Non-Consolidated Financial Statements

Transcription

1 Non-Consolidated Financial Statements and 2009 (With Independent Auditors Report Thereon)

2 Contents Page Independent Auditors Report 1 Non-Consolidated Statements of Financial Position 3 Non-Consolidated Statements of Income 4 Non-Consolidated Statements of Appropriation of Retained Earnings 6 Non-Consolidated Statements of Changes in Equity 7 Non-Consolidated Statement of Cash Flows 9 Notes to Non-Consolidated Financial Statements 12 Independent Accountants Review Report on Internal Accounting Control System 98

3 Independent Auditors Report Based on a report originally issued in Korean The Board of Directors and Stockholders Shinhan Bank: We have audited the accompanying non-consolidated statements of financial position of Shinhan Bank (the Bank ) as of and 2009 and the related non-consolidated statements of income, appropriation of retained earnings, changes in equity and cash flows for the years then ended. These non-consolidated financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these non-consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards accepted in the Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the non-consolidated financial statements referred to above present fairly, in all material respects, the financial position of Shinhan Bank as of and 2009, the results of its operations, the appropriation of retained earnings, changes in equity and its cash flows for the years then ended in conformity with accounting principles generally accepted in the Republic of Korea.

4 Without qualifying our opinion, we draw attention to the following: As discussed in note 2(a) to the accompanying non-consolidated financial statements, accounting principles and auditing standards and their application in practice vary among countries. The accompanying non-consolidated financial statements are not intended to present the financial position, results of operations, appropriation of retained earnings, changes in equity and cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to audit such non-consolidated financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying non-consolidated financial statements are for use by those knowledgeable about Korean accounting principles and auditing standards and their application in practice. KPMG Samjong Accounting Corp. Seoul, Korea February 23, 2011 This report is effective as of February 23, 2011, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying non-consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any. 2

5 Non-Consolidated Statements of Financial Position As of and 2009 (In millions of won, except share data) Notes Assets: Cash and due from banks 3,15,17 W 8,574,449 10,889,206 Securities 4,15,16 40,186,835 39,540,194 Loans, net of allowance for loan losses and deferred loan origination fees 5,15 145,881, ,956,199 Property and equipment, net of accumulated depreciation and accumulated impaired losses 6,16,17 2,174,278 2,176,431 Other assets, net of allowance for doubtful accounts 7, 8,15 8,560,609 9,675,322 Total assets W 205,377, ,237,352 Liabilities: Deposits 9, 15 W 139,666, ,284,956 Borrowings 10,15 15,254,062 14,262,059 Debentures, net 11,15 20,785,662 23,756,756 Provision for retirement and severance benefits, net 12 37,807 65,690 Other liabilities 13,15 14,627,773 15,452,308 Total liabilities 190,371, ,821,769 Stockholder s equity: Common stock of W5,000 par value Authorized 2,000,000,000 shares Issued and outstanding 1,585,615,506 shares 7,928,078 7,928,078 Capital surplus 404, ,903 Capital adjustments 19 - (2) Accumulated other comprehensive income 33 1,189,210 1,097,459 Retained earnings 20 5,484,004 3,985,145 Total stockholder s equity 15,006,193 13,415,583 Total liabilities and stockholder s equity W 205,377, ,237,352 See accompanying notes to non-consolidated financial statements. 3

6 Non-Consolidated Statements of Income For the years ended and 2009 Interest and dividend income: Interest on due from banks W 58,805 60,289 Interest and dividend on securities 1,648,297 1,655,701 Interest on loans 7,744,036 7,781,306 Other 65,401 61,494 Total interest and dividend income 9,516,539 9,558,790 Interest expense: Interest on deposits 3,769,585 4,053,008 Interest on borrowings 286, ,436 Interest on debentures 955,735 1,294,274 Other 65,386 96,474 Total interest expense 5,077,409 5,858,192 Net interest income 4,439,130 3,700,598 Provision for loan and other asset losses 960,466 1,206,976 Net interest income after provision for loan and other asset losses 3,478,664 2,493,622 Non-interest income: Fee and commission income 1,000, ,456 Unrealized gain on trading securities 497 1,499 Gain on sale of trading securities 29,669 27,216 Gain on sale of available-for-sale securities 601, ,652 Reversal of impairment loss on available-for-sale securities 1,513 7,399 Gain on valuation of securities sold 1,899 - Gain on disposition of securities sold 2,494 - Equity in income of equity method accounted investees 46,060 34,108 Gain on disposition of equity method accounted Investments 4,370 15,077 Gain on sale of loans 25,151 73,089 Fee and commission income from trust management 62,379 67,273 Gain on foreign currency transaction and translation 1,405,633 9,628,950 Gain on derivatives 10,288,964 20,643,415 Other 80, ,563 Total non-interest income 13,550,914 32,017,697 See accompanying notes to non-consolidated financial statements. 4

