KOREA NATIONAL OIL CORPORATION AND SUBSIDIARIES. Consolidated Financial Statements. December 31, (With Independent Auditors Report Thereon)

Transcription

1 KOREA NATIONAL OIL CORPORATION AND SUBSIDIARIES Consolidated Financial Statements December 31, 2017 (With Independent Auditors Report Thereon)

2 Contents Page Independent Auditors Report 1 Consolidated Financial Statements Consolidated Statements of Financial Position 4 Consolidated Statements of Comprehensive Loss 6 Consolidated Statements of Changes in Equity 7 Consolidated Statements of Cash Flows 9 Notes to the Consolidated Financial Statements 12

3 Independent Auditors Report Based on a report originally issued in Korean The Board of Directors and Shareholder Korea National Oil Corporation: We have audited the accompanying consolidated financial statements of Korea National Oil Corporation and its subsidiaries (the Group ) which comprise the consolidated statements of financial position as of December 31, 2017 and 2016, the consolidated statements of comprehensive loss, changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Korean International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Korean Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

4 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2017 and 2016 and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with Korean International Financial Reporting Standards. Emphasis of matter Without qualifying our opinion, we draw attention to the following: (1) Uncertainty of Deterioration in Operating Condition of Oil Market As described in Note 45, imbalance between supply and demand continues to drive low oil prices in the international crude oil market and oil prices are unlikely to increase in a short period of time. There is a significant uncertainty with respect to the Group s future business results depending on the recovery of oil prices. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. (2) Financial Statements Restatement As described in Note 46, the audited consolidated financial statements have been restated in relations to the accounting change for disposal of headquarters building in Ulsan. We have audited the consolidated financial statements for the year ended December 31, 2017 and issued auditors report as of February 28, Accounting for sale-and-leaseback transaction of headquarters building has been changed from an operating lease to a finance lease. As a result, the Group s net asset decreased W55,536 million and loss for the year increased W58,616 million. Other matters 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. 2

5 We have audited the consolidated financial statements for the year ended December 31, 2017 and issued auditors report as of February 28, As describe in emphasis of matter paragraph above, we have reissued the auditors report as the consolidated financial statements for the year ended December 31, 2017 have been restated. Accordingly, the restated consolidated financial statements for the year ended December 31, 2017 of the Group are different from the consolidated financial statements which have been authorized to issue by the Board of Directors on February 28, We have performed further audit procedures to express an opinion on the restated consolidated financial statements for the year ended December 31, As described above, the auditors report issued on February 28, 2018 is no longer effective, and therefore, shall not be used in relation to the consolidated financial statements for the year ended December 31, 2017, as the consolidated financial statements for the year ended December 31, 2017 have been restated. Seoul, Korea February 28, 2018 (Except for the items in note 46) June 12, 2018 (The date of the end of audit procedures performed only for the corrected misstatements in note 46) This report is effective as of June 12, 2018, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that the above audit report has not been updated to reflect the impact of such subsequent events or circumstances, if any. 3

6 Consolidated Statements of Financial Position and 2016 In thousands of Korean won Notes Assets Cash and cash equivalents 8,39,41 W 791,075, ,651,226 Current financial assets 9,10,13,14,15,39,40,41 24,710,087 19,007,401 Trade and other receivables, net 11,39,41 556,269, ,212,371 Inventories, net 16 88,273, ,113,992 Current income tax assets 37,055,000 15,439,429 Current non-financial assets ,277,633 69,817,482 Assets held for sale 6,17 3,471,555 - Current assets 1,618,131,960 1,609,241,901 Non-current financial assets, net 9,10,12,13,14,39,40,41 622,446, ,446,230 Long-term trade and other receivables 11,39,41,46 97,767, ,664,070 Property, plant and equipment, net 20,46 9,023,670,970 10,174,928,224 Goodwill ,854, ,328,694 Intangible assets other than goodwill, net 22 2,934,334,387 3,587,399,646 Investments in associates and joint ventures ,259, ,475,565 Deferred tax assets 37,46 1,218,914,526 1,154,541,941 Non-current non-financial assets 18 3,547,621,284 3,903,169,409 Non-current assets 17,873,869,683 20,457,953,779 Total assets W 19,492,001,643 22,067,195,680 See accompanying notes to the consolidated financial statements. 4

