abandonment of inventories 391 1,716 Loss (gain) on foreign exchange translation, net Loss (gain) on disposal of property, plant and equipment, net Loss gain on disposal of intangible assets, net (1,843) 248 Impairment losses of assets 1,958 - Interest income (1,462) (1,025) Dividends income (9) (3) Gain on valuation of equity method accounted investments (4,849) (3,591) Reversal of allowance for doubtful accounts (761) - Trade and other receivables (37,664) (11,871) Inventories (56,527) 2,124 Other current assets (1,366) 5,945 Other non-current assets 2,832 (7,599) Trade and other payables 45,002 39,633 Other current liabilities 13,245 3,837 Deposit received (1,561) (669) Provision for sales return 567 (1,194) Deferred revenue (7,800) 4,020 Other non-current liabilities 2, Payment of post-employment benefits (12,936) (15,936) Transfer of post-employment benefit liabilities 37 (374) Plan assets (2,513) (6,497) 148, ,711 Cash receipts generated from operating activities Interest received 770 1,032 Dividends received 1, Income tax refunded 102-2,303 1,400 Cash payments generated from operating activities Interest paid 27,421 17,559 Income tax paid 40,400 65,335 (67,821) (82,894) Net cash provided by operating activities W 319, ,191 See accompanying notes to consolidated financial statements. 7

10 Consolidated Statements of Cash Flows, Continued For the years ended December 31, 2010 and 2009 (In millions of won) Cash flows from investing activities Decrease of long-term financial deposits W 60 - Decrease of other loans and receivables Decrease of long-term loans 1,659 12,739 Decrease of guarantee deposits 8,011 1,545 Disposition of held-to-maturity financial assets 1 - Proceeds from disposal of property, plant and equipment 4,910 2,230 Proceeds from disposal of intangible assets 2, Proceeds from disposal of investment in properties 30,500 - Increase of other loans and receivables (720) (110) Increase of guarantee deposits (12,529) (15,707) Increase of long-term loans (2,394) (12,297) Net cash flows from acquisition of subsidiaries (405,951) (6,463) Acquisition of property, plant and equipment (148,648) (110,174) Acquisition of intangible assets (6,578) (1,384) Net cash used in investing activities (528,958) (129,385) Cash flows from financing activities Increase of short-term borrowings 84,423 - Increase of long-term borrowings Increase of debentures 298,758 49,758 Change in non-controlling interest 115 1,402 Repayment of short-term borrowings - (65,428) Repayment of long-term borrowings (1,145) - Repayment of current portion of long-term borrowings (345) (174) Repayment of current portion of long-term debentures (120,000) (80,000) Payment of dividends (41,993) (33,617) Payment of dividends for non-controlling interest (466) (464) Net cash provided by (used in) financing activities 219,347 (127,713) Gain (loss) on foreign exchange translation of cash and cash equivalents (150) (65) Exchange differences on translating foreign operations 501 (1,700) Net increase (decrease) in cash and cash equivalents 10,230 (6,672) Cash and cash equivalents at beginning of year 34,172 40,844 Cash and cash equivalents at end of year W 44,402 34,172 See accompanying notes to consolidated financial statements. 8

11 1. Description of Controlling Company LG Household & Health Care, Ltd. (the Company ) was spun off from LG Corp. (formerly, LG Chem Investment Ltd.) on April 1, 2001, and was registered on April 3, On April 25, 2001, the Company s shares of stock were listed on the Korea Stock Exchange. The Company is engaged in manufacturing and wholesale distribution of household products and cosmetics. The Company has its headquarters in Shinmunro 2-ga, Jongno-gu, Seoul and has manufacturing facilities in Chungju, Ulsan, Onsan and Naju in the Republic of Korea. As of December 31, 2010, capital stock amounts to W 88,589 million, including preferred stock of W 10,498 million, and LG Corp., the Company s major stockholder owns 34.03% of the common stock. The Company is authorized to issue 70 million shares of common and preferred stock at W 5,000 par value per share, and issued and outstanding shares include 15,618,197 shares of common stock and 2,099,697 shares of preferred stock. The preferred stock is non-participating with no voting rights, but is entitled to a non-cumulative preferred dividend rate, 1% of par value over common stock dividend. Consolidated financial statements for the year ended December 31, 2010 consist of the Company and its subsidiaries (the Group ), and the Group s share in the associates. 2. Basis of Preparation (a) Statement of Compliance LG Household & Health Care, Ltd. and its subsidiaries (the Group ) prepared the consolidated financial statements in accordance with Korean International Financial Reporting Standards ( K-IFRS ), as prescribed in the Act on External Audit of Corporation. K-IFRS is effective from the fiscal year beginning on or after January 1, 2011 and the Group early-adopted K-IFRS from The consolidated financial statements are the Group s first consolidated financial statements, with a transition date of January 1, The prior period consolidated financial statements presented for comparative purposes have been restated in accordance with the accounting policies described below. (b) Basis of Measurement The consolidated financial statements have been prepared under the historical cost basis method except as described in the accounting policy below on financial instruments and others. (c) Functional and Presentation Currency The non-consolidated financial statements of the individual entities within the Group are measured by functional currency that is the currency of the primary economic environment in which the individual entity operates. Foreign currency is a currency other than the functional currency of the entity. The functional and presentation currency of the Company is Korean won, and the consolidated financial statements are presented in Korean won. 9

