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

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1 Consolidated Financial Statements December 31, 2013 and 2012 (With Independent Auditors Report Thereon)

2 Contents Page Independent Auditors Report 1 Consolidated Statements of Financial Position 3 Consolidated Statements of Income 5 Consolidated Statements of Comprehensive Income 6 Consolidated Statements of Changes in Equity 7 Consolidated Statements of Cash Flows 9 11

3 Independent Auditors Report Based on a report originally issued in Korean The Board of Directors and Shareholders 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, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for the years then ended. Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Korea International Financial Standards. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of certain subsidiaries, whose financial statements represent 2.81% and 3.44% of consolidated total assets as of December 31, 2013 and 2012 respectively and 4.36% and 4.19% of consolidated sales for the years then ended respectively. Other auditors audited those financial statements and our report, insofar as it relates to the subsidiaries, is based solely on the reports of other auditors. 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 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 financial statement presentation. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2013 and 2012 and its financial performance and its cash flows for the years then ended in accordance with Korean International Financial Reporting Standards. Without qualifying our opinion, we draw attention to the following: 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 is for use by those knowledgeable about Korean auditing standards and their application in practice.

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5 Consolidated Statements of Financial Position As of December 31, 2013 and 2012 In millions of won Notes Assets Cash and cash equivalents 10,11,47,50 W 143,045 65,204 Short-term financial deposits 10,50 12,500 12,000 Trade receivables 10,12,45,46,50 410, ,286 Other receivables 10,12,45,46,47,50,51 13,013 16,099 Inventories , ,733 Non-current assets held for sale 14,20,51 6,749 - Other current assets 15 19,603 11,545 Total current assets 981, ,867 Long-term financial deposits 10,47,50 1, Other long-term receivables 10,16,45,46,50 71,030 55,297 Available-for-sale financial assets 9,10,17,50 1,635 1,416 Investments in associates 9,18 37,323 25,941 Investments in joint ventures 9,19 8,111 8,886 Deferred tax assets Property, plant and equipment 9,20,45,46,51 1,022,142 1,007,101 Investment property 20,21 23,605 24,125 Goodwill 9,22 669, ,961 Intangible assets 9,20,22,51 616, ,682 Other non-current assets 15 2,485 7,935 Total non-current assets 2,454,029 1,972,269 Total assets W 3,435,104 2,764,136 See accompanying notes to the consolidated financial statements. 3

6 Consolidated Statements of Financial Position, Continued As of December 31, 2013 and 2012 In millions of won Notes Liabilities Trade payables 10,23,45,46,47,50 W 202, ,736 Other payables 10,23,45,46,47,50,51 185, ,230 Short-term borrowings 10,24,45,47,50 317, ,773 Current portion of long-term debentures 10,25,50 79, ,982 Income tax payable 43 65,314 52,801 Deferred revenue 28 15,465 13,701 Provision for sales returns 29 9,104 8,268 Other current liabilities 10,27,30,50 105,925 96,372 Total current liabilities 981, ,863 Long-term borrowings 10,25,47,50 85,613 82,320 Long-term debentures, net of issuance cost 10,25,50 648, ,422 Deposit received 10,50 10,707 13,397 Post-employment benefit liabilities 26 40,889 35,429 Deferred tax liabilities , ,862 Other non-current liabilities 10,26,27,30,50 23,362 40,253 Total non-current liabilities 978, ,683 Total liabilities 1,959,727 1,492,546 Equity Common share of W5,000 par value Authorized - 70,000,000 shares Issued - 15,618,197 shares Outstanding - 14,659,788 shares 31 78,091 78,091 Preferred share of W5,000 par value Issued - 2,099,697 shares Outstanding - 2,096,260 shares 31 10,498 10,498 Capital surplus 32 97,326 97,326 Retained earnings 33,34 1,414,673 1,120,463 Accumulated other comprehensive loss 35 (118,674) (31,887) Other components of equity 36 (73,057) (72,940) Equity attributed to owners of the Company 1,408,857 1,201,551 Non-controlling interests 8 66,520 70,039 Total equity 1,475,377 1,271,590 Total equity and liabilities W 3,435,104 2,764,136 See accompanying notes to the consolidated financial statements. 4

