Consolidated financial statements for the years ended with independent auditors report ZEUS Co., Ltd. and its subsidiaries
Table of contents Independent auditors report 1~2 Financial statements Consolidated statements of financial position 4~5 Consolidated statements of comprehensive income 6 Consolidated statements of changes in equity 7 Consolidated statements of cash flows 8 Notes to the financial statements 9~52 Page
Independent auditors report To the Shareholders and Board of Directors of ZEUS Co., Ltd. We have audited the accompanying consolidatedd financial statements of ZEUS Co., Ltd. (the Company ) and its subsidiaries (collectively referred to as the Group ), which comprise the consolidated statements of financial position as at December 31, 2014 andd 2013, and the consolidated statements of comprehensivee income, consolidated statements of changes in equity and consolidated statements s of cash flows for the years then ended, and a summary of significant accounting policies and other explanatory e information. Management s Responsibility for the t consolidated Financial Statements Management is responsible for the preparation and fair presentation of thesee consolidated financial statements in accordance with Korean International Financial Reporting Standardss (KIFRS), 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 fraudd 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 auditing standards generally accepted in the Republic of Korea. Those standards requiree that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements s are free from material misstatement. An audit involves performing procedures to obtain audit evidence aboutt the amounts and disclosures in the consolidatedd financial statements. The procedures selected depend on the auditors judgment, including the assessment of the riskss of material misstatement of the consolidated financial f statements, whether due to fraud or error. In making those risk assessments s, the auditor considers internal control relevant to t the entity s preparation and fair presentation of the consolidated financial statementss in order to design audit procedures that are appropriate in the circumstances, but not for the purposee 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 off the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate a too provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, inn all material respects, the financial position of ZEUS Co., Ltd. and its subsidiaries as at, and their financial performancee and cash flows for the years then ended in accordance with Korean International Financial Reporting Standards. 1
Other Matters The consolidated financial statements of the ZEUS Co., Ltd. and its subsidiaries for the year ended December 31, 2013 were audited in accordance with previous auditing standards generally g accepted in the Republic of Korea. March 13, 2015 This audit report is effective as at March 13, 2015, the independent auditors report date. Accordingly, certain material subsequent events or circumstances may have occurred duringg the period from the auditors report date to the time this report is used. Such events and circumstances could significantly affect the accompanying consolidated financial statements and may result in modification too this report. 2
Consolidated financial statements for the years ended The accompanying consolidated financial statements, including all footnotes and disclosures, have been prepared by, and are the responsibility of, the Company. Jong Woo, Lee Representative Director ZEUS Co., Ltd. 3
Consolidated statements of financial position as at (Korean won in units) Notes Assets Current assets: Cash and cash equivalents 3,4,14,31,32,33 \ 23,955,398,324 \ 37,370,488,545 Trade and other receivables 4,5,30,31,32,33 42,294,965,212 41,893,958,235 Other current financial assets 4,6,14,31,32,33 29,289,839,110 19,213,873,226 Derivative financial assets 4,7,33-383,614,913 Inventories 9 46,378,157,962 54,055,367,632 Other current assets 8,31,33 4,983,211,307 3,193,778,639 Total current assets 146,901,571,915 156,111,081,190 Non-current assets: Property, plant and equipment 10,14 75,887,036,526 42,848,269,278 Intangible assets 11,35 6,309,083,103 2,932,589,785 Long-term trade and other receivables 4,5,27,32,33 4,458,795,322 4,975,052,498 Other non-current financial assets 4,6,14,33 1,156,455,597 5,651,293,265 Deferred tax assets 27 2,150,139,136 2,049,537,489 Other non-current assets 8 81,951,844 97,712,010 Total non-current assets 90,043,461,528 58,554,454,325 Total assets \ 236,945,033,443 \ 214,665,535,515 (Continued) 4