7 Consolidated Statements of Financial Position, Continued and 2016 In thousands of Korean won Notes Liabilities Trade and other payables 23,39,41,43,46 W 786,399, ,354,166 Current financial liabilities 10,24,39,40,41,43 3,252,096,536 3,208,454,829 Current income tax liabilities 46 9,459,405 9,868,339 Current non-financial liabilities 27,46 108,686,434 85,103,193 Current provisions 26 94,440, ,940,533 Current liabilities 4,251,081,771 4,432,721,060 Long-term trade and other payables 23,39,41,43,46 503,799, ,433,599 Non-current financial liabilities 10,24,39,40,41,43 10,096,071,773 11,495,471,823 Non-current non-financial liabilities 27,46 42,607,876 - Employee benefits, net 25 8,293,543 14,730,311 Deferred tax liabilities ,817, ,310,490 Non-current provisions 26 2,020,256,660 2,030,796,036 Non-current liabilities 12,803,846,207 14,125,742,259 Total liabilities W 17,054,927,978 18,558,463,319 Equity Share capital 28 10,434,864,780 10,346,851,780 Accumulated deficit 29,46 (8,463,172,816) (7,633,552,073) Other components of equity 31 (576,845,327) (314,455,121) Equity attributable to the owner of the Company 1,394,846,637 2,398,844,586 Non-controlling interests 1,042,227,028 1,109,887,775 Total equity W 2,437,073,665 3,508,732,361 Total equity and liabilities W 19,492,001,643 22,067,195,680 See accompanying notes to the consolidated financial statements. 5

8 Consolidated Statements of Comprehensive Loss For the years ended December 31, 2017 and (Restated) In thousands of Korean won Notes 2017 (Note 7) Continuing Operations Revenue 6,32 W 2,312,485,962 2,424,966,928 Cost of sales 6,38 1,850,289,885 2,397,156,177 Gross profit 6 462,196,077 27,810,751 Selling and administrative expenses 6,38,46 286,324, ,114,038 Operating profit (loss) 6 175,871,218 (232,303,287) Other non-operating income 6,33 152,268, ,672,964 Other non-operating expenses 6,33 207,235,979 26,243,896 Other loss, net 6,34,46 (463,149,784) (422,718,978) Finance income 6,35,39,46 304,558, ,857,191 Finance costs 6,36,39,46 710,411, ,782,736 Loss on investments in associates and joint ventures, net 6,19 (127,487,447) (239,808,380) Loss before income tax 6 (875,586,438) (1,323,327,122) Income tax benefit 37,46 (194,163,332) (211,684,112) Loss from continuing operations (681,423,106) (1,111,643,010) Discontinued operations Loss from discontinued operations, net of tax (52,337,450) (7,203,465) Loss for the year W (733,760,556) (1,118,846,475) Other comprehensive income (loss) Items that will never be reclassified subsequently to profit or loss Actuarial gains (losses) on defined benefit plans, net of tax 25,29 3,141,590 (1,758,211) Retained earnings adjustments in equity method, net of tax (48,043) 11,669 Items that are or may be reclassified subsequently to profit or loss Net change in the unrealized fair value of available-for-sale financial assets, net of tax 12,39 (5,920,445) (2,478,854) Net change in fair value of available-for-sale financial assets (58,177,009) reclassified to profit or loss, net of tax 12,39 - Equity adjustments arising from investments in equity-method investees, net of tax 19 5,278,959 (4,064,426) Net change in the unrealized fair value of derivatives (48,425,006) using cash flow hedge accounting, net of tax 10,39 (967,374) Net change in fair value of derivatives using cash flow hedge accounting reclassified to profit or loss, net of tax 10,39 1,093,830 - Foreign currency translation differences for foreign operations (285,311,995) (103,397,053) Other comprehensive loss for the year, net of tax (388,368,119) (112,654,249) Total comprehensive loss for the year W (1,122,128,675) (1,231,500,724) Income (loss) attributable to: Owners of the Company (832,714,290) (1,091,916,698) Non-controlling interests 98,953,734 (26,929,777) Loss for the year (733,760,556) (1,118,846,475) Total comprehensive income (loss) attributable to: Owners of the Company (1,092,010,949) (1,241,709,928) Non-controlling interests (30,117,726) 10,209,204 Total comprehensive loss for the year W (1,122,128,675) (1,231,500,724) See accompanying notes to the consolidated financial statements. 6