7 Consolidated Statements of Income In millions of won, except earnings per share Notes Sales 9,37,45,46 W 4,326,255 3,896,218 Cost of sales 37,40,45,46 (2,031,823) (1,903,209) Gross profit 2,294,432 1,993,009 Selling, general and administrative expenses 38,40,42 (1,798,020) (1,547,478) Operating profit 9 496, ,531 Finance income 9,41,42 15,242 17,348 Finance cost 9,41,42 (37,389) (34,812) Other non-operating income 39,42 19,675 19,260 Other non-operating expense 39,40,42 (24,063) (22,000) Share of profit of equity accounted investees 9,18,19 3,579 4,963 Profit before income tax 9 473, ,290 Income tax expense 43 (107,803) (118,302) Profit for the year W 365, ,988 Profit attributable to: Owners of the Company 357, ,936 Non-controlling interests 8 8,348 8,052 Earnings per share Basic earnings per share (in won) 44 W 21,311 18,126 See accompanying notes to the consolidated financial statements 5

8 Consolidated Statements of Comprehensive Income In millions of won Notes Profit for the year W 365, ,988 Other comprehensive income (loss) Items that will not be reclassified to profit or loss: 35 Remeasurements of the net defined benefit liability (136) (8,827) Total items that will not be reclassified to profit or loss (136) (8,827) Items that are or may be reclassified subsequently to profit or loss: Change in fair value of available-for-sale financial assets Reclassification of available for-sale financial assets Share of other comprehensive loss of associates (575) (258) Foreign currency translation differences for foreign operations (86,407) (32,437) Other (74) - Total items that are or may be reclassified subsequently to profit or loss (86,975) (32,491) Other comprehensive loss for the year, net of income tax (87,111) (41,318) Total comprehensive income for the year W 278, ,670 Total comprehensive income attributable to: Owners of the Company 270, ,497 Non-controlling interests 8,253 7,173 See accompanying notes to the consolidated financial statements. 6

9 Consolidated Statements of Changes in Equity In millions of won Attributed to owners of the Company Share capital Capital surplus Retained earnings Accumulated other comprehensive income (loss) Other components of equity Total Non-controlling interest Balance at January 1, 2012 W 88,589 97, ,845 (15) (72,314) 997,431 63,146 1,060,577 Comprehensive income for the year Profit for the year , ,936 8, ,988 Other comprehensive income (loss) for the year Remeasurements of the net defined benefit liability - - (8,567) - - (8,567) (260) (8,827) Reclassification of available-for-sale financial assets Share of other comprehensive loss of associates (258) - (258) - (258) Foreign currency translation differences for foreign operations (31,818) - (31,818) (619) (32,437) Subtotal other comprehensive loss for the year - - (8,567) (31,872) - (40,439) (879) (41,318) Total comprehensive income (loss) for the year ,369 (31,872) - 263,497 7, ,670 Transactions with owners of the Company, recognized directly in equity Dividends to owners of the Company(Note 33) - - (58,751) - - (58,751) - (58,751) Acquisition of NCI (621) (621) (280) (901) Others (5) (5) - (5) Balance at December 31, 2012 W 88,589 97,326 1,120,463 (31,887) (72,940) 1,201,551 70,039 1,271,590 Total equity See accompanying notes to the consolidated financial statements. 7