12 2. Basis of Preparation, Continued (d) Use of Estimates and Judgments The preparation of the consolidated financial statements in conformity with K-IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are audited on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised, and in any future periods affected. (e) Basis of Consolidation Subsidiaries Subsidiaries are entities controlled by the Group, where control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. If a member of the Group uses accounting policies other than those adopted in the consolidated financial statements for like transactions and events in similar circumstances, appropriate adjustments are made to its financial statements in preparing the consolidated financial statements. Associates Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity. If the associates use accounting policies other than those of the Group adopted for like transactions and events in similar circumstances, appropriate adjustments are made to its financial statements in applying the equity method. When the Group s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest, including any long-term investments, is reduced to nil and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has to make payments on behalf of the investee for further losses. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. 10

13 2. Basis of Preparation, Continued (e) Basis of Consolidation, Continued A summary of the subsidiaries of the Group A summary of the subsidiaries of the Group as of December 31, 2010 and 2009 are as follows: (In millions of won) 2010 Subsidiaries Location Percentage of ownership Total assets Total liabilities Profit for the year Coca-Cola Beverage Co. Korea 90.00% W 603, ,751 55,785 TheFaceShop Co., Ltd. Korea % 317, ,662 38,507 DIAMOND PURE WATER CO., LTD. Korea % 12,643 1,833 (233) Hankook Beverage Co., Ltd. Korea % 19,335 7,381 2,002 LG Household & Health Care International Trading (Shanghai) Co., Ltd. China % 29,075 30,072 (3,191) Beijing LG Household Chemical Co., Ltd. China 78.00% 21,857 2,808 1,870 Hangzhou LG Cosmetics Co., Ltd. China 81.71% 13,195 1,644 (201) LG Vina Cosmetics Company Limited Vietnam 60.00% 15,841 8, LG Household & Health Care America Inc. USA % 3,343 1, LG Household & Health Care (Taiwan), Ltd. Taiwan 90.00% 5,690 2,621 (157) THEFACESHOP North America Inc. USA % (56) The Faceshop (Shanghai) Co., Ltd(*1) China % 5, (*1) TheFaceShop Co., Ltd., one of the subsidiaries, had decided to invest USD 5,000 thousand to enter the Chinese market at the Board of Directors meeting on July 13, 2010, and finalize establishment of a new corporation on October 12, (In millions of won) 2009 Subsidiaries Location Percentage of ownership Total assets Total liabilities Profit for the year Coca-Cola Beverage Co. Korea 90.00% W 529, ,325 44,114 DIAMOND PURE WATER CO., LTD. Korea % 12,687 1,458 (882) LG Household & Health Care International Trading (Shanghai) Co.,Ltd. China % 27,950 37,419 (10,455) Beijing LG Household Chemical Co., Ltd. China 78.00% 19,799 2,782 2,182 Hangzhou LG Cosmetics Co., Ltd. China 81.71% 19,166 6, LG Vina Cosmetics Company Limited Vietnam 60.00% 17,015 9,599 (1,020) LG Household & Health Care America Inc. USA % 2,691 1, LG Household & Health Care (Taiwan), Ltd. Taiwan 90.00% 2, (482) 11