ZEUS, Ltd. and its subsidiaries Consolidated statements of financial position (cont'd) as at (Korean won in units) Notes 2014 2013 Liabilities and equity Current liabilities: Trade and other payables 4,12,31,32,33 \ 41,947,685,628 \ 38,859,126,947 Short-term borrowings 4,13,14,31,32,33 22,221,540,000 33,230,946,000 Current portion of long-term borrowings 4,13,31,32,33 5,443,594,050 3,863,922,360 Derivative financial liabilities 4,7,32,33-210,446,436 Provisions 16 1,200,787,963 991,807,553 Other current liabilities 15 4,342,155,169 3,506,647,421 Tax liabilities 27 2,728,603,004 4,335,075,162 Total current liabilities 77,884,365,814 84,997,971,879 Non-current liabilities: Long-term trade and other payables 4,12,31,32,33 1,201,564,407 1,319,307,376 Long-term borrowings 4,13,14,31,32,33 23,283,282,981 13,652,400,229 Deferred tax liabilities 27 874,580,897 856,164,934 Total non-current liabilities 25,359,428,285 15,827,872,539 Total liabilities 103,243,794,099 100,825,844,418 Equity Issued capital 1,17 4,720,000,000 4,720,000,000 Share premium 18 37,489,613,110 36,810,472,398 Other components of equity 19 - (4,342,106,780) Accumulated other comprehensive losses 6,20 (4,779,243,929) (3,155,759,881) Retained earnings 21 94,198,668,207 79,005,073,991 Equity attributable to equity holders of the parent 131,629,037,388 113,037,679,728 Non-controlling interests 2,072,201,956 802,011,369 Total equity 133,701,239,344 113,839,691,097 Total liabilities and equity \ 236,945,033,443 \ 214,665,535,515 The accompanying notes are an integral part of the consolidated financial statements. 5
Consolidated statements of comprehensive income for the years ended (Korean won in units) Notes 2014 2013 Sales 5,22,23,30,31 \ 240,977,213,864 \ 204,945,160,807 Cost of sales 12,22,23,30 (176,511,429,524) (139,719,687,553) Gross profit 64,465,784,340 65,225,473,254 Selling and administrative expenses 23,24 (43,941,699,555) (42,587,593,638) Operating profit 31 20,524,084,785 22,637,879,616 Other income 25 1,073,686,767 2,732,623,873 Other expense 25 (322,739,502) (2,016,210,996) Finance income 4,7,26 3,036,810,639 4,253,257,759 Finance costs 4,7,26 (2,483,968,724) (5,796,445,558) Profit for the year before tax 21,827,873,965 21,811,104,694 Income tax expense 27 (4,654,682,658) (4,293,878,969) Profit for the year 17,173,191,307 17,517,225,725 Other comprehensive income: Other comprehensive income(loss) to be reclassified to profit or loss in subsequent periods(net of tax): Gain (loss) on valuation of available-for-sale financial assets 6 12,948,000 (8,892,000) Exchange differences on translations of foreign operations (1,636,432,048) (3,344,500,455) Total comprehensive income, net of tax \ 15,549,707,259 \ 14,163,833,270 Profit for the year attributable to: Equity holders of the parent 16,961,594,216 17,320,992,861 Non-controlling interests 211,597,091 196,232,864 \ 17,173,191,307 \ 17,517,225,725 Total comprehensive income for the year attributable to: Equity holders of the parent 15,338,110,168 13,967,600,406 Non-controlling interests 211,597,091 196,232,864 \ 15,549,707,259 \ 14,163,833,270 Earnings per share: - Basic, profit for the year attributable to ordinary equity holders of the parent 28 \ 1,808 \ 1,959 The accompanying notes are an integral part of the consolidated financial statements. 6
Consolidated statements of changes in equity for the years ended (Korean won in units) Accumulated other Equity attributable to Other components comprehensive income equity holders of the Non-controlling Issued capital Share premium of equity (loss) Retained earnings parent interest Total equity As at January 1, 2013 \ 4,720,000,000 \ 36,810,472,398 \ (4,342,106,780) \ 197,632,574 \ 61,684,081,130 \ 99,070,079,322 \ 605,778,505 \ 99,675,857,827 Profit for the year - - - - 17,320,992,861 17,320,992,861 196,232,864 17,517,225,725 Other comprehensive income: Gain (loss) on valuation of available-for-sale financial assets - - - (8,892,000) - (8,892,000) - (8,892,000) Exchange differences on translations of foreign operations - - - (3,344,500,455) - (3,344,500,455) - (3,344,500,455) Other comprehensive income - - - (3,353,392,455) - (3,353,392,455) - (3,353,392,455) As at December 31, 2013 \ 4,720,000,000 \ 36,810,472,398 \ (4,342,106,780) \ (3,155,759,881) \ 79,005,073,991 \ 113,037,679,728 \ 802,011,369 \ 113,839,691,097 As at January 1, 2014 \ 4,720,000,000 \ 36,810,472,398 \ (4,342,106,780) \ (3,155,759,881) \ 79,005,073,991 \ 113,037,679,728 \ 802,011,369 \ 113,839,691,097 Profit for the year - - - - 16,961,594,216 16,961,594,216 211,597,091 17,173,191,307 Other comprehensive income: Gain (loss) on valuation of available-for-sale financial assets - - - 12,948,000-12,948,000-12,948,000 Exchange differences on translations of foreign operations - - - (1,636,432,048) - (1,636,432,048) - (1,636,432,048) Other comprehensive income - - - (1,623,484,048) - (1,623,484,048) - (1,623,484,048) Dividends - - - - (1,768,000,000) (1,768,000,000) - (1,768,000,000) Changes in consolidation - - - - - - 1,058,593,496 1,058,593,496 Disposal of treasury shares - 679,140,712 4,342,106,780 - - 5,021,247,492-5,021,247,492 As at December 31, 2014 \ 4,720,000,000 \ 37,489,613,110 \ - \ (4,779,243,929) \ 94,198,668,207 \ 131,629,037,388 \ 2,072,201,956 \ 133,701,239,344 The accompanying notes are an integral part of the consolidated financial statements. 7