10 Consolidated Statements of Changes in Equity, Continued In millions of won Attributed to owners of the Company Share capital Capital surplus Retained earnings Accumulated other comprehensive income (loss) Other components of equity Total Non-controlling interest Balance at January 1, 2013 W 88,589 97,326 1,120,463 (31,887) (72,940) 1,201,551 70,039 1,271,590 Comprehensive income for the year Profit for the year , ,305 8, ,653 Other comprehensive income (loss) for the year Remeasurements of the net defined benefit liability - - (155) - - (155) 19 (136) Change in fair value of available-for-sale financial assets Share of other comprehensive loss of associates (575) - (575) - (575) Foreign currency translation differences for foreign operations (86,293) - (86,293) (114) (86,407) Other (74) (74) - (74) Subtotal other comprehensive loss for the year - - (155) (86,787) (74) (87,016) (95) (87,111) Total comprehensive income (loss) for the year ,150 (86,787) (74) 270,289 8, ,542 Transactions with owners of the Company, recognized directly in equity Dividends to owners of the Company(note 8,33) - - (62,940) - - (62,940) (427) (63,367) Non-controlling interests (note8) ,155 5,155 Capital reduction of subsidiary (note 8) (16,500) (16,500) Others (43) (43) - (43) Balance at December 31, 2013 W 88,589 97,326 1,414,673 (118,674) (73,057) 1,408,857 66,520 1,475,377 Total equity See accompanying notes to the consolidated financial statements. 8

11 Consolidated Statements of Cash Flows In millions of won Cash flows from operating activities Profit for the year W 365, ,988 Adjustments for : Depreciation 96, ,179 Amortization 13,552 8,394 Post-employment benefits 33,990 29,389 Bad debt expense Reversal of allowance for doubtful accounts (246) (500) Interest expense 37,310 32,961 Impairment losses of available-for-sale financial assets Other bad debt expense 1 8 Loss (gain) on disposal of property, plant and equipment, net 1,307 (1,495) Loss on disposal of intangible assets, net Loss on disposal of subsidiary - 45 Income taxes 107, ,302 Interest income (3,031) (3,352) Dividends income (8) (6) Gain on disposal of available-for-sale financial assets (431) - Gain on foreign exchange translation, net (12,012) (13,475) Share of profit of equity accounted investees (3,579) (4,963) Trade receivables (43,978) (28,789) Other receivables 13,036 5,251 Inventories (48,734) (7,005) Other current assets 1, Other non-current assets 165 (3,097) Trade payables 41,554 (66,689) Other payables (15,258) (42,807) Deferred revenue 1, Provision for sales return 484 (1,775) Other current liabilities 3,105 (3,286) Deposit received (1,219) (154) Payment of post-employment benefits (1,358) (23,783) Transfer of post-employment benefit liabilities Plan assets (27,557) (49,887) Other non-current liabilities (15,328) ,179 47,082 Interest received 3,864 3,046 Dividends received Income tax refund received Interest paid (38,911) (39,594) Income tax paid (122,803) (84,497) Net cash provided by operating activities W 389, ,033 See accompanying notes to the consolidated financial statements. 9

12 Consolidated Statements of Cash Flows, Continued In millions of won Cash flows from investing activities Decrease of short-term financial deposits W Collection of other loans and receivables 2,005 18,576 Decrease of long-term financial deposits - 3 Collection of other long-term receivables 13,951 9,511 Proceeds from disposal of available-for-sale financial assets 1,474 - Proceeds from disposal of property, plant and equipment 4,932 3,261 Proceeds from disposal of intangible assets Increase of short-term financial deposits (500) (9,000) Increase of other loans and receivables (2,091) (27) Increase of long-term financial deposits (1,000) (1) Increase of other long-term receivables (27,867) (16,203) Net cash flows paid for acquisition of subsidiary and business segment(note 7) (333,046) (200,901) Net cash flows from disposal of subsidiaries - (12) Acquisition of investment in associate and joint ventures (8,000) (2,230) Acquisition of property, plant and equipment (134,458) (167,681) Acquisition of intangible assets (7,429) (5,274) Payment for settlement of derivatives (821) - Net cash used in investing activities (492,723) (369,678) Cash flows from financing activities Proceeds from short-term borrowings 214,785 29,621 Proceeds from long-term borrowings ,411 Proceeds from debentures 498, ,373 Distribution of capital to non-controlling interests 5,155 - Repayment of short-term borrowings (1,703) (48,159) Repayment of current portion of long-term borrowings (151,661) (2,837) Repayment of current portion of long-term debentures (300,000) (50,000) Repayment of finance lease liabilities (16) - Acquisition of interests in subsidiary - (901) Payments of dividends (63,364) (58,743) Capital reduction of subsidiary (16,500) - Stock issuance cost of paid-in capital increase of subsidiaries (43) (5) Net cash provided by financing activities 185, ,760 Effect of exchange rate fluctuations on cash and cash equivalents (232) (421) Foreign currency translation differences for foreign operations (3,970) (3,253) Net increase in cash and cash equivalents 77,841 (26,559) Cash and cash equivalents at January 1 65,204 91,763 Cash and cash equivalents at December 31 W 143,045 65,204 See accompanying notes to the consolidated financial statements 10