9 Consolidated Statements of Changes in Equity For the years ended December 31, 2017 and 2016 In thousands of Korean won Share capital Attributable to owners of the Company Other Accumulated components deficit of equity Subtotal Non-controlling interests Total equity Balance as of January 1, 2016 W 10,207,845,780 (6,539,888,833) (166,408,433) 3,501,548, ,045,051 4,195,593,565 Total comprehensive loss for the year Loss for the year - (1,091,916,698) - (1,091,916,698) (26,929,777) (1,118,846,475) Items that will not be reclassified subsequently to profit or loss Actuarial losses on defined benefit plan, net of tax - (1,758,211) - (1,758,211) - (1,758,211) Retained earnings adjustments in equity method, net of tax - 11,669-11,669-11,669 Items that may be reclassified subsequently to profit or loss Net change in the unrealized fair value of available-for-sale financial assets, net of tax - - (2,478,854) (2,478,854) - (2,478,854) Equity adjustments arising from investments in equity-method investees, net of tax - - (4,064,426) (4,064,426) - (4,064,426) Net change in the unrealized fair value of derivatives using cash flow hedge accounting, net of tax - - (967,374) (967,374) - (967,374) Foreign currency translation differences for foreign operations - - (140,536,034) (140,536,034) 37,138,981 (103,397,053) Total comprehensive income (loss) for the year - (1,093,663,240) (148,046,688) (1,241,709,928) 10,209,204 (1,231,500,724) Transactions with owners of the Company, recognized directly in equity Issuance of share capital 139,006, ,006, ,006,000 Dividends paid (46,420,000) (46,420,000) Contribution by non-controlling interests ,053, ,053,520 Total transactions with owners of the Company 139,006, ,006, ,633, ,639,520 Balance as of December 31, 2016 W 10,346,851,780 (7,633,552,073) (314,455,121) 2,398,844,586 1,109,887,775 3,508,732,361 See accompanying notes to the consolidated financial statements. 7

10 Consolidated Statements of Changes in Equity, Continued For the years ended December 31, 2017 and 2016 In thousands of Korean won Share capital Attributable to owners of the Company Other Accumulated components deficit of equity Subtotal Non-controlling interests Total equity Balance as of January 1, 2017 W 10,346,851,780 (7,633,552,073) (314,455,121) 2,398,844,586 1,109,887,775 3,508,732,361 Total comprehensive loss for the year Loss for the year - (832,714,290) - (832,714,290) 98,953,734 (733,760,556) Items that will not be reclassified subsequently to profit or loss Defined benefit plan actuarial gains, net of tax - 3,141,590-3,141,590-3,141,590 Retained earnings adjustments in equity method, net of tax - (48,043) - (48,043) - (48,043) Items that may be reclassified subsequently to profit or loss Net change in the unrealized fair value of available-for-sale financial assets, net of tax - - (5,920,445) (5,920,445) - (5,920,445) Net change in fair value of available-for-sale financial assets reclassified to profit or loss, net of tax - - (58,177,009) (58,177,009) - (58,177,009) Equity adjustments arising from investments in equity-method investees, net of tax - - 5,278,959 5,278,959-5,278,959 Net change in the unrealized fair value of derivatives using cash flow hedge accounting, net of tax - - (48,425,006) (48,425,006) - (48,425,006) Net change in fair value of derivatives using cash flow hedge accounting reclassified to profit or loss, net of tax - - 1,093,830 1,093,830-1,093,830 Foreign currency translation differences for foreign operations - - (156,240,535) (156,240,535) (129,071,460) (285,311,995) Total comprehensive loss for the year - (829,620,743) (262,390,206) (1,092,010,949) (30,117,726) (1,122,128,675) Transactions with owners of the Company, recognized directly in equity Issuance of share capital 88,013, ,013,000-88,013,000 Dividends paid (35,007,112) (35,007,112) Distribution to non-controlling interests (2,535,909) (2,535,909) Total transactions with owners of the Company 88,013, ,013,000 (37,543,021) 50,469,979 Balance as of December 31, 2017 W 10,434,864,780 (8,463,172,816) (576,845,327) 1,394,846,637 1,042,227,028 2,437,073,665 See accompanying notes to the consolidated financial statements. 8