7 Non-Consolidated Statements of Income, Continued For the years ended and 2009 (In millions of won, except earnings per share) Notes Non-interest expenses: Fee and commission expense W 230, ,294 General and administrative expense 22,32 2,247,046 2,226,343 Unrealized loss on trading securities Loss on sale of trading securities 16,388 14,307 Loss on sale of available-for-sale securities 25,222 33,343 Impairment loss on available-for-sale securities 21,729 29,573 Loss on valuation of securities sold Loss on disposition of securities sold 8,025 - Impairment loss on equity method investment securities 79,933 8,697 Loss from equity method investment securities 47,535 98,722 Loss on disposition of equity method accounted investments - 6,242 Loss on sale of loans 36,895 39,119 Contribution to credit guarantee fund 242, ,676 Loss on foreign currency transaction and translation 1,917,312 9,018,686 Loss on derivatives 9,592,051 20,908,693 Other 471, ,226 Total non-interest expense 14,937,496 33,445,111 Net non-interest income (expense) (1,386,582) (1,427,414) Income before income taxes 2,092,082 1,066,208 Income taxes , ,544 Net income W 1,648, ,664 Earnings per share in won 24 W 1, See accompanying notes to non-consolidated financial statements. 5

8 Non-Consolidated Statements of Appropriation of Retained Earnings For the years ended and 2009 Date of Appropriation for 2010: March 22, 2011 Date of Appropriation for 2009: March 24, 2010 Note Unappropriated retained earnings: Balance at beginning of year W - - Net income 1,648, ,664 1,648, ,664 Transfer from voluntary reserve: Other reserve 10,183 43,238 Voluntary reserve 3,223,470 2,668,724 3,233,653 2,711,962 Total 4,882,042 3,460,626 Appropriation of retained earnings: Legal reserve 164,839 74,867 Appropriation of other capital adjustment - 2 Voluntary reserve 4,232,167 3,223,470 Other reserve 7,003 12,554 Dividends , ,733 4,882,042 3,460,626 Unappropriated retained earnings to be carried over to subsequent year W - - See accompanying notes to non-consolidated financial statements. 6

9 Non-Consolidated Statements of Changes in Equity For the years ended and 2009 Capital stock Capital surplus Capital adjustments Accumulated other comprehensive income (loss) Retained earnings Total Balance at January 1, 2009 W 7,928, ,080 (52,756) 369,842 3,304,638 11,947,882 Dividends paid (11,099) (11,099) Appropriation of capital adjustment ,756 - (52,756) - Net income , ,664 Adjustment in foreign currency rate (4,302) (4,302) Transfer of business to subsidiary - 6, ,823 Unrealized gain on availablefor-sale securities , ,949 Unrealized holding gain of equity method accounted investees (80,702) - (80,702) Unrealized holding loss of equity method accounted investees (79,630) - (79,630) Others - - (2) - - (2) Balance at December 31, 2009 W 7,928, ,903 (2) 1,097,459 3,985,145 13,415,583 See accompanying notes to non-consolidated financial statements. 7

10 Non-Consolidated Statements of Changes in Equity, Continued For the years ended and 2009 Capital stock Capital surplus Capital adjustments Accumulated other comprehensive income (loss) Retained earnings Total Balance at January 1, 2010 W 7,928, ,903 (2) 1,097,459 3,985,145 13,415,583 Dividends paid (149,733) (149,733) Appropriation of capital adjustment (2) - Net income ,648,389 1,648,389 Adjustment in foreign currency rate Acquisition of minority interests - (2) (2) Unrealized gain on availablefor-sale securities ,524-59,524 Unrealized holding gain of equity method accounted investees ,476-4,476 Unrealized holding loss of equity method accounted investees ,751-27,751 Balance at W 7,928, ,901-1,189,210 5,484,004 15,006,193 See accompanying notes to non-consolidated financial statements. 8