13 1. Description of the Reporting Entity (1) Description of the 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 incorporated on April 3, On April 25, 2001, the Company s stocks were listed on the Korea Stock Exchange. The Company is engaged in manufacturing and wholesale distribution of household products and cosmetics. The Company is headquartered in 58, Saemunan-ro Jongno-gu, Seoul, Korea and has manufacturing facilities in Chungju, Ulsan, Onsan and Naju in the Republic of Korea. As of December 31, 2013, par value of the Company s capital stock amounts to W88,589 million, including preferred stock of W10,498 million, and LG Corp., the Company s major stockholder owns 34.03% of the common shares. The Company is authorized to issue 70 million shares of common and preferred share at W5,000 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 as of December 31, The preferred stock is nonparticipating with no voting rights, but is entitled to a non-cumulative preferred dividend rate 1% of par value over common share dividend. The accompanying consolidated financial statements consist of the Company and its subsidiaries (the Group ), and the Group s share in the associates and jointly ventures. Details of the subsidiaries and summary financial information are included in note 6 to the consolidated financial statements. 2. Basis of Preparation The consolidated financial statements have been prepared in accordance with Korean International Financial Reporting Standards ( K-IFRS ), as prescribed in the Act on External Audits of Corporations in the Republic of Korea. The consolidated financial statements were authorized for issue by the Board of Directors on January 23, 2014, which will be submitted for approval to the shareholders meeting to be held on March 14, (1) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis, except for the following material items in the consolidated statement of financial position: available-for-sale financial assets are measured at fair value contingent consideration assumed in a business combination liabilities for defined benefit plans are recognized at the net of the total present value of defined benefit obligations less the fair value of plan assets (2) Functional and presentation currency The stand-alone 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. These consolidated financial statements are presented in Korean won, which is the Company s functional currency and presentation currency. 11

14 2. Basis of Preparation, Continued (3) 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 reviewed 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. (a) Judgments Information about judgments made in accounting policies that have the most significant effects on the amounts recognized in the consolidated statements is included in the following notes: Note 22 - the possibility of impairment of goodwill and intangible assets with indefinite useful lives (b) Assumptions and estimation uncertainties Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year are included in the following notes: Note 7 - acquisition of business : measurement of fair value Note 22 - impairment test : the possibility of impairment of goodwill and intangible assets with indefinite useful lives Note 26 - measurement of defined benefit obligations : key actuarial assumptions Note 28 - deferred revenues - key assumptions about the likelihood and magnitude of use of points Note 29, 30 and 49 - provision and contingencies : key assumptions about the likelihood and magnitude of an outflow of resources Note 43 - deferred tax assets : use of unused tax losses (c) Measurement of fair values A number of the Group s accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities. The Group has an established control framework with respect to the measurement of fair values. This includes a valuation team that has overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values, and report directly to the CFO. The valuation team regularly reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or pricing services, in used to measure fair values, then the valuation assesses the evidence obtained from the third parties to support the conclusion that such valuations meet the requirement of K-IFRS, including the level in the fair value hierarchy in which such valuations should be classified. Significant valuation issues are reported to the Audit Committee. When measuring the fair value of an asset of a liability, the Group uses market observable data as far as possible. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows. Level 1 : quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2 : inputs other than quoted prices included in Level 1 that are observable for the assets or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) Level 3 : inputs for the assets or liability that are not based on observable market data (unobservable inputs) 12

