Korea Development Bank

Transcription

1 Interim consolidated financial statements Six months ended with independent accountants review report

2 Interim consolidated financial statements Six months ended with independent accountants review report

3 Contents Page Independent accountants review report 1-2 Interim consolidated statements of financial position 3-4 Interim consolidated statements of income 5-6 Interim consolidated statements of changes in equity 7 Interim consolidated statements of cash flows

4 Independent accountants review report The Board of Directors Korea Development Bank We have reviewed the accompanying interim consolidated statement of financial position of Korea Development Bank (the Bank ) and its subsidiaries (collectively the Company ) as of June 30, 2010 and the related interim consolidated statements of income, changes in equity and cash flows for the six -month periods ended. These interim consolidated financial statements are the responsibility of the Company s management. Our responsibility is to express a conclusion on these interim consolidated financial statements based on our reviews. We did not review the interim financial statements of Daewoo Shipbuilding & Marine Engineering Co., Ltd., a consolidated subsidiary. The subsidiary represents 10.87% of the Company s interim consolidated total assets as of June 30, 2010, and 61.38% of the Company s interim consolidated income before income taxes for the six-month period ended June 30, Those interim financial statements were reviewed by other accountants whose report has been furnished to us, and our conclusion, insofar as it relates to the amounts included for Daewoo Shipbuilding & Marine Engineering Co., Ltd., is based solely on the report of other accountants. We conducted our reviews in accordance with review standard for interim financial statements in the Republic of Korea. That standard requires that we plan and perform the review to obtain moderate assurance about whether the financial statements are free of material misstatement. A review is limited primarily to inquiries of company personnel and analytical procedures applied to financial data and thus provides less assurance than an audit. We have not performed an audit and, accordingly, we do not express an audit opinion. Based on our reviews and the report of other accountants, nothing has come to our attention that causes us to believe that the accompanying interim consolidated financial statements are not presented fairly, in all material respects, in accordance with accounting principles generally accepted in the Republic of Korea. We have previously audited, in accordance with generally accepted auditing standards in the Republic of Korea, the consolidated statement of financial position of Korea Development Bank as of December 31, 2009, and the related consolidated statements of income, appropriations of retained earnings, changes in equity and cash flows for the year then ended (not presented herein); and in our report dated March, 18, 2010, we expressed an unqualified opinion on those statements. The accompanying consolidated statement of financial position of the Company as of December 31, 2009, which is presented for comparative purposes, does not materially differ from the above audited consolidated statement of financial position. 1

5 The Board of Directors Korea Development Bank Accounting principles and review standard and their application in practice vary among countries. The accompanying interim 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 review such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying interim consolidated financial statements are for use by those who are knowledgeable about Korean accounting principles and review standard and their application in practice. August 16, 2010 This review report is effective as of August 16, 2010, the independent accountants review report date. Accordingly, certain material subsequent events or circumstances may have occurred during the period from the accountants review report date to the time this review report is used. Such events and circumstances could significantly affect the accompanying interim consolidated financial statements and may result in modifications to this report. 2

6 1. Company information The accompanying interim consolidated financial statements include Korea Development Bank (the Bank ), certain trust accounts of Korea Development Bank (the Trust Accounts ) and its controlled subsidiaries (collectively, the Company ). The general information describing the Company and its equity method investees is provided below. Korea Development Bank The Bank was established in 1954 in accordance with the Korea Development Bank Act of the Republic of Korea to supply and manage major industrial funds for the promotion of the industrial development and advancement of the national economy. The Bank has 47 local branches (HQ branch included), 7 overseas branches, 5 overseas subsidiaries and 2 overseas offices at June 30, The Bank is engaged in the banking business under the Korea Development Bank Act and other related regulations and in the trust business in accordance with the Financial Investment Services and Markets Act. The Bank s spin-off On October 28, 2009, the Bank spun off its public finance unit and financial subsidiaries business support unit into Korea Finance Corporation ( KoFC ) and KDB Financial Group ( KDBFG ), respectively. New shares of the two new entities were issued and distributed to the Bank s stockholder at the spin-off date on a pro-rata basis, and the Bank continues its remaining operations. The Bank and the new entities will be jointly and severally liable for all liabilities existing prior to the spin-off. On November 24, 2009, the Korea government who was also the sole equity owner of the Bank, exchanged the Bank's shares with KDBFG shares at the exchange ratio of KDBFG share for every 1 share of the Bank. Immediately after the completion of the share exchange, the Bank became a wholly-owned subsidiary of KDBFG. The capital stock of the Bank amounts to \9,251,861 million as of June 30, Consolidated subsidiaries The Company s invested amount and ownership percentages in its subsidiaries as of June 30, 2010 and December 31, 2009 are summarized as follows (Korean won in millions, US dollar, Brazilian reais and Thai baht in thousands, Hungarian forint and Lumania leu in millions): KDB Ownership Invested amount (%) June 30, December 31, June 30, Investor Subsidiaries (Unaudited) (Audited) (Unaudited) Domestic direct subsidiaries: Daewoo Shipbuilding & Marine Engineering Co., Ltd. \ 288,383 \ 288, Korea Marine Finance Corp. (*1) 1,200 1, Korea Infrastructure Fund 32,274 57, KDB Value Private Equity Fund I (*2) - 31,500 - KDB Value Private Equity Fund II 102, , KDB Value Private Equity Fund III 63,465 63, KDB Venture M&A 14,240 14, KDB Turn Around 48,080 48, KDB-Tstone Private Equity Fund (*3) 19, KDB Consus Value (*3) 188,