11 Non-Consolidated Statements of Cash Flows For the years ended and 2009 Cash flows from operating activities: Net income W 1,648, ,664 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 160, ,358 Provision for credit losses 960,466 1,206,976 Provision for retirement and severance benefits 89,135 79,718 Interest income due to amortization of discount (18,698) (8,111) Share-based compensation expense 17,074 33,025 Unrealized loss (gain) on trading securities 152 (1,309) Loss (gain) on valuation of securities sold, net (1,633) - Loss (gain) on disposition of securities sold, net 5,531 - Impairment loss on available-for-sale securities 21,729 29,573 Reversal of impairment loss on available-for-sale securities (1,513) (7,399) Equity in net loss (income) of equity method accounted Investees, net 1,475 64,614 Loss (gain) on disposition of equity method accounted investments, net (4,370) (8,835) Impairment loss on equity method accounted investments 79,933 8,697 Loss (gain) on valuation of derivatives, net (67,172) (374,307) Loss (gain) on foreign currency translation, net 235,050 (815,170) Deferred income tax expense (revenue) 57,987 (33,613) Expenses on early retirement plan - 134,563 Other, net 79,219 23,018 Changes in assets and liabilities : Decrease (increase) in trading securities, net (2,484,351) (405,456) Decrease (increase) in available-for-sale securities, net 1,448,278 2,264,850 Decrease (increase) in held-to-maturity securities, net 756,887 (3,499,664) Decrease (increase) in loans, net (6,990,699) 4,342,845 Decrease (increase) in derivative assets 3,355,498 10,786,734 Increase (decrease) in derivative liabilities (3,241,096) (10,624,583) Decrease (increase) in other assets 674,140 2,665,723 Increase (decrease) in other liabilities (774,536) (4,459,023) Dividend received from equity method accounted investments 5,179 6,474 Decrease in provision for retirement and severance benefits and succession from related party (5,434) (179,185) Decrease (increase) in deposit for severance benefit insurance and plan assets (111,321) 36,249 Net cash provided by (used in) operating activities (4,104,273) 2,210,426 See accompanying notes to non-consolidated financial statements. 9

12 Non-Consolidated Statements of Cash Flows, Continued For the years ended and 2009 Cash flows from investing activities: Cash provided by investing activities: Proceeds from disposal of property and equipment W 25,055 65,111 Disposal of equity method accounted investments 12, ,352 Security deposits received 18,495 64,547 Proceeds from disposal of intangible assets Disposal of gold bullion, net 29,153 - Sale of business to subsidiary - 40,559 85, ,569 Cash used in investing activities: Acquisition of equity method accounted investments (339,237) (449,557) Purchase of property and equipment (170,359) (155,214) Purchase of intangible assets (19,223) (53,418) Security deposits paid (64,962) (53,704) Purchase of gold bullion, net - (2,407) (593,781) (714,300) Net cash used in investing activities (508,516) (433,731) Cash flows from financing activities: Cash provided by financing activities: Increase in deposits 4,349,619 16,255,538 Proceeds from borrowings 13,708,864 16,019,308 Proceeds from issuance of debentures 5,112,622 4,181,159 Proceeds from borrowings from trust accounts 364,391 - Proceeds from deposits for letters of guarantees and others, net 40, ,902 Increase in securities sold 1,356,031 - Increase in settlement of foreign exchange remittances, net - 101,136 Increase in guarantee deposits for securities subscription 2,759-24,934,764 36,702,043 See accompanying notes to non-consolidated financial statements. 10

13 Non-Consolidated Statements of Cash Flows, Continued For the years ended and 2009 Cash used in financing activities: Repayment of borrowings W (13,130,105) (21,818,708) Repayment of debentures (8,171,686) (12,346,678) Payment of debenture issuance costs (50,924) (40,103) Payment of borrowings from trust accounts, net - (1,886,458) Settlement of foreign exchange remittances, net (75,594) - Refund of deposits for letters of guarantees and others, net - - Refund of deposits held for subscription of securities, net - (30,559) Dividends paid (149,733) (11,099) Decrease in securities sold (1,056,198) - Acquisition of minority interests (2,492) - (22,636,732) (36,133,605) Net cash provided by financing activities 2,298, ,438 Net increase (decrease) in cash and due from banks (2,314,757) 2,345,133 Decrease in cash and due from banks due to conversion of branch to a subsidiary - (34,857) Cash and due from banks at beginning of year 10,889,206 8,578,930 Cash and due from banks at end of year W 8,574,449 10,889,206 See accompanying notes to non-consolidated financial statements. 11

14 Notes to Non-Consolidated Financial Statements 1. Organization and Description of Business Shinhan Bank (the Bank ) was established through the merger of Hansung Bank, which was established on February 19, 1897, and Dongil Bank, which was established on August 8, 1906, to engage in commercial banking and trust operations. The Bank is headquartered in 120, Taepyeongro 2-ga, Junggu, Seoul, Korea. The Bank acquired Chungbuk Bank and Kangwon Bank in 1999, and acquired the former Shinhan Bank on April 3, 2007, and then changed the name of the Bank to Shinhan Bank. As of, the Bank has 1,585,615,506 outstanding shares with par value of W7,928,078 million and Shinhan Financial Group Co., Ltd. owns 100% of them. As of, the Bank operates through 847 domestic branches, 104 depositary offices, and 7 overseas branches. 2. Basis of Presenting Financial Statements and Summary of Significant Accounting Policies (a) Basis of Presenting Financial Statements The Bank maintains its accounting records in Korean Won and prepares statutory non-consolidated financial statements in the Korean language in conformity with accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Bank 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 non-consolidated financial statements are intended solely for use by only those who are informed in Korean accounting principles and practices. The English language non-consolidated financial statements have been condensed and restructured from the Korean language non-consolidated financial statements filed with the Financial Services Commission. Certain information included in the Korean language non-consolidated financial statements, but not required for a fair presentation of the Bank's financial position, results of operations, appropriation of retained earnings, changes in equity and cash flows is not presented in the English language nonconsolidated financial statements. The accompanying non-consolidated financial statements include only the accounts of the Bank, and do not include the accounts of any of its subsidiaries. (b) Application of the Statements of Korean Financial Accounting Standards The Bank applied the same accounting policies that were adopted in the previous year s nonconsolidated financial statements. 12