15 2. Basis of Preparation, Continued (3) Use of estimates and judgments, continued (c) Measurement of fair values, continued If the inputs used to measure the fair value of an asset or a liability might be categorized in different levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The Group recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred. Further information about the assumptions made in measuring fair values is included in the following note: Note 10, 12 and 50 - financial instruments 3. Changes in accounting policies Except as described below, the accounting policies applied by the Group in these consolidated financial statements are same as those applied by the Group in its consolidated financial statements as of and for the year ended December 31, K-IFRS No. 1110, Consolidated Financial Statements K-IFRS No. 1111, Joint Arrangements K-IFRS No. 1112, Disclosure of Interests in Other Entities K-IFRS No. 1113, Fair Value Measurement K-IFRS No. 1019, Employee Benefits Amendments to K-IFRS No. 1001, Presentation of items of other comprehensive income Amendments to K-IFRS No. 1107, Disclosures of offsetting financial assets and financial liabilities The nature and effects of these changes are explained below. (i) Subsidiaries The Group adopted K-IFRS No. 1110, Consolidated Financial Statements, since January 1, As a result, the Group has changed its accounting policy with respect to determining whether it has control over and consequently whether it consolidates its investees. K-IFRS No introduces a new control model that focuses on whether the Group has power over an investee, exposure or right to variable returns from its involvement with the investee and ability to use its power to affect those returns. In accordance with the adoption of K-IFRS No. 1110, the Group reassessed the control of its investees at January 1, As a result of reassessment of the control, there is no change in subsidiaries. 13

16 3. Changes in accounting policies, Continued (ii) Joint Arrangements Under K-IFRS No. 1111, the standard classifies joint arrangements into two types - joint operation and joint ventures. When making this assessment in accordance with this standard, the Group considered the structure of the arrangements, the legal form of any separate vehicles, the contractual terms of the arrangements and other facts and circumstances. Previously, the structure of the arrangement was the sole focus of classification. The Group has re-evaluated its involvement in its only joint arrangement and has reclassified the investment from a jointly controlled entity to a joint venture. Notwithstanding the reclassification, the investment continues to be recognized by applying the equity method and there has been no impact on the recognized assets, liabilities and comprehensive income of the Group. (iii) Disclosure of Interests in Other Entities As a result of K-IFRS No. 1112, the Group has expanded its disclosures about its interests in subsidiaries (see note 6) and equity-accounted investees (see notes 18 and 19). (iv) Fair value Measurement K-IFRS No establishes a single framework for measuring fair value and making disclosures about fair value measurements when such measurements are required for permitted by other K-IFRSs. It unifies the definition of fair values 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. It replaces and expands the disclosure requirements abut fair value measurements in other K-IFRSs, including K- IFRS No As a result the Group has included additional disclosure in this regard (see notes 10 and 50). In accordance with the transitional provisions of K-IFRS No. 1113, the Group has applied the new fair value measurement guidance prospectively and has not provided any comparative information for new disclosures. Notwithstanding the above, the change had no significant impact on the measurements of the Group s assets and liabilities. (v) Post-employment Defined Benefit Plans As a result of K-IFRS No. 1019, the Group has changed its accounting policy with respect to the basis for determining the income or expense related to its post-employment defined benefit plans. Under K-IFRS No. 1019, the Group determines the net interest expense (income) on the net defined benefit liability (assets) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability (assets), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Consequently, the net interest on the net defined benefit liability (asset) now comprises: interest cost on the defined benefit obligation, interest income on plan assets, and interest on the effect on the asset ceiling. Previously, the Group determined interest income on plan assets based on their long-term rate of expected return. The change in accounting policy did not have any significant impact on the Group s financial statements. (vi) Presentation of Items of OCI As a result of K-IFRS No. 1001, the Group has modified the presentation of items of OCI in its statement of comprehensive income, to present separately items that would be reclassified to profit or loss from those that would never be. Comparative information has been re-presented accordingly. (vii) Offsetting of Financial Assets and Financial Liabilities There is no significant impact on the disclosures about the offsetting of financial assets and financial liabilities that are required as a result of the amendment to K-IFRS No