7 1. Company information (cont d) Consolidated subsidiaries (cont d) Ownership Invested amount (%) June 30, December 31, June 30, Investor Subsidiaries (Unaudited) (Audited) (Unaudited) Components and Materials M&A Private Equity Fund (*3) 17, KoFC-KDB Materials and Components Investment Fund No.1 (*3) 12, \ 789,245 \ 643,675 Overseas direct subsidiaries: KDB KDB Asia (HK) Ltd. USD 140,000 USD 140, KDB Ireland Co., Ltd. USD 20,000 USD 20, KDB Bank (Hungary) Ltd. HUF 17,290 HUF 17, Banco KDB Brasil S.A. BRL 175,509 BRL 67, KDB Uzbekistan, Ltd. USD 8,949 USD 8, USD 168,949 USD 168,949 HUF 17,290 HUF 17,290 BRL 175,509 BRL 67,554 Domestic indirect subsidiaries: Daewoo Shipbuilding & Marine Engineering Co., Ltd. DSEC Co., Ltd. \ 14,117 \ 14, Welliv Corp. 23,617 23, Shinhan Machinery Co., Ltd. 62,981 62, DSME Construction Co., Ltd. 81,434 81, DSME E&R Ltd. 35,973 35, DeWind Co. 49,956 49, Korea Marine Finance Corp. (*1) 2,000 2, KDB Turn Around SunStar Co., Ltd. 48,550 48, Components and Materials M&A Private Equity Fund Aurora Investment Ltd. 23, KDB Consus Value KDB Life Insurance Co., Ltd. 480, \ 822,246 \ 318,628 Overseas indirect subsidiaries: Daewoo Shipbuilding & Marine Engineering Co., Ltd. Dw Mangalia Heavy Industries Lei 156,138 Lei 156, DSME-Shandong Co., Ltd. USD 79,900 USD 79,

8 1. Company information (cont d) Consolidated subsidiaries (cont d) (*1) Korea Marine Finance Corp. is a subsidiary of the Bank and Daewoo Shipbuilding & Marine Engineering Co., Ltd. (*2) KDB Value Private Equity Fund I was excluded from consolidation since it is in the process of liquidation. (*3) These subsidiaries were included in consolidation. Trust Accounts In accordance with financial reporting guidelines prescribed in the Regulations on Supervision of Bank Business, the Trust Accounts of the Bank where the Bank has provided guarantees on principal amount of the trust shares issued by the trusts are consolidated. Such trusts include development trusts, general unspecified money trusts, private pension trusts, retirement trusts, oldage living pension trusts, new private pension trusts, new old-age living pension trusts and others which are all consolidated. Trust Accounts for which the Bank did not provide such guarantees are not subject to being consolidated. Daewoo Shipbuilding & Marine Engineering Co., Ltd. Daewoo Shipbuilding & Marine Engineering Co., Ltd. ( Daewoo S&ME ) was established on October 1, 2000 by a split off from Daewoo Heavy Industries & Machinery Ltd. and its shares were listed on the Korea Exchange on February 2, 2001, and its global depositary receipts were listed on the Luxembourg Stock Exchange on June 10, Daewoo S&ME was originally named as Daewoo Shipbuilding & Engineering Co., Ltd., and its name was subsequently changed to Daewoo Shipbuilding & Marine Engineering Co., Ltd. in March 16, Daewoo S&ME is engaged in manufacturing naval ships, submarines and other special purpose vessels. Paid-in capital of Daewoo S&ME is \961,954 million as of June 30, Korea Marine Finance Corp. Korea Marine Finance Corp. ( KOMARF ) was established on February 7, 2003 in accordance with the Ship Investment Company Act. KOMARF is engaged in the management business consigned by ship investment companies. Paid-in capital of KOMARF is \8,500 million as of June 30, Korea Infrastructure Fund Korea Infrastructure Fund ( KIF ) was established on December 15, 1999 in accordance with Financial Investment Services and Capital Markets Act ( FSCMA ) and the Private Participation in Infrastructure Act ( PPIA ). KIF is an investment company that operates by investing in entities that have entered into long-term concession agreements with central, provincial and city governments in Korea implemented under the framework of the PPIA. Korea Infrastructure Investment Asset Management Co., Ltd. is the Korea Infrastructure Fund s asset manager. Paid-in capital of Korea Infrastructure Fund is \41,842 million as of June 30, KDB Value Private Equity Fund II KDB Value Private Equity Fund II ( KDB Fund II ) was established on September 27, 2006 in accordance with the FSCMA to engage in investing in securities. Paid-in capital of KDB Fund II is \199,100 million as of June 30, KDB Value Private Equity Fund III KDB Value Private Equity Fund III ( KDB Fund III ) was established on September 16, 2008 in accordance with the FSCMA to engage in investing in securities. Paid-in capital of KDB Fund III is \91,688 million as of June 30,