15 2. Basis of Presenting Financial Statements and Summary of Significant Accounting Policies, Continued (c) Investments in Securities (excluding in associates, subsidiaries or interests in joint ventures) Classification Upon acquisition, the Bank classifies debt and equity securities (excluding investments in subsidiaries, associates and joint ventures) into the following categories: held-to-maturity, availablefor-sale or trading securities. This classification is reassessed at the end of each reporting period. Investments in debt securities where the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity. Securities that are acquired principally for the purpose of selling in the short term are classified as trading securities. Investments not classified as either held-tomaturity or trading securities are classified as available-for-sale securities. Initial recognition Investments in securities (excluding investments in subsidiaries, associates and joint ventures) are initially recognized at cost. Subsequent measurement and income recognition Trading securities are subsequently carried at fair value. Gains and losses arising from changes in the fair value of trading securities are included in the non-consolidated income statement in the period in which they arise. Available-for-sale securities are subsequently carried at fair value. Gains and losses arising from changes in the fair value of available-for-sale securities are recognized as accumulated other comprehensive income, net of tax, directly in equity. Investments in available-forsale securities that do not have readily determinable fair values are recognized at cost less impairment, if any. Held-to-maturity investments are carried at amortized cost with interest income and expense recognized in the non-consolidated income statement using the effective interest method. Fair value information The fair value of marketable securities is determined using quoted market prices as of the period end. Non-marketable equity securities are recorded at fair value calculated by the valuation model using reliable data of independent professional institutes. Non-marketable debt securities are fair valued by discounting cash flows using the prevailing market rates for debt with a similar credit risk and remaining maturity. Credit risk is determined using the issuer s credit rating as announced by accredited credit rating agencies in Korea. Non-marketable beneficiary certificates are recorded at the fair value using the standard trading yield rate determined by fund management companies. Impairment The Bank reviews investments in securities whenever events or changes in circumstances indicate that the carrying amount of the investments may not be recoverable. Impairment losses are recognized when the reasonably estimated recoverable amounts are less than the carrying amount and there is no clear evidence that impairment is not necessary. Impairment, if any, is recorded as a reduction in the carrying amount of the securities and included in the non-consolidated income statement in the period in which they arise. Recovery of impairment loss, when it is objectively related to an event occurring after the recognition of impairment loss, is recognized as current income. However, the new carrying amount after the reversal of impairment cannot exceed the carrying value of the investment security that would have been measured at the date of reversal had no impairment loss been recognized. 13