17 4. Significant Accounting Policies The significant accounting policies applied by the Group in preparation of its consolidated financial statements are included below. The accounting policies set below have been applied consistently to all periods presented in these consolidated financial statements except for the change in accounting policies as explained in Note 3. The Group reclassified certain comparative amounts in the consolidated statement of comprehensive income as a result in amendments to the standard regarding the presentation of items of OCI (note 3 (ⅵ). (1) Operating segments A segment is a distinguishable component of the Group that engages in business activities from which it any earn revenues and incur expenditures, whose operating results are regularly reviewed by the Group s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. The Group has three operating segments which consist of Healthy, Beautiful and Refreshing as described in note 9. Segment results that are reported to the chief operating decision maker include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. (2) Basis of consolidation (i) Business combination A business combination is accounted for by applying the acquisition method, unless it is a combination involving entities or business under common control. The consideration transferred in the acquisition is generally measured at fair value, as are identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchases is recognized in profit or loss immediately. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognized in profit or loss. Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognized in profit or loss. If share-based payment awards (replacement awards) are required to be exchanged for awards held by the acquiree s employees (acquiree s awards), then all or a portion of the amount of the acquirer s replacement awards is included in measuring the consideration transferred in the business combination. This determination is based on the market-based measure of the replacement awards compared with the market-based measure of the acquiree s awards and the extent to which the replacement awards relate to pre-combination service. (ii) Non-controlling Interests( NCI ) NCI are measured at their proportionate share of the acquiree s identifiable net assets ant the acquisition date. Changes in the Group s interest in subsidiary that do not result in loss of control are accounted for as equity transaction. 15

18 4. Significant Accounting Policies, Continued (2) Basis of consolidation, continued (iii) Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has ability to affect those returns through its power over the entity. The financial statements of subsidiaries are include in the consolidated financial statements from the date on which control commences until the date on which control ceases. (iv) Loss of control When the Group losses control over a subsidiary, it derecognizes the assets and liabilities of the subsidiary, and any related NCI and other components of equity. Any resulting gain or loss is recognized in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost. (v) Interests in equity-accounted Investees The Group s interests in equity-accounted investees comprise interest in associates and a joint venture. Associates are those entities in which the Group has significant influence, but not control or joint control, over the financial and operating policies. A joint venture is an arrangement in which the Group has joint control, whereby the Group has rights to the net assets of the arrangement, rather than rights its assets and obligations for its liabilities. Interests in associates and the joint venture are accounted for using the equity method. They are recognized initially at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Group s share of the profit or loss and OCI of equityaccounted investees, until the date on which significant influence or joint control ceases. (vi) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealized income and expenses arising from intragroup transactions, are eliminated. Unrealized gains arising from transactions with equityaccounted investees are eliminated against the investment to the extent of the Group s interest in the investee. Unrealized losses are eliminated in the same way unrealized gains, but only to the extent that there is no evidence of impairment. (vii) Business combination under common control For business combination under common control, the Group recognized assets and liabilities acquired using carrying amount in the consolidated financial statement of the ultimate parent. (3) Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposit with maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments. 16