14 3. Summary of Significant Accounting Policies The significant accounting policies applied by the Group in preparation of its consolidated financial statements are as follows. The Group applies the same accounting policies for these consolidated financial statements ended December 31, 2010 and prior years. (a) Business Combination All business combinations shall be accounted for using the purchase method unless it is a combination involving entities or business under common control. The consideration transferred in a business combination shall be measured at fair value, which shall be calculated as the sum of the acquisition-date fair value of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the acquirer and the equity interests issued by the acquirer. Any acquisition-related costs shall be accounted for as expenses in the periods in which the costs are incurred and services are received. The Group recognizes goodwill as of the acquisition date measured as the excess of the aggregate of (i) the consideration transferred measured in accordance with the related K-IFRS, which generally requires acquisition-date fair value; (ii) amount of any non-controlling interest in the acquiree measured in accordance with K-IFRS; and (iii) in a business combination achieved in stages, the acquisition-date fair value of the acquirer s previously held equity interest in the acquiree, over the net fair value of the identifiable assets acquired and the liabilities. The fair value of property, plant and equipment recognized as a result of a business combination is based on market values. The market value of property is the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm s length transaction with appropriate marketing activity wherein the parties had each acted knowledgeably and willingly. The fair value of items of plant, equipment, fixtures and fittings is based on quoted market prices for similar items. (b) Foreign Currencies Foreign currency transactions are initially recorded using the spot exchange rate to the foreign currency amount between the functional currency and the foreign currency at the date of the transaction. At the end of each reporting period, monetary items in foreign currency are translated using the closing exchange rate at that date. Non-monetary items that are measured based on historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rate at the date when the fair value is determined. Foreign exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements are recognized in profit or loss in the period in which they arise. When gains or losses on non-monetary items are recognized in other comprehensive income, foreign exchange differences included in such gains or losses are recognized in other comprehensive income. When gains or losses on non-monetary items are recognized in profit or loss, exchange differences in such gains or losses are recognized in profit or loss. (c) Cash and Cash Equivalents Cash and cash equivalents comprise cash on hand, demand deposits and short-term, highly liquid investments that are readily convertible to cash and subject to insignificant risk of changes in value. 12

15 3. Summary of Significant Accounting Policies, Continued (d) Non-Derivative Financial Assets The Group recognizes and measures by classifying a non-derivative financial asset into the following four categories: financial assets at fair value through profit or loss, held-to-maturity investments, loans and receivables or available-for-sale financial assets, relating to recognition and measurement of financial assets. The Group recognizes financial assets in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of the instrument. When a financial asset is recognized initially, the Group measures it at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset except for a financial asset at fair value through profit and loss. Financial Assets at Fair Value through Profit or Loss A financial asset is classified at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. Upon initial recognition, transaction costs that are directly attributable to the acquisition are recognized in loss as incurred. Held-to-maturity Financial Assets If the Group has the positive intention and ability to hold to maturity, then such financial assets are classified as held-to-maturity. Subsequent to initial recognition, held-to-maturity financial assets are measured at amortized cost using the effective interest method. Loans and Receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method except for loans and receivables which do not have significant interest revenue. Available-for-sale Financial Assets Available-for-sale financial assets are non-derivative financial assets that are designated as available-forsale and that are not classified as loans and receivables, held to maturity investments or financial assets at fair value through profit or loss. Subsequent to initial recognition, they are measured at fair value. Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments are measured at cost. When the financial asset is derecognized or impairment loss is recognized, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss. Dividends on available-for-sale financial assets are recognized in profit or loss when the Group s right to receive payment is determined. Derecognition of a Financial Asset The Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or when it transfers the rights to receive the cash flows on the financial asset and substantially all the risks and rewards of ownership of the financial asset. If the Group neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset, the Group determines whether it has retained control of the financial asset. If the Group has not retained control, the Group derecognizes the financial asset. If the Group has retained control, the Group continues to recognize the financial asset to the extent of its continuing involvement in the financial asset. If the Group has retained substantially all the risks and rewards of ownership of the transferred asset, the Group continues to recognize the transferred asset in its entirety and recognizes a financial liability for the consideration received. 13