16 2. Basis of Presenting Financial Statements and Summary of Significant Accounting Policies, Continued (d) Investments in Associates and Subsidiaries Associates are all entities of which the Bank has the ability to significantly influence the financial and operating policies and procedures, generally through 15 percent to 50 percent of the voting rights. Subsidiaries are entities controlled by the Bank. Investments in associates and subsidiaries are accounted for using the equity method of accounting and are initially recognized at cost. The Bank s investments in associates and subsidiaries include goodwill identified on acquisition (net of any accumulated impairment loss). Goodwill is calculated as the excess of the acquisition cost of an investment in an associate or subsidiary over the Bank s share of the fair value of the identifiable net assets acquired. Goodwill is amortized using the straight-line method over its estimated useful life. Amortization of goodwill is recorded together with equity in income (loss) of equity method accounted investees. When events or circumstances indicate that the carrying value of goodwill may not be recoverable, the Bank reviews goodwill for impairment and records any impairment loss immediately in the nonconsolidated income statement. The Bank s share in post-acquisition profits or losses of associates and subsidiaries is recognized in the non-consolidated income statement, and its share of post-acquisition movements in equity is recognized in equity. The cumulative post-acquisition movements are adjusted against the carrying amount of each investment. Changes in the carrying amount of an investment resulting from dividends by an associate or subsidiary are recognized when the associate or subsidiary declares the dividend. When the Bank s share of losses in an associate or subsidiary equals or exceeds its interest in the associate or subsidiary, including preferred stock or other long term loans and receivables issued by the associate or subsidiary, the Bank does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate or subsidiary. If an associate or a subsidiary uses accounting policies or estimates other than those of the Bank for like transactions and events in similar circumstances, the Bank makes appropriate adjustments to conform the associate s accounting policies to those of the Bank when the associate s financial statements are used by the Bank in applying the equity method. However, under the revised Statements of Korea Accounting Standards (the SKAS ) No. 15 Equity Method of Accounting, in the event that accounting policies and estimates differ due to the application of Exceptions to Accounting for Small and Medium-Sized Entities or K-IFRS, no adjustments are made. If the investee is a subsidiary, net income and net assets of the parent company s separate financial statements should agree with the parent company s share in the net income and net assets of the consolidated financial statements, except when the Bank discontinues the application of the equity method due to its investment in a subsidiary being reduced to zero. Unrealized gains on transactions between the Bank and its associates or subsidiaries are eliminated to the extent of the Bank s interest in each associate or subsidiary. (e) Interest in Joint Ventures Joint ventures are those operations or assets over whose activities the Bank has joint control. In respect of jointly controlled operations, the Bank includes, in its non-consolidated financial statements, the assets that it controls and the liabilities and expenses it has incurred, plus its share of the income from the joint operation. For its interest in jointly controlled assets, the Bank recognizes, in the non-consolidated financial statements, its share of the assets it jointly controls, the liabilities jointly incurred and net income, plus the liabilities and expenses it has solely incurred, if any. The Bank accounts for its interest in a jointly controlled entity using the equity method of accounting. 14

17 2. Basis of Presenting Financial Statements and Summary of Significant Accounting Policies, Continued (f) Allowance for Loan Losses In estimating the allowance for corporate and household including credit card loan losses, the Bank records the greater amount resulting from the provisioning methods described below for each loan classification. i) Expected Loss Method The Bank estimates the allowance for corporate and household loan losses by applying the expected loss method, which analyzes factors of estimated loss based on probability of default ("PD") and loss given default ("LGD"). This provisionary method considers both financial and non-financial factors of borrowers to assess PD and LGD. PD is determined by considering the type of borrowers, the nature of loans and delinquent days and LGD is determined by considering the type of loan and collateral. ii) Financial Supervisory Service Guideline The Bank applies the Financial Supervisory Service (the FSS ) guidelines for corporate and household loans in accordance with the Regulations for the Supervision of Banks revised on December 7, The prescribed minimum levels of provision per the FSS guidelines are as follows, Corporate loans Household loans Normal(*) (*) 0.85% 1% Precautionary 7% 10% Substandard 20% 20% Doubtful 50% 55% Estimated loss 100% 100% (*) 0.9% is applied for industries susceptible to market; construction, real estate and rental services, retail and wholesale, lodging and restaurant. In addition, the Bank includes interbank loan, call loan, bills bought under repurchase agreement and deposit from banks except for Bank of Korea in estimating the allowance for loan losses classified as normal. Additionally, the Bank considers the borrower s ability to repay and the recovery value of collateral in estimating expected loss on high-risk large volume loan balance. Loans are charged-off if they are deemed to be uncollectible by falling under any of the following categories: - Loans for which collection is not foreseeable due to insolvency or bankruptcy, dissolution or the closure of the business by the debtor; - Payments outstanding on unsecured consumer loans, which have been overdue for more than six months; or - The portion of loans classified as estimated loss, net of any recovery from collateral, which is deemed to be uncollectible. 15

18 2. Basis of Presenting Financial Statements and Summary of Significant Accounting Policies, Continued (g) Troubled Debt Restructuring A loan in which the contractual terms are modified in a troubled debt restructuring program is accounted for at the present value of the expected future cash flows of the modified loan discounted at the effective interest rate of the original loan. The excess of the carrying amount over the present value of expected future cash flows is recorded as provision for loan losses in the current period. The present value discounts are recorded in allowance for loan losses and reflected as a deduction from the nominal value of the loans. The present value discounts are amortized using the effective interest method and recognized as interest income. (h) Deferred Loan Origination Fees Certain fees associated with lending activities which meet specified criteria, are deferred and amortized over the life of the loan as an adjustment to the carrying amount of the loan using the effective yield method and recognized as interest income. (i) Transfer of Assets Transfers of financial assets to third parties are accounted for as sales when control is surrendered to the transferee. The Bank derecognizes financial assets from the state of financial position including any related allowance, and recognizes all assets obtained, and liabilities incurred, including any recourse obligations to the transferee, at fair value. Any resulting gain or loss on the sale is recognized in earnings. Conversely, the Bank only recognizes financial assets transferred from third parties on the state of financial position when the Bank obtains control of financial assets. (j) Interest Income Interest income on bank deposits, loans and securities is recognized on an accrual basis, except for interest on loans that are past due and loans to customers who are bankrupt which are placed on nonaccrual. Any unpaid interest previously accrued on such loans is reversed from income, and thereafter interest is recognized only to the extent payments are received. Payments on delinquent loans are first applied to delinquent interest, to normal interest, and then to the principal balance. 16