9 1. Company information (cont d) Consolidated subsidiaries (cont d) KDB Venture M&A KDB Venture M&A was established on May 2, 2007 in accordance with the FSCMA to engage in investing in securities. Paid-in capital of KDB Venture M&A is \24,740 million as of June 30, KDB Turn Around KDB Turn Around was established on April 8, 2009 in accordance with the FSCMA to engage in private equity financial service. Paid-in capital of KDB Turn Around is \50,540 million as of June 30, KDB-Tstone Private Equity Fund KDB-Tstone Private Equity Fund ( KDB-Tstone ) was established on January 29, 2010 in accordance with the FSCMA to engage in private equity financial services. On June 30, 2010, the Bank acquired 46.67% ownership interest of KDB-Tstone, which became subject to consolidation. Paid-in capital of KDB-Tstone is \41,758 million as of June 30, KDB Consus Value KDB Consus Value was established on February 22, 2010 in accordance with the FSCMA to engage in private equity financial services. On June 30, 2010, the Bank acquired 38.41% ownership interest of KDB Consus Value, which became subject to consolidation. Paid-in capital of KDB Consus Value is \491,500 million as of June 30, Components and Materials M&A Private Equity Fund Components and Materials M&A Private Equity Fund ( Components and Materials M&A ) was established on January 28, 2010 in accordance with the FSCMA to engage in private equity financial services. On June 30, 2010, the Bank acquired 83.33% ownership interest of Components and Materials M&A, which became subject to consolidation. Paid-in capital of Components and Materials M&A is \21,500 million as of June 30, KoFC-KDB Materials and Components Investment Fund No.1 KoFC-KDB Materials and Components Investment Fund No.1 was established on June 29, 2010 in accordance with the Act on Special Measures for the Promotion of Specialized Enterprises, etc. for Components and Materials to engage in private equity financial services. On June 30, 2010, the Bank acquired 50.00% ownership interest of KoFC-KDB Materials and Components Investment Fund No.1, which became subject to consolidation. Paid-in capital of KoFC-KDB Materials and Components Investment Fund No.1 is \25,000 million as of June 30, KDB Asia (HK) Ltd. KDB Asia (HK) Ltd. was incorporated on January 23, 1986 in Hong Kong. KDB Asia (HK) Ltd. is engaged in providing financing services to Korean companies and investing in securities. Paid-in capital of KDB Asia (HK) Ltd. is USD140 million as of June 30, KDB Ireland Co., Ltd KDB Ireland Co., Ltd. was incorporated on June 18, 1997 in Ireland. KDB Ireland Co., Ltd. is engaged in providing financing services to Korean companies and investing in securities. Paid-in capital of KDB Ireland Co., Ltd. is USD25 million as of June 30,

10 1. Company information (cont d) Consolidated subsidiaries (cont d) KDB Bank (Hungary) Ltd. KDB Bank (Hungary) Ltd. was incorporated on February 1, 1990 to engage in commercial banking business. On December 30, 2002, the Bank took over all the shares of KDB Bank (Hungary) Ltd. which were previously owned by Daewoo Securities Co., Ltd. ( Daewoo Securities ). Paid-in capital of KDB Bank (Hungary) Ltd. is HUF15,340,100 thousand as of June 30, Banco KDB Brasil S.A. Banco KDB Brasil S.A. was incorporated on October 25, 2005 to engage in providing financing services to companies and investing in securities and investment bank business. Paid-in capital of Banco KDB Brasil S.A. is BRL175,509 thousand as of June 30, KDB Uzbekistan, Ltd. KDB Uzbekistan, Ltd. was incorporated on March 1, 1997 to engage in providing financing services to companies and investing in securities and investment bank business. On February 10, 2006, the Bank took over the shares of KDB Uzbekistan, Ltd. which were previously owned by Daewoo Securities. Paid-in capital of KDB Uzbekistan, Ltd. is USD6,361 thousand as of June 30, Consolidated indirect subsidiaries information Information of the Company s indirect subsidiaries as of June 30, 2010 is summarized as follows (Korean won in millions): Net asset Value Investors Investees (Unaudited) Principal activity Daewoo S&ME DSEC Co., Ltd. \ 68,682 Providing service & Wholesale ` business Welliv Corp. 64,241 Providing service Shinhan machinery Manufacturing of Co., Ltd. 57,388 shipping part DSME Construction Co., Ltd. 83,878 Engineering & construction industry DSME E&R Ltd. 34,744 Investment & retail business DeWind Co. 33,756 Wind turbine design & development Dw Mangalia Heavy Industries (235,381) Shipbuilding DSME-Shandong Co., Ltd. 169,913 Manufacturing of shipping part KDB Turn Around SunStar Co., Ltd. 21,739 Sewing machine manufacturing & retail business KDB-Tstone Aurora Investment Ltd. 23,427 Investments and others KDB Consus Value KDB Life Insurance Co., Ltd. 140,751 Insurance 14