16 3. Summary of Significant Accounting Policies, Continued (d) Non-Derivative Financial Assets, Continued Offsetting between a Financial Asset and a Financial Liability A financial asset and a financial liability are offset and the net amount is presented in the statement of financial position only when the Group currently has a legally enforceable right to offset the recognized amounts, and the intention to settle on a net basis or to realize the asset and settle the liability simultaneously. (e) Financial Liabilities and Equity Capital Financial Liabilities The Group classifies financial liabilities into financial liabilities at fair value through profit or loss or other financial liabilities in accordance with the substance of the contractual arrangement and the definitions of financial liabilities. The Group recognizes financial liabilities in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of the financial liability. Financial liabilities at fair value through profit or loss include financial liabilities held for trading or designated as such upon initial recognition. After initial recognition, financial liabilities at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. Upon initial recognition, transaction costs that are directly attributable to the acquisition are recognized in profit or loss as incurred. Financial liabilities other than financial liabilities at fair value through profit or loss are classified as other financial liabilities. At the date of initial recognition, other financial liabilities are measured at fair value minus transaction costs that are directly attributable to the acquisition. Subsequent to initial recognition, other financial liabilities are measured at amortized cost using the effective interest method. The Group derecognizes financial liability from the consolidated statement of financial position when it is extinguished, for instance, when the obligation specified in the contract is discharged or cancelled or expires. Share Capital An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. (i) Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognized as a deduction from equity, net of any tax effect. (ii) Preference share capital Preference share capital is classified as equity if it is non-redeemable, or redeemable only by the Company s decision, and any dividends are discretionary. Dividends thereon are recognized as distributions within equity upon approval by the Group s shareholders. (iii) Treasury shares If the Group repurchases its own equity instruments, those instruments ( treasury shares ) are recognized as a deduction from equity. The gain or loss on the purchase, sale, issue or cancellation of treasury shares is not recognized in profit or loss but recognized directly in equity. 14

17 3. Summary of Significant Accounting Policies, Continued (f) Property, Plant and Equipment Recognition and Measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. The cost of property, plant and equipment includes expenditure arising directly from the construction or acquisition of the assets, any costs directly attributable to bringing the assets to the location and condition necessary for them to be capable of operating in the manner intended by management and the initial estimate of the costs of dismantling and removing the items and restoring the site on which they are located. When components of property, plant and equipment have significantly different useful lives, they are accounted for as separate assets of property, plant and equipment. Subsequent Costs Subsequent costs are added to the carrying amount of property, plant and equipment accounted for as the components separated from the property, plant and equipment if it is probable that future economic benefits associated with the components will flow to the Group and the cost of the components can be measured reliably. The carrying amount of the existent component replaced with subsequent costs is derecognized. The costs of the day-to-day servicing of property, plant and equipment are recognized in profit or loss as incurred. Depreciation Property, plant and equipment, except for land and some other tangible fixed assets, are depreciated on a straight-line basis that reflects appropriately the pattern in which the asset s future economic benefits are expected to be consumed over the following estimated useful lives. A component that is significant compared to the total cost of property, plant and equipment is depreciated over separate useful lives. The estimated useful lives of the assets are as follows: Useful lives (years) Buildings 25 ~ 50 Structures 25 ~ 50 Machinery 10 ~ 12 Vehicles 5 ~ 10 Tools and equipment 2 ~ 6 Furniture and fixtures 2 ~ 12 Other property, plant and equipment ( Other PP&E ) 4 ~ 5 Depreciation methods, useful lives and residual values are audited at the end of each reporting date and adjusted if a change is appropriate. The change is accounted for as a change in an accounting estimate. 15

18 3. Summary of Significant Accounting Policies, Continued (g) Borrowing Costs The Group capitalizes borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. To the extent that the Group borrows funds specifically for the purpose of obtaining a qualifying asset, the Group determines the amount of borrowing costs eligible for capitalization as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings. To the extent that the Group borrows funds generally and uses them for the purpose of obtaining a qualifying asset, the Group determines the amount of borrowing costs eligible for capitalization by applying a capitalization rate to the expenditures on that asset. The Group recognizes other borrowing costs as an expense in the period in which it incurs them. (h) Goodwill Goodwill arising from acquisition of subsidiary represents the excess of the cost of the business combination over the Group s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree. Goodwill is recognized at acquisition cost at the date of initial acquisition and deducts accumulated impairment losses afterwards. Goodwill acquired in a business combination is allocated to groups of the cash-generating units ( CGUs ) that are expected to benefit from the synergies of the combination. CGUs, which goodwill is allocated to, are tested for impairment annually and/or more frequently if events or changes in circumstances indicate that it might be impaired. Impairment losses recognized in CGU are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amounts of the other assets in the CGU in proportion to the carrying amount of them. An impairment loss allocated in goodwill is not reversed. When the Group disposes subsidiaries, the amounts of related goodwill are accounted for as gain or loss on disposal. (i) Intangible Assets except Goodwill Intangible assets are initially measured at cost. Subsequently, intangible assets are carried at cost less accumulated amortization and accumulated impairment losses. Intangible assets consist of industrial property rights, software, right to facility usage and other intangible assets. Amortization is calculated on a straight-line basis over the estimated useful lives of intangible assets from the date that they are available for use. The residual value of intangible assets is zero. However, as there are no foreseeable limits to the periods over which right to facility usage and other intangible assets (such as brand value and Bottler s Agreement) are expected to be available for use, these intangible assets are determined as having indefinite useful lives and not amortized. Useful lives (years) Industrial property rights 5 ~ 10 Software 3 ~ 6 Other intangible assets 6 ~ 10 16