19 4. Significant Accounting Policies, Continued (4) Inventories The cost of inventories is based on the specification method for goods-in-transit and on the totalaverage method and moving average method for all other inventories, and includes expenditures for acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing 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. 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 selling expenses. The amount of any writedown 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, are recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs. (5) Non-derivative financial assets The Group recognizes and measures non-derivative financial assets by the following four categories: financial assets at fair value through profit or loss, held-to-maturity investments, loans and receivables and available-for-sale 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. Upon initial recognition, non-derivative financial assets are measured at their 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 asset s acquisition or issuance. (i) Financial assets at fair value through profit or loss A financial asset is classified as financial assets at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Subsequent to 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 are recognized in profit or loss when incurred. (ii) Held-to-maturity investments A non-derivative financial asset with a fixed or determinable payment and fixed maturity, for which the Group has the positive intention and ability to hold to maturity, are classified as held-to-maturity investments. Subsequent to initial recognition, held-to-maturity investments are measured at amortized cost using the effective interest method. (iii) 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 of which the effect of discounting is immaterial. 17

20 4. Significant Accounting Policies, Continued (5) Non-derivative financial assets, continued (iv) Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified as financial assets at fair value through profit or loss, held-tomaturity investments or loans and receivables. Subsequent to initial recognition, they are measured at fair value, which changes in fair value, net of any tax effect, recorded in other comprehensive income in equity. 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 such unquoted equity instruments and must be settled by delivery of such unquoted equity instruments are measured at cost. When a financial asset is derecognized or impairment losses are recognized, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss. Dividends on an available-for-sale equity instrument are recognized in profit or loss when the Group s right to receive payment is established. (v) De-recognition of financial assets The Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or the Group transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognized as a separate asset or liability. If the Group retains substantially all the risks and rewards of ownership of the transferred financial assets, the Group continues to recognize the transferred financial assets and recognizes financial liabilities for the consideration received. (vi) Offsetting between financial assets and financial liabilities Financial assets and financial liabilities are offset and the net amount is presented in the consolidated statement of financial position only when the Group currently has a legally enforceable right to offset the recognized amounts, and there is the intention to settle on a net basis or to realize the asset and settle the liability simultaneously. (6) Derivative financial assets Derivatives are initially recognized at fair value. Subsequent to initial recognition, derivatives are measured at fair value except derivative asset that is linked to and must be settled by delivery of an equity instrument that does not have a quoted price in an active market for an identical instrument whose fair value cannot otherwise be reliably measured, which shall be measured at cost. Embedded derivatives are separated from the host contract and accounted for separately only if the following criteria have been met: - the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract; - a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and - the hybrid instrument is not measured at fair value with changes in fair value recognized in profit or loss. Changes in the fair value of separable embedded derivatives are recognized immediately in profit or loss. 18

21 4. Significant Accounting Policies, Continued (7) Impairment of financial assets A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has 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 estimated reliably. However, losses expected as a result of future events, regardless of likelihood, are not recognized. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. If financial assets have objective evidence that they are impaired, impairment losses should be measured and recognized. (i) Financial assets measured at amortized cost An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of its estimated future cash flows discounted at the asset s original effective interest rate. If it is not practicable to obtain the instrument s estimated future cash flows, impairment losses would be measured by using prices from any observable current market transactions. The Group can recognize impairment losses directly or establish a provision to cover impairment losses. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss shall be reversed either directly or by adjusting an allowance account. (ii) Financial assets carried at cost The amount of the impairment loss in respect of a financial assets carried at cost is measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss is not reversed. (iii) Available-for-sale financial assets 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 shall be reclassified from equity to profit or loss as a reclassification adjustment even though the financial asset has not been derecognized. Impairment losses recognized in profit or loss for an investment in an equity instrument classified as available-for-sale shall not be reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss shall be reversed, with the amount of the reversal recognized in profit or loss. 19