11 1. Company information (cont d) Equity method Investments Information of the Company s equity method investments as of June 30, 2010 and December 31, 2009 are summarized as follows (Korean won in millions): June 30, 2010 December 31,2009 (Unaudited) (Audited) Invested Invested capital Ownership capital Ownership Principal Investor Investee amount (%) amount (%) activity KDB Korea BTL Fund I \ 194, \ 170, Investment Business KDB electronic power PEF 148, , Investment Business Korea Infrastructure Fund II 100, , Investment Business Korea Railroad Fund I 96, , Investment Business Korea Education Fund 81, , Investment Business National Pension Service 05-4 KDB bio venture Investment partnership 7, , Business Sewon Corporation 4, , Manufacturing of automobile parts Moorim P&P Co., Ltd , Paper and lumber business Daewoo S&ME DK Maritime S.A. 62, , Ship management KLDS Maritime S.A. 20, , Ship management Samwoo Heavy Manufacturing Industries Co., Ltd. 17, of ship Samwoo Propeller Co., Ltd. 13, Manufacturing of shipping part 2. Summary of significant accounting policies Basis of financial statement preparation The accompanying interim consolidated financial statements do not disclose all information and disclosures required in the annual consolidated financial statements and should be read in conjunction with the annual consolidated financial statements as of December 31, The Company maintains its official accounting records in Korean won and prepares financial statements in Korean language in conformity with accounting principles generally accepted in the Republic of Korea (henceforth Korean GAAP ) with the exception of overseas branches and subsidiaries, where the Company used financial statements prepared in accordance with the financial accounting standards generally accepted in their jurisdictions, with adjustments to align with Korean GAAP, if the adjustments materially effects the Company s interim consolidated financial statements. Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these financial statements are intended for use by those who are informed about Korean accounting principles and practices. In the event of any differences in interpreting the interim consolidated financial statements or the independent accountants review report thereon, the Korean version, which is used for regulatory reporting purposes, shall prevail. The accompanying interim consolidated financial statements have been condensed, restructured and translated into English (with certain expanded descriptions) from the Korean language financial statements. 15

12 2. Summary of significant accounting policies (cont d) Basis of financial statement preparation (cont d) The significant accounting policies adopted in the preparation of the interim consolidated financial statements, which are consistent with those followed in the preparation of the annual consolidated financial statements for the year ended December 31, 2009, are summarized below. Recognition of interest income Interest income on loans and investments is recognized on an accrual basis. However, interest income on loans overdue or dishonored is recognized on a cash basis except for those secured and guaranteed by financial institutions for which the interest is recognized on an accrual basis. Securities Securities are classified as either trading, held-to-maturity or available-for-sale securities, as appropriate, and are initially measured at cost, including incidental expenses. The Company determines the classification of its investments after initial recognition, and, where allowed and appropriate, re-evaluates this designation at each fiscal year end. Securities that are acquired and held principally for the purpose of selling them in the near term are classified as trading securities. Debt securities which carry fixed or determinable principal payment and a fixed maturity are classified as held-to-maturity, if the Company has the positive intention and ability to hold to maturity. Securities that are not classified as either trading or held-to-maturity are classified as available-for-sale securities. After initial measurement, available-for-sale securities are measured at fair value with unrealized gains or losses being recognized as other comprehensive income in equity. Likewise, trading securities are also measured at fair value after initial measurement, but with unrealized gains or losses reported as part of net income. Held-to-maturity securities are measured at amortized cost after initial measurement. The cost is computed as the amount initially recognized minus principal repayments, plus or minus the cumulative amortization using the effective interest method, of any difference between the initially recognized amount and the maturity amount. The fair value of trading and available-for-sale securities that are traded actively in the open market (marketable securities) is measured at the closing price of those securities at the reporting date. Non-marketable equity securities are carried at a value announced by a public independent credit rating agency. If application of such measurement method is not feasible, non-marketable equity securities are measured at cost less impairment, if any, subsequent to initial recognition. Nonmarketable debt securities are carried at the present value of their future cash flows discounted using an appropriate interest rate which reflects the issuer s credit rating, as announced by a public independent credit rating agency. When held-to-maturity securities are reclassified to available-for-sale, those securities are accounted for at fair value on the reclassification date and the difference between the fair value and book value is reported in other comprehensive income as a gain or loss on valuation of available-for sale securities. When available-for-sale securities are reclassified to held-to-maturity, gains or losses on valuation of these available-for-sale securities, which had been recorded until the reclassification date, continue to be included in other comprehensive income and are amortized using the effective interest rate method. Such amortization amount is charged to interest income until maturity. Once the reclassification is made, trading securities cannot be reclassified to available-for-sale securities or held-to-maturity securities and vice versa, except in rare circumstances only. In addition, when certain trading securities become non-marketable, such securities are reclassified to available-for-sale at fair value at the reclassification date. 16