Consolidated statements of cash flows for the years ended (Korean won in units) Notes 2014 2013 Operating activities: Cash generated from operating activities: Profit for the year \ 17,173,191,307 \ 17,517,225,725 Adjustments 29 3,221,300,563 6,972,078,852 Working capital adjustments 29 12,833,944,799 (16,218,905,532) 33,228,436,669 8,270,399,045 Interest received 816,346,445 635,422,090 Interest paid (1,093,405,526) (837,087,181) Income tax paid (4,654,682,658) (631,987,994) Net cash flows from operating activities 28,296,694,930 7,436,745,960 Investing activities: Decrease in other receivables 406,614,913 22,770,000 Decrease in other financial instruments 47,111,651,674 17,680,599,343 Decrease in deposits 1,228,587,360 940,225,466 Decrease in other non-current financial assets - 1,872,654,102 Increase in property, plant and equipment 157,146,181 11,445,554,139 Increase in intangible assets 89,090,909 - Increase in other receivables - (40,000,000) Increase in other current financial assets (51,693,071,619) (23,674,658,591) Increase in deposits (1,197,289,185) (1,250,225,314) Increase in other non-current financial assets - (3,066,129,494) Acquisition of property, plant and equipment (35,692,444,851) (12,622,537,908) Acquisition of intangible assets (1,619,623,862) (933,513,436) Acquisition of investment property 35 (1,928,479,423) - Net cash flow used in investing activities (43,137,817,903) (9,625,261,693) Financing activities: Proceeds from short-term borrowings 15,900,000,000 21,187,159,000 Proceeds from long-term borrowings 9,897,819,552 5,399,230,686 Proceeds from disposal of treasury shares 5,021,247,492 - Repayment of short-term borrowings (27,643,956,823) (6,000,000,000) Repayment of current portion of long-term borrowings - (1,214,644,240) Dividends paid (1,768,000,000) - Net cash flows provided by financing activities 1,407,110,221 19,371,745,446 Net increase (decrease) in cash and cash equivalents (13,434,012,752) 17,183,229,713 Net foreign exchange difference 18,922,531 (502,137,101) Cash and cash equivalents as at January 1 37,370,488,545 20,689,395,933 Cash and cash equivalents as at December 31 \ 23,955,398,324 \ 37,370,488,545 The accompanying notes are an integral part of the consolidated financial statements. 8
1. Corporate information (1) The Company ZEUS Co.,Ltd.(the Company ) was incorporated in March 1970 and converted from ZEUS COMM trading company in December 1988, is engaged in manufacturing of semiconductor and LCD production equipment and import retail business. The Company is located in 161-6 Kyunggidong-ro, (Busan-dong) Osan city, Kyunggi province, Korea. The Company was listed on the KOSDAQ on February 1, 2006. Since its inception, it has distributed stock dividends, performed stock split and increased capital and its paid-in capital as at December 31, 2014 is 4,720,000 thousand. And its major shareholders as at December 31, 2014 are as follows: Shareholder Number of shares Equity ownership (%) Lee, Jong Woo 2,064,655 21.87 Moon, Jung Hyun 900,000 9.53 Lee, Dong Ak 1,190,000 12.61 Employee Stockholders Association 80,663 0.85 Others 5,204,682 55.14 9,440,000 100.00 (2) Subsidiaries The Company s subsidiaries as at December 31, 2014 are as follows: Equity ownership (%) Subsidiary Year-end Country of domicile 3Z Co., Ltd. 100.0 100.0 Dec. 31 Korea J.E.T Co., Ltd. Sole Bridge Co., Ltd. 3Z Metal Co., Ltd. APCT Co., Ltd. Xieyou International Science Technology Co., Ltd. ZEUS China 100.0 100.0 " Japan 75.0 75.0 " Korea Principal activity Manufacture of taps,valves and related components Manufacture of semiconductors, LCD components and related equipment Manufacture of semiconductor production machinery Parent company ZEUS Co.,Ltd 60.0 60.0 " " Production of steel 3Z Co.,Ltd 67.8 - " " 100.0 100.0 " Taiwan Production of chemicals and related machinery Manufacture of semiconductor production machinery " " ZEUS Co.,LTd J.E.T Co.,Ltd 100.0 100.0 " China " " 9