11 Consolidated Statements of Cash Flows For the years ended December 31, 2017 and 2016 In thousands of Korean won Cash flows from operating activities Loss for the year W (733,760,556) (1,118,846,475) Adjustment for: Severance and retirement benefits 10,013,447 9,656,685 Depreciation 806,411, ,689,274 Amortization of intangible assets other than goodwill 98,482, ,930,271 Bad debt expense - 428,504 Reversal of other bad debt allowance (7,937,647) (670,562) Gains on exemption of debts (76,743,985) (220,473,024) Loss on cancellation of debt exemption 2,701,210 - Non-operating income from overseas oil fields (other income) (3,914,767) (7,265,315) Interest costs on provision for decommissioning 73,316,028 93,005,038 Other bad debt expense 180,185,957 14,521,334 Gains on disposal of property, plant and equipment (2,130,079) (55,943,249) Gains on disposal of intangible assets other than goodwill - (483,491) Reversal of impairment losses on property, plant and equipment (163,644,901) (400,959,457) Reversal of impairment losses on intangible assets other than goodwill - (6,416,059) Gains on foreign currency translation (other profit or loss) (39,594,669) (21,467,246) Losses on disposal of property, plant and equipment 182,050 9,045,000 Losses on disposal of intangible assets other than goodwill 3,524,172 66,325,786 Losses on valuation of inventories 6,820,816 - Losses on valuation of derivatives (other profit or loss) - 3,164,396 Impairment losses on property, plant and equipment 363,206, ,606,570 Impairment losses on intangible assets other than goodwill 227,051, ,031,887 Impairment losses on goodwill 87,470,422 32,440,037 Losses on foreign currency translation (other profit or loss) 45,109,552 26,709,709 Income tax benefit (199,940,426) (214,127,410) Interest income (50,601,455) (37,816,259) Dividends income (9,991) (24,114) Gains on disposal of available-for-sale financial investments - (26,232,279) Gains on repayment of financial liabilities (1,583,427) (17,233,744) Gains on transaction of derivatives (finance income) (1,168,345) (737,705) Gains on foreign currency translation (finance income) (143,659,143) (60,053,861) Interest expense 401,018, ,597,942 Impairment losses on available-for-sale financial assets 71,585,757 45,576,708 Losses on transaction of derivatives (finance cost) 11,604,928 5,748,906 Loss on valuation of derivatives (finance cost) 25,305,094 - Losses on foreign currency translation (finance cost) 93,114, ,689,862 Other finance costs (interest expense) 26,610,339 32,224,499 Share of loss in associates and joint ventures 128,645, ,858,177 Share of gain in associates and joint ventures (6,684,312) (10,176,936) Impairment losses on investments in associates and joint ventures 5,526, ,139,758 Gains on disposal of investments in associates and joint ventures - (12,620) 1,970,274,568 2,023,297,012 Changes in: Inventories 21,542,265 43,869,162 Trade and other receivables (84,476,210) 155,555,916 Other receivables from operating activities (67,541,088) 48,398,420 Trade and other payables 89,645,401 (126,602,890) Other payables from operating activities 17,104,940 (54,297,941) Defined benefit liability (4,700,902) (3,682,234) Provisions (61,140,231) (60,170,625) (89,565,825) 3,069,808 See accompanying notes to the consolidated financial statements. 9