13 2. Summary of significant accounting policies (cont d) Securities (cont d) If the recoverable amount of a held-to-maturity security and available-for-sale security is less than acquisition cost or carrying value, and such decline is deemed other than temporary, such security is adjusted to its recoverable amount with an impairment loss charged to the statement of income after eliminating any gains and losses previously recorded in other comprehensive income for temporary changes. A subsequent recovery is also recorded in the statement of income to the extent of the previously recorded impairment losses if such recovery is attributable to an event occurring subsequent to the recognition of the impairment losses. Equity method investments Investments in entities over which the Company has significant influence are accounted for using the equity method. Under the equity method of accounting, the Company s initial investment in an investee is recorded at acquisition cost. Subsequently, the carrying amount of the investment is adjusted to reflect the Company s share of income or loss of the investee in the statement of income and share of changes in equity that have been recognized directly in the equity of the investee in the related equity account of the Company on the balance sheet. If the Company s share of losses of the investee equals or exceeds its interest in the investee, it discontinues recognizing its share of further losses. However, if the Company has other long-term interests in the investee, it continues recognizing its share of further losses to the extent of the carrying amount of such long-term interests. The Company resumes the application of the equity method if the Company s shares of income or changes in equity of an investee exceed the Company s share of losses accumulated during the period of discontinuance of the equity method of accounting. At the date of acquisition, the excess of the cost of the investment over the Company s share of the net fair value of the investee s identifiable assets and liabilities is accounted for as goodwill or negative goodwill. Goodwill is amortized over its useful life of five years using the straight-line method and the amortization expense is included as a part of valuation gain or loss on equity method investments in the statement of income. Further, the Company s share of any difference between the net fair value of the investee s identifiable assets and liabilities, and net book value of such assets and liabilities is amortized based on the investee s accounting treatments on the related assets and liabilities and charged or credited to valuation gain or loss on equity method investments in the statement of income. The Company s share in the investee s unrealized profits and losses resulting from transactions between the Company and its investee are eliminated to the extent of the interest in the investee. Allowance for possible loan losses The Bank provides allowance for possible loan losses based on the borrowers future debt servicing ability (forward looking criteria) as determined by a credit rating model developed by the Bank. This credit rating model includes financial and non-financial factors of borrowers and classifies the borrowers credit risk. Allowances are determined by applying the following minimum percentages to the various credit risk ratings: Loan classifications Minimum provision percentages (%) Normal 0.85 Precautionary 7 Substandard 20 Doubtful 50 Estimated loss

14 2. Summary of significant accounting policies (cont d) Troubled debt restructuring If the present value of a loan is different from its book value due to a rescheduling of terms as agreed by the related parties (as in the case of court receivership, court mediation or workout), the difference in present value of the restructured loan payments and book value of the loan is recorded as an allowance for possible loan loss. The difference recorded as an allowance is amortized to current earnings over the related period using the effective interest rate method. The amortization is recorded as interest income. Deferred loan fees and expenses The Company defers and amortizes certain fees received from borrowers and expenses paid to third parties associated with originating certain loans. Such fees and expenses are amortized over the life of the associated loan using the straight-line method. Valuation of long-term receivables (payables) at present value Receivables or payables arising from long-term installment transactions are stated at present value. The difference between the carrying amount of these receivables or payables and their present value is amortized using the effective interest rate method and credited or charged to the statement of income over the installment period. Property, plant and equipment Property, plant and equipment are stated at cost. Maintenance and repairs are expensed in the year in which they are incurred. Expenditures which enhance the value or extend the useful lives of the related assets are capitalized as additions to property, plant and equipment. Depreciation of property, plant and equipment is provided using the straight-line method for buildings and the declining balance method for all other property, plant and equipment over the following estimated useful life of assets: Years Buildings 20 ~ 50 Structures 3 ~ 50 Machinery 3 ~ 12 Ships 15 Vehicles 3 ~ 6 Others 3 ~ 10 Intangible assets Intangible assets of the Company consist of goodwill, trademarks, development costs and software, which are stated at cost less accumulated amortization. Intangible assets are amortized using the straight-line method over a period of four or five years. Impairment of assets When the recoverable amount of an asset is less than its carrying amount, the decline in value, if material, is deducted from the carrying amount and recognized as an asset impairment loss in the current period. Bond purchased under resale agreement and bonds sold under repurchase agreements Bond purchased or sold under resale or repurchase agreements are included in loans and borrowings, respectively. The difference between the selling and repurchase price is treated as interest and is accrued evenly over the period covered by the agreements. 18

15 2. Summary of significant accounting policies (cont d) Debenture issuance costs Debenture issuance costs are amortized as interest expense over the redemption term using the effective interest rate method. Accrued severance and retirement benefits In accordance with the Employee Retirement Benefit Security Act and the Bank s and its Korean subsidiaries regulations, employees and directors terminating their employment with at least one year of service are entitled to severance and retirement benefits, based on the rates of pay in effect at the time of termination, years of service and certain other factors. The Company s severance and retirement benefits are partly funded through an insurance plan with Citibank Korea Inc. and others. Up to March 1999, the Company had previously prepaid a portion of its severance and retirement benefits obligation to the National Pension Service ( NPS ). The insurance deposits and prepayments are presented as a deduction from the provision for severance and retirement benefits. Provisions and contingent liabilities Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made on the amount of the obligation. The provision is used only for expenditures for which the provision was originally recognized. If the effect of the time value of money is material, provisions are stated at present value. Confirmed acceptances and guarantees, unconfirmed acceptances and guarantees and bills endorsed are not recognized on the statement of financial position, but are disclosed as offstatement of financial position items in the notes to the financial statements. The Company provides a provision for such off-statement of financial position items, applying a Credit Conversion Factor ( CCF ) and provision rates, and records the provision as an allowance for possible losses on acceptances and guarantees. The Company records an allowance for a certain portion of unused credit lines and cash advance commitments. The Company records the provision for such unused balances as a reserve for possible losses on unused loan commitments and cash advance commitments which are calculated by applying a CCF and the minimum required provision percentage given by the Regulation on the Supervision of Banking Business. Income taxes Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from, or paid to, the tax authorities. Deferred income taxes are provided using the liability method for the tax effect of temporary differences between the tax bases of assets and liabilities and their reported amounts in the accompanying financial statements. Deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. In addition, current tax and deferred tax are charged or credited directly to equity if the tax relates to items that are charged or credited directly to equity. 19