1. Corporate information (cont d) (3) Financial information of subsidiaries Summarized financial information of subsidiaries as at and for the year ended December 31, 2014 and 2013 are as follows (Korean won in thousands): 2014 Total Subsidiary Assets Liabilities Equity Sales Profit (loss) for the year comprehensive income (loss) 3Z Co., Ltd. 27,301,778 9,470,174 17,831,604 15,804,113 1,418,452 1,418,452 J.E.T Co., Ltd. 50,268,219 32,302,746 17,965,473 69,833,035 3,482,525 1,863,732 Sole bridge Co., Ltd. 3,837,767 1,963,520 1,874,247 5,934,688 655,100 655,100 3Z Metal Co., Ltd. 8,113,902 6,659,030 1,454,872 5,594,920 211,811 211,811 APCT Co., Ltd. 5,384,669 2,213,684 3,170,985 684,063 (114,532) (114,532) Xieyou International Science 4,321,618 1,010,302 3,311,316 3,543,890 202,499 145,744 Technology Co., Ltd. ZEUS China 2,109,666 369,430 1,740,236 3,169,890 458,428 497,544 2013 Total Subsidiary Assets Liabilities Equity Sales Profit for the year comprehensive income (loss) 3Z Co.,Ltd. 25,318,848 8,905,696 16,413,152 17,263,793 5,672,632 5,672,632 J.E.T Co., Ltd. 63,963,176 47,861,435 16,101,741 62,352,794 4,964,186 1,732,854 Sole bridge Co.,Ltd. 5,546,028 4,326,881 1,219,147 5,134,078 518,013 518,013 3Z Metal Co.,Ltd. 7,714,979 6,471,917 1,243,062 4,743,731 166,824 166,824 Xieyou International Science 3,911,346 745,774 3,165,572 3,738,247 128,359 1,996 Technology Co., Ltd. ZEUS China 1,403,951 161,259 1,242,692 2,142,364 73,892 87,087 (4) Changes in consolidation Changes in consolidation for the year ended December 31, 2014 are as follows: Subsidiary APCT Co.,Ltd. Reason Newly acquired: 67.8% equity increased 2. Basis of preparation and summary of significant accounting policies 2.1 Basis of preparation The Group prepares statutory financial statements in the Korean language in accordance with Korean International Financial Reporting Standards (KIFRS) enacted by the Act on External Audit of Stock of Companies. The accompanying consolidated financial statements have been translated into English from the Korean language financial statements. In the event of any differences in interpreting the financial statements or the independent auditors report thereon, the Korean version, which is used for regulatory reporting purposes, shall prevail. The accompanying consolidated financial statements have been prepared on a historical cost basis and are presented in Korean won (KRW) in units except when otherwise indicated 10
2. Basis of preparation and summary of significant accounting policies (cont d) 2.2 Basis of consolidation The consolidated financial statements comprise the financial statements of the Group and its subsidiaries as at December 31, 2014. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has: Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee) Exposure, or rights, to variable returns from its involvement with the investee The ability to use its power over the investee to affect its returns Generally, there is a presumption that a majority of voting rights result in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing wheather it has power over an investee, including: The contractual arrangement with the other vote holders of the investee Rights arising from other contractual arrangements The Group s voting rights and potential voting rights The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary. Profit or loss and each component of other comprehensive income (OCI) are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the noncontrolling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it: Derecognizes the assets (including goodwill) and liabilities of the subsidiary Derecognizes the carrying amount of any non-controlling interests Derecognizes the cumulative translation differences recorded in equity Recognizes the fair value of the consideration received Recognizes the fair value of any investment retained Recognizes any surplus or deficit in profit or loss Reclassifies the parent s share of components previously recognized in OCI to profit or loss or retained earnings, as appropriate, as would be required if the Group had directly disposed of the related assets or liabilities 11
2. Basis of preparation and summary of significant accounting policies (cont d) 2.3 Summary of significant accounting policies 2.3.1 Business combinations and goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred measured at acquisition date fair value and the amount of any non-controlling interests in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree s identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, any previously held equity interest is re-measured at its acquisition date fair value and any resulting gain or loss is recognized in profit or loss. Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of KIFRS 1039 Financial Instruments: Recognition and Measurement, is measured at fair value with changes in fair value recognized either in either profit or loss or as a change to OCI. If the contingent consideration is not within the scope of KIFRS 1039, it is measured in accordance with the appropriate KIFRS. Contingent consideration that is classified as equity is not re-measured and subsequent settlement is accounted for within equity. Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interests, and any previous interest held, over the net identifiable assets acquired and liabilities assumed. If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Group re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognized at the acquisition date. If the re-assessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognized in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Where goodwill has been allocated to a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured based on the relative values of the disposed operation and the portion of the cash-generating unit retained. 2.3.2 Current versus non-current classification The Group presents assets and liabilities in statement of financial position based on current/non-current classification. An asset as current when it is: Expected to be realized or intended to sold or consumed in normal operating cycle Held primarily for the purpose of trading Expected to be realized within twelve months after the reporting period, or Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period All other assets are classified as non-current. 12
2. Basis of preparation and summary of significant accounting policies (cont d) 2.3 Summary of significant accounting policies (cont d) 2.3.2 Current versus non-current classification (cont d) A liability is current when: It is expected to be settled in normal operating cycle It is held primarily for the purpose of trading It is due to be settled within twelve months after the reporting period, or There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period The Group classifies all other liabilities as non-current. Deferred tax assets and liabilities are classified as non-current assets and liabilities 2.3.3 Fair value measurement The Group measures financial instruments, such as derivatives, and non-financial assets such as investment properties, at fair value at each balance sheet date. Fair value related disclosures for financial instruments and non-financial assets that are measured at fair value or where fair values are disclosed, are summarized in the following notes: Disclosures for valuation methods, significant estimates and assumptions Notes 3,7,16,17,20.4 and 25 Contingent consideration Note 7 Quantitative disclosures of fair value measurement hierarchy Note 11 Investment in unquoted equity shares (discontinued operations) Note 13 Property, plant and equipment under revaluation model Note 16 Investment properties Note 17 Financial instruments (including those carried at amortised cost) Note 20.4 Non-cash distribution Note 25 The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level1 Quoted (unadjusted) market prices in active markets for identical assets or liabilities Level2 Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable Level3 Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable For assets and liabilities that are recognized in the financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. 13
2. Basis of preparation and summary of significant accounting policies (cont d) 2.3 Summary of significant accounting policies (cont d) 2.3.4 Foreign currencies The Group s consolidated financial statements are presented in Korean won, which is the functional currency. 1) Transactions and balances Transactions in foreign currencies are initially recorded by the Group s entities at their respective functional currency spot rates at the date the transaction first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of exchange at the reporting date. Differences arising on settlement or translation of monetary items are recognized in profit or loss with the exception of monetary items that are designated as part of the hedge of the Group s net investment of a foreign operation. These are recognized in other comprehensive income until the net investment is disposal, at which time, the cumulative amount is reclassified to profit or loss. Tax charges and credits attributable to exchange differences on those monetary items are also recorded in other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on translation of non-monetary items measured at fair value is treated in line with the recognition of the gain or loss on the change in fair value of the item (i.e. translation differences on items whose fair value gain or loss is recognized in other comprehensive income or profit or loss is also recognized in other comprehensive income or profit or loss, respectively). Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the spot rate of exchange at the reporting date. 2) Group companies On consolidation, the assets and liabilities of foreign operations are translated into Korean won at the rate of exchange prevailing at the reporting date and the financial statements are translated at exchange rates prevailing at the dates of the transactions. The exchange differences arising on translation for consolidation are recognized in other comprehensive income. On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is recognized in profit or loss. 2.3.5 Property, plant and equipment Property, plant and equipment is stated at cost, net of accumulated depreciation and accumulated impairment losses, if any. Such cost includes the cost of replacing part of the property, plant and equipment and borrowing costs for long-term construction projects if the recognition criteria are met. When significant parts of property, plant and equipment are required to be replaced at intervals, the Group recognizes such parts as individual assets with specific useful lives and depreciates them accordingly. Likewise, when a major inspection is performed, its cost is recognized in the carrying amount of the plant and equipment as a replacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognized in profit or loss as incurred. The present value of the expected cost for the decommissioning of an asset after its use is included in the cost of the respective asset if the recognition criteria for a provision are met. Refer to significant accounting judgments, estimates and assumptions and provisions for further information about the recorded decommissioning provision. Property, plant and equipment transferred from customers is initially measured at fair value at the date on which control is obtained. 14
2. Basis of preparation and summary of significant accounting policies (cont d) 2.3 Summary of significant accounting policies (cont d) 2.3.5 Property, plant and equipment (cont d) Land and buildings are measured at fair value less accumulated depreciation on buildings and impairment losses recognized at the date of revaluation. Valuations are performed with sufficient frequency to ensure that the fair value of a revalued asset does not differ materially from its carrying amount. A revaluation surplus is recorded in OCI and credited to the asset revaluation reserve in equity. However, to the extent that it reverses a revaluation deficit of the same asset previously recognized in profit or loss, the increase is recognized in profit and loss. A revaluation deficit is recognized in the income statement, except to the extent that it offsets an existing surplus on the same asset recognized in the asset revaluation reserve. Depreciation is calculated to the cost of each asset less residual value using the straight-line method over the estimated useful lives of the assets as follows: Buildings Machinery Vehicles Office equipment Tools and furniture Other Property, Plant and Equipment Useful lives 30 years, 40 years 6 years, 10 years 4 years, 5 years 4 years, 5 years 4 years, 5 years 4 years, 10 years An item of property, plant and equipment and any significant part initially recognized is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement when the asset is derecognized. The assets residual values, useful lives and methods of depreciation are reviewed at each financial year end, and adjusted prospectively, if appropriate. 2.3.6 Intangible assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and accumulated impairment losses. Internally generated intangibles, excluding capitalized development costs, are not capitalized and the related expenditure is reflected in profit or loss in the period in which the expenditure is incurred. The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are considered to modify the amortization period or method, as appropriate, and are treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the income statement as the expense category that is consistent with the function of the intangible assets. Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually, either individually or at the cash-generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis. 15
2. Basis of preparation and summary of significant accounting policies (cont d) 2.3 Summary of significant accounting policies (cont d) 2.3.6 Intangible assets (cont d) Gains or losses arising from de-recognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the income statement when the asset is derecognized. A summary of the policies applied to the Group s intangible assets is, as follows: Industrial property rights Software Licenses Membership Development costs Useful lives 10 years 4 years 5 years Indefinite 10 years Amortization method used Internally generated or acquired Amortized on a straight line basis over the period of the idustial property rights Amortized on a straight line basis over the period of the software Amortized on a straight line basis over the period of the license No amortization Amortized on a straight line basis over the period of the development costs Acquired Acquired Acquired Acquired Internally generated Research and development costs Research costs are expensed as incurred. Development expenditures on an individual project are recognized as an intangible asset when the Group can demonstrate: The technical feasibility of completing the intangible asset so that the asset will be available for use or sale Its intention to