12 Consolidated Statements of Cash Flows, Continued For the years ended December 31, 2017 and 2016 In thousands of Korean won Cash generated from operating activities W 1,146,948, ,520,345 Dividend received 24,242,702 14,700,343 Interest paid (472,962,743) (477,471,075) Interest received 68,773,996 17,832,607 Income tax paid (71,619,868) (90,667,506) Net cash provided by operating activities W 695,382, ,914,714 Cash flows from investing activities: Proceeds from disposal of investments in associates and joint ventures - 3,626,880 Acquisition of investments in associates and joint ventures (19,932,879) (42,176,384) Proceeds from disposal of property, plant and equipment 216,130,892 86,560,097 Acquisition of property, plant and equipment (801,791,485) (640,995,307) Proceeds from disposal of intangible assets other than goodwill 11,920 5,725,944 Acquisition of intangible assets other than goodwill (27,933,109) (44,334,731) Acquisition of non-current non-financial assets (92,476,135) (90,792,457) Proceeds from disposal of available-for-sale financial investments - 67,184,859 Acquisition of available-for-sale financial investments (17,744) - Increase in long-term and short-term financial assets (206,429,516) - Decrease in long-term and short-term financial assets 206,192,617 66,804 Increase in leasehold deposits provided (21,506,145) (18,364,281) Decrease in leasehold deposits provided 1,066,154 16,059,739 Increase in short-term and long-term loans (59,686,502) (107,154,291) Collection of short-term and long-term loans 23,259,743 10,576,677 Increase in leasehold deposits received 476,209 1,988,940 Decrease in leasehold deposits received - (29,786) Net cash used in investing activities W (782,635,980) (752,057,297) Cash flow from financing activities Proceeds from increase in share capital 88,013, ,006,000 Proceeds from short-term borrowings 152,272, ,772,900 Repayments of short-term borrowings (801,762,951) (1,149,502,996) Proceeds from issue of bond payables 2,209,147,968 2,576,075,381 Repayments of bond payables (1,946,543,420) (2,165,791,933) Proceeds from long-term borrowings 801,623,879 34,826,579 Repayments of long-term borrowings (242,928,671) (87,824,325) Dividends paid (35,007,112) (46,420,000) Repayments of finance lease liability (7,855,845) - Net cash inflow from contribution by non-controlling interests - 452,053,520 Net cash outflow due to other distribution to non-controlling interests i (2,535,909) - Net cash provided by financing activities W 214,423, ,195,126 See accompanying notes to the consolidated financial statements. 10

13 Consolidated Statements of Cash Flows, Continued For the years ended December 31, 2017 and 2016 In thousands of Korean won Net increase in cash and cash equivalents before net effect of foreign exchange differences W 127,170,113 71,052,543 Effect of exchange rate fluctuations on cash held (152,866,817) (44,431,621) Net Increase (decrease) in cash and cash equivalents (25,696,704) 26,620,922 Cash and cash equivalents as of January 1 816,816, ,195,584 Cash and cash equivalents as of December 31 before deduction of government grants 791,119, ,816,506 Government grants (44,734) (4,165,280) Cash and cash equivalents as of December 31 after deduction of government grants W 791,075, ,651,226 See accompanying notes to the consolidated financial statements. 11