19 2. Basis of Presenting Financial Statements and Summary of Significant Accounting Policies, Continued (k) Property and Equipment Property and equipment are stated at cost except in the case of revaluations made in accordance with the Asset Revaluation Law which allowed for asset revaluation prior to the Law being revoked. Assets acquired through investment in kind or donation, are recorded at fair value. Significant additions or improvements extending useful lives of assets are capitalized. However, normal maintenance and repairs are charged to expense as incurred. Depreciation is computed by the straight-line method over the estimated useful lives or the decliningbalance method using rates based on the estimated useful lives of the respective assets as follows: Descriptions Depreciation method Useful lives Buildings Straight-line 40~60 years Leasehold improvements Straight-line 5 years Furniture, office equipment and others Declining-balance 5 years The Bank reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized when the expected estimated undiscounted future net cash flows from the use of the asset and its eventual disposal are less than its carrying amount. The Bank recognizes an impairment loss by reducing its carrying amount to the estimated recoverable amount. (l) Intangible Assets Intangible assets which mainly consist of software are stated at cost less accumulated amortization and impairment loss, if any. Such intangible assets are amortized using the straight-line method over five years. The Bank reviews intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Bank reduces its carrying amount to the recoverable amount and the amount impaired is recognized as impairment loss. (m) Leases The Bank classifies and accounts for lease transactions as either an operating or capital lease, depending on the terms of the lease. Leases where the Bank assumes substantially all the risks and rewards of ownership are classified as capital leases. All other leases are classified as operating leases. Capital lease is recorded as the net investment in the lease asset at lease inception representing the aggregate future minimum lease payments. Lease income is recognized to approximate a level rate of return on the net investment by using the effective yield method over the lease term. Payments under operating lease are recognized in income on a straight-line basis over the lease term. 17

20 2. Basis of Presenting Financial Statements and Summary of Significant Accounting Policies, Continued (n) Bonds under Resale or Repurchase Agreements Bonds purchased under resale agreements are recorded as loans and bonds sold under repurchase agreements are recorded as borrowings when the Bank purchases or sells securities under resale or repurchase agreements. (o) Securities Sold Marketable securities borrowed from the Korea Securities Depository are not recorded in the statement of financial position, until the borrowed securities are actually sold. The market value of such securities at the time of sale is recorded as a liability. Gains and losses from changes in the fair value of securities sold are included in non-interest income (expenses). (p) Discount (Premium) on Debentures Discount(premium) on debentures issued, which represents the difference between the face value and issuance price of debentures, is amortized(accreted) using the effective interest method over the life of the debentures. The amount amortized(accreted) is included in interest expense. (q) Provision for Retirement and Severance Benefits The Bank introduced a pension plan from Under the Retirement Benefits Regulation, consideration of service requirements under the plan begins from the date employees join the Bank (where benefits are paid in interim payments, from the date of interim payments). The type of pension plan adopted by the Bank is defined benefit pension plan, where each eligible employee receives a fixed amount of pension after retirement. The Bank's estimated liability under the pension plan which would be payable if all employees left at the end of reporting period is accrued as a liability for retirement and severance benefits in the accompanying non-consolidated statements of financial position. Pension plan assets are reflected in the accompanying non-consolidated statements of financial position as a reduction of the liability for retirement and severance benefits. (Provided that the amount of pension plan assets exceeds the amount of the liability for retirement and severance benefits, the exceeding amount is presented as Investments.) (r) Provision and Contingent Liabilities Provisions are recognized when all of the following are met: (1) an entity has a present obligation as a result of a past event, (2) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and (3) a reliable estimate can be made of the amount of the obligation. Where the effect of the time value of money is material, the amount of a provision is the present value of the expenditures expected to be required to settle the obligation. Where the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement is recognized as a separate asset when, and only when, it is virtually certain that reimbursement will be received if the Bank settles the obligation. The expense generated by the provision is presented net of the amount of expected reimbursement. (s) Allowance for Loss on Guarantees and Acceptances The Bank estimates allowance for losses on outstanding guarantees and acceptances, contingent guarantees and acceptances and endorsed bills in accordance with the same loan classification criteria applied in estimating allowance for loan losses and recorded as other liabilities with the respective changes records it as other non-interest expense. 18