16 2. Summary of significant accounting policies (cont d) Translation of foreign currency and financial statements of overseas branches Transactions involving foreign currencies are recorded at the exchange rates prevailing at the time the transactions are made. Assets and liabilities denominated in foreign currencies are translated into Korean won using the exchange rates provided by Seoul Money Brokerage Service, Ltd., which are in effect on the reporting date. The resulting translation gains or losses are credited or charged to current operations. Accounting records of the overseas branches are maintained in foreign currencies. In translating financial statements of the overseas branches, the Company applies the appropriate rate of exchange at the reporting date. Derivative financial instruments Derivative financial instruments are presented as assets or liabilities valued principally at the fair value of the rights or obligations associated with the derivative contracts. The unrealized gain or loss from a derivative transaction with the purpose of hedging the exposure to changes in the fair value of a recognized asset or liability or unrecognized firm commitment is recognized in current operations. For a derivative instrument with the purpose of hedging the exposure to the variability of cash flows of a recognized asset or liability or a forecasted transaction, the hedge-effective portion of the derivative instrument s gain or loss is deferred as other comprehensive income in equity. The ineffective portion of the gain or loss is charged or credited to current operations. Derivative instruments that do not meet the criteria for hedge accounting, or contracts for which the Company has not elected hedge accounting are measured at fair value with unrealized gains or losses reported in current operations. Insurance policy reserves In accordance with the Insurance Business Act ( IBA ) and the Regulation on Supervision of Insurance Business ( RSIB ), the Company is required to maintain policy reserves as a liability which are measured in accordance with the manual for calculation of premium and policy reserve issued by the Financial Supervisory Commission. Details are as follows: (A) Premium reserve Premium reserve refers to an amount calculated using the net premium method for payment on future claims, which is the larger amount between the one calculated using the standard interest rate and standard risk rate issued by the Financial Supervisory Service and the one calculated using the standard rate on the premium calculation. If the premium reserve is less than zero, it is recorded at zero. (B) Unearned premium reserve The Company is required to maintain an unearned premium reserve, which is the premium whose payment date is within the current year and whose applicable period has not yet commenced at the reporting date. (C) Reserve for outstanding claims Reserve for outstanding claims is an estimate of loss for insured events that have occurred prior to the date of statement of financial position but for which a fixed value cannot be determined. - Estimated amount: The expenses to be incurred in the course of settlement of the insured event, such as lawsuit or arbitration (if partial amount is paid, the remainder is recognized.) - IBNR (Incurred But Not Reported): Estimated amount using a reasonable statistical method considering the Company s experience rate. - Reserve for ineffective contracts: Reserve for ineffective contracts due to default in premium payment (Partial amount of surrender value) - Unpaid claims: The amount of claims, surrender value and dividend to be paid is determined but not paid yet. 20

17 2. Summary of significant accounting policies (cont d) Insurance policy reserves (cont d) (D) Reserve for participating policyholders dividends The reserve for participating policyholders dividends is classified into an interest dividend reserve, a mortality dividend reserve, an interest rate difference guarantee reserve and a long-term duration dividend reserve. (E) Excess participating policyholder dividend reserve Pursuant to relevant laws and contracts, the Company may provide an excess participating policyholder dividend reserve in accordance with the operating results of related insurance products. The reserve may be used to pay participating policyholder dividends or additional dividends. (F) Reserve adjustment account for reinsurance ceded In the event of ceding or assuming insurance, the Company maintains reinsurance reserves at the amount that are expected to be collected from, or paid to, the related reinsurance companies pursuant to the relevant laws. (G) Guaranteed benefit reserve Guaranteed benefit reserve guarantees a certain level of the insurance claims considering expected losses in the future. Accounting for the trust accounts The Company recognizes, in accordance with the Financial Investment Services and Markets Act, trust fees earned from the trust accounts as income from trust operations. If losses are incurred on trust accounts that have a guarantee of principal repayment, the losses are recognized as a loss from trust operations. Inventories Inventories of Daewoo S&ME and other non-financial subsidiaries are stated at the lower of cost or market value, with cost being determined using the specific identification method for goods-inprocess and goods-in-transit, and moving-average method for raw materials and supplies. If the net realizable value of inventory is less than its cost, a contra inventory account representing the valuation loss is presented to reduce the inventory to its net realizable value. The said valuation loss is recorded as cost of sales. Significant judgments and accounting estimates The preparation of financial statements in accordance with Korean GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 21