14 Notes to the Consolidated Financial Statements 1. Reporting Entity (a) Description of the controlling company Korea National Oil Corporation (the Company or the Parent Company ) was incorporated on March 3, 1979 to engage in the development of oil fields, distribution of crude oil, maintenance of petroleum reserve stock and improvement of the petroleum distribution infrastructure under the Korea National Oil Corporation Act. The Company s head office is located at 305, Jongga-Ro, Jung-Gu, Ulsan in Korea. The Company also has 9 petroleum stockpile sites, 1 domestic gas field management office, 1 overseas office in Kazakhstan and overseas subsidiaries and affiliates in the United States and other countries., the Company s share capital is W10,434,865 million, which is wholly owned by the government of the Republic of Korea. The consolidated financial statements comprise the Company and its subsidiaries (together referred to as the Group and individually as Group entities ) and the Group s interests in associates and joint ventures. The list of subsidiaries as of December 31, 2017 and 2016 is disclosed in Note Basis of Preparation (a) Statement of compliance 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 June 12, (b) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis, except for the following material items in the statement of financial position: derivative financial instruments are measured at fair value financial instruments at fair value through profit or loss are measured at fair value available-for-sale financial assets are measured at fair value investments in associates and joint venture are measured at fair value 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 12

15 2. Basis of Preparation, Continued (c) Functional and presentation currency Items included in the financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency ). The accompanying consolidated financial statements are prepared in the Group s functional currency, the United States dollar, and presented in Korean won, the Group s presentation currency, for the financial reporting purposes in accordance with K-IFRS No. 1021, The Effects of Changes in Foreign Exchange Rates. The Group is required to present its financial statements in Korean won in accordance with regulations in Korea. Assets and liabilities for each statement of financial position presented (i.e. including comparatives) were translated at the closing rate at the date of that statement of financial position, income and expenses for each statement presenting profit or loss and other comprehensive income (i.e. including comparatives) were translated at the average exchange rates of the period and all resulting exchange differences were recognized in other comprehensive income. (d) Use of estimates and judgments The preparation of the consolidated financial statements in conformity with K-IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are 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. (i) Management s judgment Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements is included in the following notes Note 19: Investments in Associates and Joint Ventures classification of a joint arrangement (ii) 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 19: Investments in Associates and Joint Ventures main assumptions for recoverable amounts Note 20: Property, Plant and Equipment estimation of factors for depreciation and recoverable amount Note 21: Goodwill main assumptions for recoverable amounts Note 22: Intangible assets other than goodwill main assumptions for recoverable amounts Note 25: Employee Benefits main actuarial assumptions Note 26 and 44: Provisions and Contingencies assumptions for possibility of cash outflows and their amounts Note 37: Income tax benefit possibility of realization of deferred tax assets 13

16 2. Basis of Preparation, Continued (d) Use of estimates and judgments, continued (iii) Measurement of fair value 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 reports 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, is used to measure fair values, then the valuation team assesses the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of K-IFRS, including the level in the fair value hierarchy in which such valuations should be classified. When measuring the fair value of an asset or 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 asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). If the inputs used to measure the fair value of an asset or a liability fall into 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. Information about the assumptions made in measuring fair values is included in the following notes: Note 39 Categories of financial instruments Note 41 Risk Management 14

17 3. Changes in Accounting Policies Except for the changes below, the Group has consistently applied the accounting policies set out in note 4 to all periods presented in these consolidated financial statements. The Group has adopted the following amendments to standards with a date of initial application of January 1, (a) K-IFRS No Statement of Cash Flows Amendments to K-IFRS No. 1007, Statement of Cash Flows require an entity to disclose changes from financing cash flows, changes arising from obtaining or losing control of subsidiaries or other businesses, the effect of changes in foreign exchange rates, changes in fair values and other changes in liabilities arising from financing activities. K-IFRS No does not require the disclosure of comparative information of prior year. The related disclosures are included in note 43. (b) K-IFRS No Income taxes Amendments to K-IFRS No. 1012, in the case of debt instruments evaluated with fair values, deferred tax accounting treatment is clarified, as the temporary difference is calculated from the difference between the carrying amount and taxable base amount of the debt liabilities, regardless of the expected recovery method. When reviewing the feasibility of deferred tax assets, if there is sufficient evidence that it is likely to recover some part of an entity s assets in excess of the carrying amount, the estimated amount of future taxable income would be included in the estimated future taxable income. In addition, future taxable income estimates are calculated as the amount before deducting the deductible (deduction) effect from deductible temporary differences. (c) Impact of changes in accounting policies. Management believes the impact of the amendments on the Group s consolidated financial statements is not significant, and the Group did not retrospectively apply the amendments to K-IFRS No stated above. 15