21 2. Basis of Presenting Financial Statements and Summary of Significant Accounting Policies, Continued (t) Allowance for Unused Loan Commitments The Bank estimates the allowance for unused corporate and household loan commitments by each classification considering the credit conversion factor (CCF), the ratio in which the off-balance sheet commitments are converted into outstanding amounts based on historical data. In addition, the Bank applies the FSS guidelines for unused corporate and household loan commitments in accordance with the Regulations for the Supervision of Banks revised at December 7, 2007 as follows: for unused corporate loan commitments a minimum of 0.85% for normal (0.9% for construction, real estate and rental services, retail and wholesale, and lodging and restaurant; industries susceptible to market), 7% for precautionary, 20% for substandard, 50% for doubtful and 100% for estimated loss, respectively; and for unused household loan commitments a minimum of 1.0% for normal, 10% for precautionary, 20% for substandard, 55% for doubtful and 100% for estimated loss, respectively. The Bank records the greater amount resulting from the provisioning methods described above by each classification as other allowances included in other liabilities with the respective changes recorded in other non-interest expense. (u) Translation of Foreign Currency Denominated Assets and Liabilities Assets and liabilities denominated in foreign currencies are translated into Korean won at the end of reporting period, with the resulting gains and losses recognized in current results of operations. Assets and liabilities denominated in foreign currencies are translated into Korean won at W1, and W1, to US $1 based on the basic exchange rate and the cross exchange rates announced by the Seoul Money Brokerage Services Ltd. on and 2009, the last business day of each respective period. Foreign currency assets and liabilities of foreign-based operations and branches accounted for using the equity method are translated based on the exchange rate at the end of reporting period. Foreign currency transactions in the non-consolidated statement of income are translated using an average rate. Translation gains and losses arising from collective translation of the foreign currency financial statements of foreign-based operations are recorded as accumulated other comprehensive income. These gains and losses are subsequently recognized as income in the year the foreign operations or companies are liquidated or sold. 19

22 2. Basis of Presenting Financial Statements and Summary of Significant Accounting Policies, Continued (v) Derivatives and Hedge Accounting The Bank holds derivative financial instruments to hedge its foreign currency and interest rate risk exposures. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, and a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative. Derivatives are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at their fair value. Attributable transaction costs are recognized in profit or loss when incurred. Hedge accounting Where a derivative, which meets certain criteria, is used for hedging the exposure to changes in the fair value of a recognized asset, liability or firm commitment, it is designated as a fair value hedge. Where a derivative, which meets certain criteria, is used for hedging the exposure to the variability of the future cash flows of a forecasted transaction it is designated as a cash flow hedge. The Bank documents, at the inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Bank documents its assessment, both at hedge inception and on a monthly basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting the changes in fair values or cash flows of hedged items. Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the non-consolidated statement of income, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in equity as other comprehensive income. The gain or loss relating to any ineffective portion is recognized immediately in the earnings. Amounts accumulated in equity are recycled to the income statement in the periods in which the hedged item will affect profit or loss. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at the time remains in equity and is recognized when the forecast transaction is ultimately recognized in earnings. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the statement of income. Derivatives that do not qualify for hedge accounting Changes in the fair value of derivative instruments that are not designated as fair value or cash flow hedges are recognized immediately in the statement of income. Separable embedded derivatives Changes in the fair value of separable embedded derivatives are recognized immediately in the statement of income. 20

23 2. Basis of Presenting Financial Statements and Summary of Significant Accounting Policies, Continued (w) Share-Based Payment The Bank has granted shares or share options to its employees and other parties. For equity-settled share-based payment transactions, the Bank measures the goods or services received, and the corresponding increase in equity as a capital adjustment at the fair value of the goods or services received, unless that fair value cannot be estimated reliably. If the entity cannot estimate reliably the fair value of the goods or services received, the Bank measures their value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted. If the fair value of the equity instruments cannot be estimated reliably at the measurement date, the Bank measures them at their intrinsic value and recognizes the goods or services received based on the number of equity instruments that ultimately vest. For cash-settled share-based payment transactions, the Bank measures the goods or services acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the Bank remeasures the fair value of the liability at each reporting date and at the date of settlement, with changes in fair value recognized in profit or loss for the period. (x) Income Taxes Income tax on the income or loss for the year comprises current and deferred tax. Income tax is recognized in the non-consolidated statement of income except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted. Deferred tax is provided using the asset and liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates to be enacted or substantively enacted upon realization or settlement. A deferred tax asset is recognized only to the extent that it is probable that future taxable income will be available against which the unused tax losses and credits can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized. Changes in deferred taxes due to a change in the tax rate except for those related to items initially recognized outside profit or loss (either in other comprehensive income or directly in equity) are recognized as income in the current year. Shinhan Financial Group Co., Ltd. has filed with the Korean tax authorities a national income tax return under the consolidated corporate tax system, which allows national income tax payments based on the consolidated profits or losses of the Shinhan Financial Group Co., Ltd. and its wholly owned domestic subsidiaries including the Bank. Deferred taxes are measured based on the future tax benefits expected to be realized in consideration of the expected profits or losses of eligible companies in accordance with the consolidated corporate tax system. Consolidated corporate tax amounts, once determined, are allocated to each of the subsidiaries and are used as a basis for the income taxes to be recorded in their separate financial statements. (y) Valuation of Receivables and Payables at Present Value Receivables and payables arising from long-term cash loans/borrowings and other similar transactions are stated at present value. The difference between the nominal value and present value of these receivables or payables is amortized using the effective interest method. The amount amortized is included in interest expense or interest income. 21