18 2. Summary of significant accounting policies (cont d) Principles of consolidation The investment accounts of the parent company and the corresponding equity accounts of the subsidiaries are eliminated in consolidation. The consolidated financial statements reflect only the share of the consolidated subsidiaries post-acquisition earnings and other equity changes after acquiring or gaining control of the subsidiaries. The difference between the cost of investment and the Company s share of fair value of identifiable net assets of the subsidiaries at the date of acquisition is presented as goodwill or negative goodwill. All significant inter-company transactions and account balances among consolidated companies are eliminated on consolidation. Unrealized gains or losses included in loans and borrowings arising from transactions between consolidated companies are eliminated on consolidation. The related accounts receivable and payable are also eliminated on consolidation. Accounts of foreign subsidiaries are maintained in the currency of the country in which they conduct their operations. In translating the foreign currency financial statements into Korean won, the financial statements are translated at the exchange rate prevailing on the reporting date. Minority interests are presented as a separate component of equity in the consolidated statement of financial position. Losses in excess of minority interests are treated as a reduction to equity. If there is a subsequent recovery from the losses in excess of the minority interests, a reversal of the previous charge to equity is made up to the extent of the original amount charged to equity. The Company consolidates the financial statements using the parent company s financial statements reporting period which is coterminous with the reporting period of the consolidated subsidiaries. Trust Accounts under the arrangement of guaranteed fixed rate of return and/or repayment of the principal each year are included in the consolidated financial statements. 22

19 3. Cash and due from banks Cash and due from banks at June 30, 2010 and December 31, 2009 consist of the following (Korean won in millions): June 30, December 31, (Unaudited) (Audited) Cash and cash equivalents: Korean won \ 69,181 \ 68,171 Foreign currency 82,069 86, , ,436 Due from banks: Korean won 5,083,699 2,645,551 Foreign currency 682, ,882 5,766,453 3,396,433 \ 5,917,703 \ 3,550,869 Due from banks in Korean won at June 30, 2010 and December 31, 2009 are as follows (Korean won in millions): Annual June 30, December 31, interest rate Counterparty Account (%) (Unaudited) (Audited) Bank of Korea ( BOK ) Reserve deposits with BOK - \ 198,709 \ 646,172 Kookmin Bank Other deposits 3.1 ~ , ,304 Korea Exchange Bank Other deposits 1.0 ~ 3.9 2,486 57,092 Samsung Investment Trust Management Other deposits 2.3 ~ ,000 70,000 KB Asset Management Other deposits 2.3 ~ ,000 60,000 UBS Hana Asset Management Other deposits 2.3 ~ ,000 - HI Asset Management Other deposits 2.3 ~ ,000 30,000 IBK Asset Management Other deposits 2.3 ~ ,000 - KYOBO Investment Trust Management Other deposits 2.3 ~ ,000 - EUGENE Asset Management Other deposits 2.3 ~ ,000 60,000 Others Other deposits, etc. - 2,639,114 1,609,983 \ 5,083,699 \ 2,645,551 Due from banks in foreign currency at June 30, 2010 and December 31, 2009, are as follows (Korean won in millions): Annual June 30, December 31, interest rate Counterparty Account (%) (Unaudited) (Audited) BOK Checking accounts - \ 53,274 \ 59,704 Hana Bank Time deposits, etc Korea Exchange Bank 0.4 ~ 1.6 8,333 76,630 Woori Bank 0.5 ~ , ,838 Others 0.0 ~ , ,616 \ 682,754 \ 750,882 23

20 3. Cash and due from banks (cont d) Restricted balances in due from banks at June 30, 2010 and December 31, 2009 are summarized as follows (Korean won in millions): June 30, December 31, Counterparty (Unaudited) (Audited) Restriction BOK \ 251,983 \ 705,876 Reserve for payment of deposit Kookmin Bank 113, ,302 Reserve for payment of principal on behalf of special purpose entities Shinhan Bank 38,352 35,586 ICBC Shanghai and Reserve for payment of deposit others 68,525 46,689 by the local law Others 26,998 55,245 To maintain checking accounts \ 499,684 \ 949,698 The maturities of due from banks outstanding as of June 30, 2010 and December 31, 2009 are as follows (Korean won in millions): June 30, 2010 (Unaudited) Foreign Korean won currencies Total Within 3 months \ 687,904 \ 256,210 \ 944,114 After 3 months but no later than 6 months 31, , ,435 After 6 months but no later than 1 year 65,863 64, ,131 After 1 year but no later than 3 years 148, , ,665 After 3 years but no later than 5 years Later than 5 years 4,150,000 40,108 4,190,108 \ 5,083,699 \ 682,754 \ 5,766,453 December 31, 2009 (Audited) Foreign Korean won currencies Total Within 3 months \ 1,431,114 \ 423,475 \ 1,854,589 After 3 months but no later than 6 months 228,432 45, ,983 After 6 months but no later than 1 year 31, , ,187 After 1 year but no later than 3 years - 54,004 54,004 After 3 years but no later than 5 years Later than 5 years 954,308 37, ,637 \ 2,645,551 \ 750,882 \ 3,396,433 Due from banks by financial institution at June 30, 2010 and December 31, 2009 are as follows (Korean won in millions): June 30, 2010 (Unaudited) Foreign Counterparty Korean won currencies Total BOK \ 198,709 \ 53,275 \ 251,984 Other banks 195, , ,799 Others 4,689,654 41,016 4,730,670 \ 5,083,699 \ 682,754 \ 5,766,453 24