complete and its ability and intention to use or sell the asset How the asset will generate future economic benefits The availability of resources to complete the asset The ability to measure reliably the expenditure during development Following initial recognition of the development expenditure as an asset, the asset is carried at cost less any accumulated amortization and accumulated impairment losses. Amortization of the asset begins when development is complete and the asset is available for use. It is amortized over the period of expected future benefit. Amortization is recorded in cost of sales. During the period of development, the asset is tested for impairment annually. Membership Memberships are not armortized as there are no restrictions for the period on the useage period. 2.3.7 Inventories Inventories are valued at the lower of cost and net realizable value. Costs incurred in bringing each product to its present location and conditions are accounted for as follows: Raw materials: purchase cost on a first in, first out basis Finished goods and work in progress: cost of direct materials and labor and a proportion of manufacturing overheads based on the normal operating capacity, but excluding borrowing costs Initial cost of inventories includes the transfer of gains and losses on qualifying cash flow hedges, recognized in OCI, in respect of the purchases of raw materials. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. 16
2. Basis of preparation and summary of significant accounting policies (cont d) 2.3 Summary of significant accounting policies (cont d) 2.3.8 Impairment of non-financial assets The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset s recoverable amount. An asset s recoverable amount is the higher of an asset s or cashgenerating unit s (CGU) fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators. The Group bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Group s CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of five years. For longer periods, a long-term growth rate is calculated and applied to project future cash flows after the fifth year. Impairment losses of continuing operations, including impairment on inventories, are recognized in the income statement in expense categories consistent with the function of the impaired asset, except for properties previously revalued with the revaluation taken to OCI. For such properties, the impairment is recognized in OCI up to the amount of any previous revaluation. For assets excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognized impairment losses no longer exist or have decreased. If such indication exists, the Group estimates the asset s or CGU s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the income statement unless the asset is carried at a revalued amount, in which case, the reversal is treated as a revaluation increase. The following assets have specific characteristics for impairment testing: Goodwill Goodwill is tested for impairment annually as at 31 October and when circumstances indicate that the carrying value may be impaired Impairment is determined for goodwill by assessing the recoverable amount of each CGU (or group of CGUs) to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods. Intangible assets Intangible assets with indefinite useful lives are tested for impairment annually as at December 31 at the CGU level, as appropriate, and when circumstances indicate that the carrying value may be impaired. 17
2. Basis of preparation and summary of significant accounting policies (cont d) 2.3 Summary of significant accounting policies (cont d) 2.3.9 Cash and short-term deposits Cash and short-term deposits in the statement of financial position comprise cash at banks and on hand and short-term deposits with a maturity of three months or less, which are subject to an insignificant risk of changes in value. For the purpose of the statement of cash flows, cash and cash equivalents consist of cash and short-term deposits, as defined above, net of outstanding bank overdrafts as they are considered an integral part of the Group s cash management. 2.3.10 Financial instruments initial recognition and subsequent measurement A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. (1) Financial assets Initial recognition and measurement Financial assets are classified, at initial recognition, as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, AFS financial assets, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. All financial assets are recognized initially at fair value plus, in the case of financial assets not recorded at fair value through profit or loss, transaction costs that are attributable to the acquisition of the financial asset. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognized on the trade date, i.e., the date that the Group commits to purchase or sell the asset. Subsequent measurement For purposes of subsequent measurement financial assets are classified in four categories: Financial assets at fair value through profit or loss Loans and receivables Held-to-maturity investments Available-for-sale financial assets Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments as defined by KIFRS 1039. The Group has not designated any financial assets at fair value through profit or loss. Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value presented as finance costs (negative net changes in fair value) or finance income (positive net changes in fair value) in the income statement. Derivatives embedded in host contracts are accounted for as separate derivatives and recorded at fair value if their economic characteristics and risks are not closely related to those of the host contracts and the host contracts are not held for trading or designated at fair value though profit or loss. These embedded derivatives are measured at fair value with changes in fair value recognized in profit or loss. Re-assessment only occurs if there is either a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required or a reclassification of a financial asset out of the fair value through profit or loss. 18
2. Basis of preparation and summary of significant accounting policies (cont d) 2.3 Summary of significant accounting policies (cont d) 2.3.10 Financial instruments initial recognition and subsequent measurement (cont d) Loans and receivables This category is the most relevant to the Group. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortized cost using the effective interest rate (EIR) method, less impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included in finance income in the consolidated statement of comprehensive income. The losses arising from impairment are recognized in the income statement in finance costs for loans and in cost of sales or other operating expenses for receivables. Held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held to maturity when the Group has the positive intention and ability to hold them to maturity. After initial measurement, held to maturity investments are measured at amortized cost using the EIR, less impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included as finance income in the income statement. The losses arising from impairment are recognized in the income statement as finance costs. The Group did not have any held-to-maturity investments during the years ended. Available-for-sale (AFS) financial assets AFS financial assets include equity investments and debt securities. Equity investments classified as AFS are those that are neither classified as held-for-trading nor designated at fair value through profit or loss. Debt securities in this category are those that are intended to be held for an indefinite period of time and that may be sold in response to needs for liquidity or in response to changes in the market conditions. After initial measurement, AFS financial assets are subsequently measured at fair value with unrealized gains or losses recognized in OCI and credited in the AFS reserve until the investment is derecognized, at which time the cumulative gain or loss is recognized in other operating income, or the investment is determined to be impaired, when the cumulative loss is reclassified from the AFS reserve to the income statement in finance costs. Interest earned whilst holding AFS financial assets is reported as interest income using the EIR method. The Group evaluates whether the ability and intention to sell its AFS financial assets in the near term is still appropriate. When, in rare circumstances, the Group is unable to trade these financial assets due to inactive markets, the Group may elect to reclassify these financial assets if the management has the ability and intention to hold the assets for foreseeable future or until maturity. For a financial asset reclassified from the AFS category, the fair value carrying amount at the date of reclassification becomes its new amortized cost and any previous gain or loss on the asset that has been recognized in equity is amortized to profit or loss over the remaining life of the investment using the EIR. Any difference between the new amortized cost and the maturity amount is also amortized over the remaining life of the asset using the EIR. If the asset is subsequently determined to be impaired, then the amount recorded in equity is reclassified to the income statement. Derecognition A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognized (i.e. removed from the Group s statement of financial position) when: The rights to receive cash flows from the asset have expired, or The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a passthrough arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset 19