18 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 out below have been applied consistently to all periods presented in these consolidated financial statements, except for changes in accounting policies as explained in note 3. (a) Basis of consolidation (i) Non-controlling interests Non-controlling interests are measured at their proportionate share of the acquiree s identifiable net assets at the date of acquisition. Changes in the Group s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. (ii) Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases. (iii) Loss of control When the Group loses 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. 16

19 4. Significant Accounting Policies, Continued (a) Basis of consolidation, continued (iv) Interests in equity-accounted investees The Group s interests in equity-accounted investees comprise interests 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 to its assets and obligations for its liabilities. Interests in associates and the joint venture are accounted for using the equity method. They are initially recognized 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 equity-accounted investees, until the date on which significant influence or joint control ceases. (v) 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 as unrealized gains, but only to the extent that there is no evidence of impairment. (b) Discontinued operations The Group classifies its business segment or subsidiary as discontinued operation when it disposes a separate line of business or a segment, meets the criteria for assets held for sale, or acquires a subsidiary for sole purpose of sale. The consolidated statements of comprehensive income should be restated as if the operations have been discontinued from the beginning of the comparative fiscal period. (c) Cash and cash equivalents Cash and cash equivalents comprise cash on hand, demand deposits, and short-term investments in highly liquid securities that are readily convertible to known amounts of cash with maturities of three months or less from the acquisition date and which are subject to an insignificant risk of changes in value. Equity investments are excluded from cash and cash equivalents unless they are, in substance, cash equivalents, for example in the case of preferred shares when it has a short maturity with a specified redemption date. 17

20 4. Significant Accounting Policies, Continued (d) Inventories Inventories are measured at the lower of cost and net realizable value. The cost of inventories is based on the moving-weighted average method, and includes expenditures for acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. 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 write-down of inventories to net realizable value and all losses of inventories are recognized as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realizable value, are recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs. (e) 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 are classified at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Upon initial recognition, transaction costs are recognized in profit or loss when incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. (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. 18

21 4. Significant Accounting Policies, Continued (e) 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 and must be settled by delivery of such unquoted equity instruments are measured at cost. (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 it 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. 19

22 4. Significant Accounting Policies, Continued (f) Derivative financial instruments, including hedge accounting Derivatives are initially recognized at fair value. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below. (i) Hedge accounting The Group holds forward exchange contracts, interest rate swaps, currency swaps and other derivative contracts to manage interest rate risk and foreign exchange risk. The Group designated derivatives as hedging instruments to hedge the risk of changes in the fair value of assets, liabilities or firm commitments (a fair value hedge) and foreign currency risk of highly probable forecasted transactions or firm commitments (a cash flow hedge). On initial designation of the hedge, the Group formally documents the relationship between the hedging instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. Fair value hedge Changes in the fair value of a derivative hedging instrument designated as a fair value hedge are recognized in gain or loss. The gain or loss from remeasuring the hedging instrument at fair value for a derivative hedging instrument and the gain or loss on the hedged item attributable to the hedged risk are recognized in profit or loss in the same line item of the consolidated statement of comprehensive income. The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, or if the hedge no longer meets the criteria for hedge accounting. Any adjustment arising from gain or loss on the hedged item attributable to the hedged risk is amortized to profit or loss from the date the hedge accounting is discontinued. Cash flow hedge When a derivative is designated to hedge the variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecasted transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognized in other comprehensive income, net of tax, and presented in the hedging reserve in equity. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss on the hedging instrument that has been recognized in other comprehensive income is reclassified to profit or loss in the periods during which the forecasted transaction occurs. If the forecasted transaction is no longer expected to occur, then the balance in other comprehensive income is recognized immediately in profit or loss. 20