19 3. Summary of Significant Accounting Policies, Continued (i) Intangible Assets except Goodwill, Continued Amortization periods and the amortization methods for intangible assets with finite useful lives are audited at the end of reporting period. The useful lives of intangible assets that are not being amortized are audited at the end of reporting period to determine whether events and circumstances continue to support indefinite useful life assessments for those assets. If appropriate, the changes are accounted for as changes in accounting estimates. Subsequent expenditure is capitalized only when it increases the future economic benefits from the specific assets to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognized as expense as incurred. (j) Investment Property Properties held to earn rent or for capital appreciation are classified as investment properties. Investment properties are measured initially at cost including transaction costs and after initial recognition, are carried at cost less accumulated depreciation and accumulated impairment losses. Subsequent costs are added to the carrying amount of investment property accounted for as the components separated from the investment property if it is probable that future economic benefits associated with the components will flow to the Group and the cost of the components can be measured reliably. The carrying amount of the existent component replaced with subsequent costs is derecognized. The costs of the day-to-day servicing of investment property are recognized in profit or loss as incurred. Investment properties, except for land, are depreciated on a straight-line basis over 25 ~ 50 years, the estimated useful lives. Depreciation methods, useful lives and residual values are audited at each reporting date and adjusted if appropriate. The change is accounted for as a change in an accounting estimate. (k) Lease The Group classifies and accounts for leases as either a finance or operating lease, depending on the terms. Leases where the Group assumes substantially all of the risks and rewards of ownership are classified as finance leases. All other leases are classified as operating leases. Lease in the financial statements of lessors The Group shall recognize assets held under a finance lease in their statements of financial position and present them as a receivable at an amount equal to the net investment in the lease. The recognition of finance income shall be recognized based on the effective interest method for the balance off the receivable in the finance lease. Lease income from operating leases shall be recognized as income on a straight-line basis over the lease term. Initial direct costs incurred by lessors in negotiating and arranging an operating lease shall be added to the carrying amount of the leased asset and recognized as an expense over the lease term on the same basis as the lease income. 17

20 3. Summary of Significant Accounting Policies, Continued (k) Lease, Continued Lease in the financial statements of lessees At the commencement of the lease term, the Group shall recognize finance leases as assets and liabilities in their statements of financial position at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. Minimum lease payments shall be apportioned between the finance charge and the reduction of the outstanding liability. The finance charge shall be allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Financial charges except capitalized costs to the assets are presented as expenses immediately. Adjustments of lease payment are recognized as expenses in the periods in which they are incurred. Under operating lease, lease payments shall be recognized as an expense on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of the Group s benefit. Contingent rents are charged as expenses in the periods in which they are incurred. (l) Inventories Inventories are measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. The cost of inventories is based on the specification method for materials-in-transit and by the moving-average method and the total-average method for all other inventories, and includes expenditures incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to the location and condition. When inventories are sold, the carrying amount of those inventories is recognized as cost of sales in the period in which the related revenue is recognized. The amount of any write-down of inventories to net realizable value and all losses of inventories are recognized as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realizable value, is recognized as an expense in the period in which the reversal occurs. (m) Impairment Financial assets A financial asset not carried at fair value through profit or loss is assessed at the end of the reporting period to determine whether there is objective evidence that it is impaired. A financial asset is determined to be impaired if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be reliably estimated. Objective evidence that financial assets are impaired includes default or delinquency in principal or interest payments by issuer, relieving the condition for borrowing due to the borrower s financial difficulty, or the disappearance of an active market for that financial asset. For an investment in an unquoted equity security which is classified as available-for-sale financial assets, objective evidence of impairment includes (i) significant financial difficulty of the issuer, (ii) a significant or prolonged decline in its fair value below its cost. 18