24 2. Basis of Presenting Financial Statements and Summary of Significant Accounting Policies, Continued (z) Accounting for Trust Accounts The Bank accounts for trust accounts separately from its bank accounts under the Financial Investment Services and Capital Markets Act and thus the trust accounts are not included in the accompanying non-consolidated financial statements. Funds transferred between a bank account and a trust account is recognized as borrowings from trust accounts in other liabilities with fees for managing the accounts recognized as non-interest income by the Bank. Furthermore, the Bank recognizes as loss in other non-interest expense any excess amount of the guaranteed principal and earnings over the sum of trust fee income and a special provision which consist of up to 25% of total trust fees or 5% of certain trust accounts. (aa) Cash Management Account The Bank offers Cash Management Accounts ( CMA ) services, of which investments consist of eligible securities for open market operations, bills discounted, trade bills, etc. The trust money received from the CMA depositor is presented as trust of cash management account in liabilities and invested in securities, bills discounted, etc., and such assets under custody in cash management is accounted for both cash management account assets and other trading securities. As the Bank renders the investment yield to the depositor, such earnings are recognized as interest on deposits in operating expenses. As the Bank receives commission from the depositor with regard to withdrawal of the trust money or arrival to maturity, such commissions are recognized as commissions income in operating revenues. (bb) Use of Estimates The preparation of non-consolidated financial statements in accordance with accounting principles generally accepted in the Republic of Korea requires management to make estimates and assumptions that affect the amounts reported in the non-consolidated financial statements and related notes to the non-consolidated financial statements. Actual results could differ from those estimates. 22

25 3. Cash and Due from Banks (a) Cash and due from banks at and 2009 consisted of the following: Cash on hand: Won W 2,165,162 1,465,046 Foreign currency 282, ,521 2,448,032 1,690,567 Due from banks in won: Reserve deposits with the Bank of Korea 3,566,174 6,172,687 Other 1,357,286 1,323,734 4,923,460 7,496,421 Due from banks in foreign currencies: Demand deposits 605, ,255 Time deposits 337, ,133 Other 106, ,586 1,049,500 1,445,974 Due from banks invested in gold 153, ,244 W 8,574,449 10,889,206 (b) Restricted due from banks as of and 2009 were as follows: Restriction Due from banks in won: Reserve deposits with the Bank of Korea W 3,566,174 6,172,687 Bank of Korea Act Other 11, ,501 3,577,541 6,301,188 Due from banks in foreign currencies: 578, ,705 Bank of Korea Act & others W 4,156,477 6,946,893 23

26 3. Cash and Due from Banks, Continued (c) The maturities of due from banks at and 2009 were as follows: Due from banks in At Foreign Won Gold currencies Total Due in 3 months W 4,912,214 1,012, ,457 6,078,345 Due after 3 months through 3 years - 36,826-36,826 Due after 3 years 11, ,246 W 4,923,460 1,049, ,457 6,126,417 Due from banks in At December 31, 2009 Foreign Won Gold currencies Total Due in 3 months W 7,363,246 1,420, ,244 9,040,175 Due after 3 months through 3 years 4,796 11,454-16,250 Due after 3 years 128,379 13, ,214 W 7,496,421 1,445, ,244 9,198, Securities (a) Securities as of and 2009 consisted of the following: Trading securities W 4,804,227 2,320,028 Available-for-sale securities 23,374,388 24,744,157 Held-to-maturity securities 10,295,844 11,052,807 Equity method accounted investments 1,712,376 1,423,202 W 40,186,835 39,540,194 24

27 4. Securities, Continued (b) Trading Securities (i) Trading securities as of and 2009 consisted of the following: Equity securities W - 42,996 Debt securities: Government bonds 307,212 20,139 Finance debentures 80,117 89,645 Corporate bonds 9, , ,784 CMA investments (note 31) 759, ,704 Commercial paper 3,647,636 1,654,544 W 4,804,227 2,320,028 (ii) Details of trading equity securities as of December 31, 2009 were as follows: 2009 Acquisition cost Fair value Book value Trading equity securities 41,777 42,996 42,996 25