23 4. Significant Accounting Policies, Continued (f) Derivative financial instruments, including hedge accounting, continued (ii) Separable embedded derivatives Embedded derivatives are separated from the host contract and accounted for separately only if the following criteria have been met: 1 The economic characteristics and risks of the embedded derivative are not closely related to those of the host contract; 2 A separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and 3 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. (iii) Other derivative financial instruments Changes in the fair value of other derivative financial instrument not designated as a hedging instrument are recognized immediately in profit or loss. (g) 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. If there is objective evidence that financial instruments are impaired, impairment losses are measured and 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. (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. Losses are recognized in profit or loss and reflected in an allowance account. When the Group considers that there are no realistic prospects of recovery of the asset, the relevant amounts are written off. If the amount of impairment loss subsequently decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, then the previously recognized impairment loss is reversed through profit or loss either directly or by adjusting an allowance account. 21

24 4. Significant Accounting Policies, Continued (g) Impairment of financial assets, continued (ii) Financial assets carried at cost If there is objective evidence that an impairment loss has occurred on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, the amount of the impairment loss 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 losses shall not be 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. (h) Property, plant and equipment Property, plant and equipment are initially measured at cost and after initial recognition, are carried at cost less accumulated depreciation and accumulated impairment losses. 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. The following costs are capitalized as oil and gas properties. - the costs incurred in development stage for constructing facilities and drilling wells for production - the costs of acquiring production areas or fields with proved reserves - the construction costs and other expenditures for initiating production - the estimated costs for decommissioning Additionally, the Group depreciates the acquisition costs of oil and gas properties which are aggregated on an area-by-area basis or field-by-field basis. For the costs of oil and gas properties which are aggregated on an area-by-area basis, the Group depreciates the acquisition costs using proved reserves as the total estimated production when applying the unit-of-production depreciation method. For the costs of oil and gas properties which are aggregated on a field-by-field basis, the Group depreciates the acquisition costs using proved developed reserves as the total estimated production when applying the unit-of-production depreciation method. 22

25 4. Significant Accounting Policies, Continued (h) Property, plant and equipment, continued Costs related to undeveloped oil and gas properties are not immediately included in the depletable pool of developed assets but are transferred to the depletable pool as the reserves become proved (for area-by-area basis) or developed (for field-by-filed basis) through drilling activities. Subsequent costs are recognized in the carrying amount of property, plant and equipment 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. Property, plant and equipment, except for land and oil and gas properties, are depreciated on a straightline basis over estimated useful lives that appropriately reflect the pattern in which the asset s future economic benefits are expected to be consumed. Buildings Structures Machineries Vessels Tools and fixtures Vehicles Useful lives (years) 20 ~ 40 years 20 ~ 40 years 5 ~ 20 years 20 years 5 years 5 years 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. 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 an accounting estimate. (i) Intangible assets Intangible assets with finite useful lives acquired separately are carried at cost. Intangible assets acquired in a business combination are initially recognized at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortization and accumulated impairment losses. Prior to acquiring the legal rights to explore an area, all costs related to exploration and evaluation of an area are charged directly to the statement of comprehensive loss. Once the legal rights to explore are acquired, all costs associated with acquisition of exploration rights, geological, geophysical and geographical research, drilling costs and evaluation of technical and commercial viability of economic production are capitalized as exploration and evaluation assets. All such costs are subject to review for impairment when facts and circumstances suggest that the carrying amount of the assets exceeds their recoverable amount. When technical feasibility and commercial viability are established, the relevant expenditure is transferred to oil and gas properties after impairment is assessed and any resulting impairment loss is recognized. If no potentially commercial petroleum is discovered from exploration drilling, the relating exploration and evaluation assets are written off through the statement of comprehensive loss. 23