21 3. Summary of Significant Accounting Policies, Continued (m) Impairment, Continued If there is objective evidence that an impairment loss has been incurred on financial assets carried at amortized cost, available-for-sale financial assets, the amount of the impairment loss is measured as below: An impairment loss for held-to-maturity financial assets or loans and receivables carried at amortized cost is measured as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset s original effective interest rate. Impairment losses are recognized in profit or loss and reflected in an allowance account for loans and receivables. The amount of the impairment loss on financial assets carried at cost is measured as the difference between the carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment losses are not reversed. When a decline in the fair value of an available-for-sale financial asset has been recognized in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss that had been recognized in other comprehensive income is reclassified from equity to profit or loss. The amount of the cumulative loss that is reclassified from equity to profit or loss is the difference between the acquisition cost and current fair value, less any impairment loss on that financial asset previously recognized in profit or loss. For specific financial assets such as trade receivables, if the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, it collectively assesses them for impairment. The objective evidence that the group of loans and receivables is impaired includes increased number of delayed payments and an adverse change in national or local economic conditions that correlate with defaults on the assets in the group. In a subsequent period, if the increase of the fair value is objectively related to the event from which the impairment loss was recognized, the previously recognized impairment loss is reversed. The amount of the reversal in financial assets carried at amortized cost and a debt instrument classified as available for sale is recognized in profit or loss. However, impairment loss recognized for an investment in an equity instrument classified as available-for-sale is reversed through other comprehensive income. Non-financial assets The carrying amounts of the Group s non-financial assets, other than assets arising from construction contracts or employee benefits, non-current assets held for sale, inventories and deferred tax assets, are audited at the end of the reporting period to determine whether there is any indication of impairment. If any such indication exists, then the asset s recoverable amount is estimated. Goodwill and intangible assets that have indefinite useful lives or that are not yet available for use, irrespective of whether there is any indication of impairment, are tested for impairment annually comparing the recoverable amount and the carrying amount. The Group estimates the recoverable amount of an individual asset, if it is impossible to measure the individual recoverable amount of an asset, then the Group estimates the recoverable amount of CGU. CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. 19

22 3. Summary of Significant Accounting Policies, Continued (m) Impairment, Continued The value in use is estimated by applying a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset for which have not been adjusted in estimating future cash flows, to future cash flows expected to be generated by an asset or CGU. An impairment loss is recognized if the carrying amount of an asset or a CGU exceeds its recoverable amount. Impairment losses are recognized in profit or loss. (n) Non-current assets held for sale Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. For this to be the case, the asset (or disposal group) must be available for immediate sale in its present condition and its sale must be highly probable. The assets or disposal group that are classified as non-current assets held for sale are measured at the lower of their carrying amount and fair value less cost to sell. Immediately before the initial classification of the asset (or disposal group) as held for sale, the carrying amounts of the asset (or all the assets and liabilities in the group) are measured in accordance with applicable K-IFRS. A non-current asset, while it is classified as held for sale or while it is part of a disposal group classified as held for sale, is not depreciated (or amortized). The Group recognizes an impairment loss for any initial or subsequent write-down of an asset(or disposal group) to fair value less costs to sell, and a gain for any subsequent increase in fair value less costs to sell an asset, but not in excess of the cumulative impairment loss that has been recognized previously in accordance with K-IFRS No Impairment of Assets. (o) Employee Benefits Defined contribution plans Defined contribution plans are post-employment benefits plans under which an entity pays fixed contributions to a separate entity and will have no legal or constructive obligation to pay further contributions. The contributions are recognized as an expense when the employees render service. Defined benefit plans Retirement benefits plans other than defined contribution plans is classified as defined benefit plans. The defined benefit liabilities are calculated at the present value of the defined benefit obligations less the fair value of the plan assets at the end of the reporting period. The calculation is performed annually by an independent actuary using the projected unit credit method. The discount rate is the yield at the end of the reporting period on corporate bonds that have maturity dates approximating to the terms of the Group s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The Group recognizes all actuarial gains and losses arising from defined benefit plans in other comprehensive income and presents them in the statements of comprehensive income. 20