21 3. Cash and due from banks (cont d) December 31, 2009 (Audited) Foreign Counterparty Korean won currencies Total BOK \ 646,172 \ 59,704 \ 705,876 Other banks 297, , ,750 Others 1,702,217 28,590 1,730,807 \ 2,645,551 \ 750,882 \ 3,396, Securities (1) Trading securities at June 30, 2010 and December 31, 2009 consist of the following (Korean won in millions): Fair value (book value) June 30, December 31, Annual Type interest rate (%) (Unaudited) (Audited) Securities denominated in Korean won: Equity securities - \ 35,170 \ 3,650 Debt securities: Government and public bonds 3.4 ~ , ,349 Finance bonds 3.2 ~ , ,395 Corporate bonds 4.2 ~ , ,090 1,608,492 1,088,834 Beneficiary certificates: Bond type - 190, Mixed type with securities - 1,029 1,025 Other type - 112, ,967 1,302 Other securities - 478, ,800 2,426,561 1,514,186 Securities denominated in foreign currency: Equity securities - 1,859 - Debt securities 0.2 ~ ,469 75,917 Others - 2,216-94,544 75,917 \ 2,521,105 \ 1,590,503 Debt securities included in trading securities at June 30, 2010 and December 31, 2009 consist of the following (Korean won in millions): June 30, 2010 (Unaudited) Acquisition Fair value Type Par value cost (book value) Government and public bonds \ 951,550 \ 963,447 \ 959,242 Finance bonds 442, , ,377 Corporate papers 196, , ,873 Bonds denominated in foreign currency 91,250 85,300 90,469 \ 1,681,875 \ 1,690,331 \ 1,698,961 25

22 4. Securities (cont d) December 31, 2009 (Audited) Acquisition Fair value Type Par value cost (book value) Government and public bonds \ 410,440 \ 417,214 \ 412,349 Finance bonds 181, , ,395 Corporate bonds 510, , ,090 Bonds denominated in foreign currency 77,331 74,377 75,917 \ 1,179,468 \ 1,184,272 \ 1,164,751 Debt securities in Korean won are measured based on the lower of the valuation provided by KIS Pricing Inc. or the Korea Bond Pricing Co. Debt securities in foreign currency are measured based on the lower of the valuation provided by NICE Pricing Services Inc. or the Korea Bond Pricing Co. (2) Available-for-sale securities at June 30, 2010 and December 31, 2009 consist of the following (Korean won in millions): June 30, December 31, Annual interest rate (%) (Unaudited) (Audited) Securities denominated in Korean won: Equity securities: Marketable equity securities - \ 1,746,670 \ 1,378,540 Non-marketable equity securities - 1,885,684 2,080,828 3,632,354 3,459,368 Debt securities: Government bonds 4.3 ~ 5.8 1,691,496 1,083,637 Public bonds Finance bonds 2.9 ~ 6.5 3,664,911 3,922,907 Corporate bonds 1.0 ~ ,589,106 11,865,198 13,945,531 16,871,760 Beneficiary certificates - 2,508,082 2,714,851 Others - 171,443-20,257,410 23,045,979 Securities denominated in foreign currency: Equity securities - 87, ,272 Debt securities 0.4 ~ ,417,847 5,078,574 Beneficiary certificates securities - 340,006 42,333 Others - 350,822-5,196,004 5,285,179 \ 25,453,414 \ 28,331,158 26

23 4. Securities (cont d) Details of marketable equity securities (including equity securities denominated in foreign currencies) at June 30, 2010 and December 31, 2009 consist of the following (Korean won in millions): June 30, December 31, (Unaudited) (Audited) Ownership Fair value Fair value Company (%) (book value) (book value) Doosan Heavy Industries and Construction Co., Ltd \ 569,460 \ 610,889 STX Pan Ocean Co., Ltd , ,718 KUMHO Industrial Co., Ltd ,596 - Ssangyong Cement Industry Co., Ltd ,900 94,738 Asiana Airlines Inc ,462 44,469 STX Corporation ,178 40,375 Neosemitech Corporation ,402 13,892 Taesan LCD Co., Ltd ,758 9,995 Hanchang Paper Co., Ltd ,631 4,779 Medy-Tox Inc ,222 4,490 HDCS Co., Ltd , Hyundai Corporation ,238 Dongbu HiTek Co., Ltd ,477 Ace Dightech Co., Ltd ,120 Dong Bang Co., Ltd ,000 Others 494, ,952 \ 1,746,670 \ 1,378,540 Details of non-marketable equity securities (including equity securities denominated in foreign currencies) at June 30, 2010 and December 31, 2009 consist of the following (Korean won in millions): June 30, December 31, (Unaudited) (Audited) Ownership Fair value Fair value Company (%) (book value) (book value) GM Daewoo Auto and Technology Corporation \ 290,221 \ 286,543 Consumer Credit Assistant Fund Co., Ltd , ,198 Pantech Co., Ltd , ,762 Good-KDB 3 rd Securitization Specialty Co., Ltd ,725 57,725 Korea Asset Management ,880 48,880 Samsung Total Petrochemicals Co.,Ltd ,155 38,391 Good-KDB 2 nd Securitization Specialty Co., Ltd ,706 37,706 Hwan Young Steel Ind. Co.,Ltd ,903 32,983 Korea Securities Finance Corporation ,680 29,397 27