22 4. Significant Accounting Policies, Continued (8) Property, plant and equipment Property, plant and equipment are initially measured at cost. The cost of property, plant and equipment includes expenditures arising directly from the construction or acquisition of the asset, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management and the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located. Subsequent to initial recognition, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses. Property, plant and equipment, except for land, are depreciated on a straight-line basis over estimated useful lives that appropriately reflect the pattern in which the asset s future economic benefits are expected to be consumed. A component that is significant compared to the total cost of property, plant and equipment is depreciated over its separate useful life. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognized in profit or loss. The estimated useful lives of the Group s assets are as follows: Useful lives (years) Buildings 20 ~ 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 reviewed at the end of each reporting date and adjusted, if appropriate. The change is accounted for as a change in accounting estimate. The Group changed its accounting estimations in useful lives of certain furniture and fixtures from 2, 5 and 9 years to 3, 7 and 11 years respectively (see note 20). (9) Intangible assets Intangible assets are measured initially at cost and, subsequently, are carried at cost less accumulated amortization and accumulated impairment losses. Amortization of intangible assets except goodwill 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 club memberships 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. 20

23 4. Significant Accounting Policies, Continued (9) Intangible assets, continued The estimated useful lives of the Group s intangible assets are as follows: Useful lives (years) Industrial property rights 5 ~ 10 Software 3 ~ 6 Other intangible assets 5 ~ 15 Amortization periods and the amortization methods for intangible assets with finite useful lives are reviewed at the end of each reporting period. The useful lives of intangible assets that are not being amortized are reviewed at the end of each reporting period to determine whether events and circumstances continue to support indefinite useful life assessments for those assets. Changes are accounted for as changes in accounting estimates. (i) Research and development Expenditures on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, are recognized in profit or loss as incurred. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Group intends to and has sufficient resources to complete development and to use or sell the asset. Other development expenditures are recognized in profit or loss as incurred. (ii) Subsequent expenditures Subsequent expenditures are capitalized only when they increase the future economic benefits embodied in the specific asset to which it relates. All other expenditures, including expenditures on internally generated goodwill and brands, are recognized in profit or loss as incurred. (10) 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. Other borrowing costs are recognized in expense as incurred. A qualifying asset is an asset that requires a substantial period of time to get ready for its intended use or sale. Financial assets and inventories that are manufactured or otherwise produced over a short period of time are not qualifying assets. Assets that are ready for their intended use or sale when acquired are not qualifying assets. 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 shall determine the amount of borrowing costs eligible for capitalization by applying a capitalization rate to the expenditures on that asset. The capitalization rate shall be the weighted average of the borrowing costs applicable to the borrowings of the Group that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs that the Group capitalizes during a period shall not exceed the amount of borrowing costs incurred during that period. 21

24 4. Significant Accounting Policies, Continued (11) Government grants Government grants are not recognized unless there is reasonable assurance that the Group will comply with the grant s conditions and that the grant will be received. Government grants which are intended to compensate the Group for expenses incurred are recognized as deduction to related expenses in profit or loss over the periods in which the Group recognizes the related costs as expenses. (12) Investment property Property held for the purpose of earning rentals or benefiting from capital appreciation is classified as investment property. Investment property is initially measured at its cost. Transaction costs are included in the initial measurement. Subsequently, investment property is carried at depreciated cost less any accumulated impairment losses. Subsequent costs are recognized in the carrying amount of investment property at cost or, if appropriate, as separate items if it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing are recognized in profit or loss as incurred. Investment properties, except for land, are depreciated on a straight-line basis over estimated useful lives of 25 ~ 50 years. Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. The change is accounted for as a change in an accounting estimate. (13) Impairment of non-financial assets The carrying amounts of the Group s non-financial assets, other than assets arising from employee benefits, inventories, deferred tax assets and non-current assets held for sale, are reviewed 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 by comparing their recoverable amount to their 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 cashgenerating unit ( CGU ). The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. The value in use is estimated by applying a post-tax discount rate that reflect current market assessments of the time value of money and the risks specific to the asset or CGU for which estimated future cash flows have not been adjusted, to the estimated future cash flows expected to be generated by the asset or CGU. An impairment loss is recognized in profit or loss if the carrying amount of an asset or a CGU exceeds its recoverable amount. 22