Samsung Heavy Industries Co., Ltd. and Subsidiaries Consolidated Financial Statements
Index Page(s) Independent Auditor s Report... 1-2 Consolidated Financial Statements Consolidated Statements of Financial Position... 3-4 Consolidated Statements of Income...5 Consolidated Statements of Comprehensive Income...6 Consolidated Statements of Changes in Equity...7 Consolidated Statements of Cash Flows...8... 9-57
Independent Auditor s Report (English Translation of a Report Originally Issued in Korean) To the Board of Directors and Shareholders of Samsung Heavy Industries Co., Ltd. We have audited the accompanying consolidated financial statements Samsung Heavy Industries Co., Ltd. and its subsidiaries (collectively the Group ), which comprise the consolidated statements of financial position as of, and the consolidated statements of income, comprehensive income, changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the International Financial Reporting Standards as adopted by the Republic of Korea ( Korean IFRS ) and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the Korean Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion
Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of, and their financial performance and cash flows for the years then ended in accordance with the Korean IFRS. Other Matters The financial statements of the Company as of and for year ended December 31, 2013 were audited in accordance with the previous Korean Standards on Auditing. We used audit results performed by other auditors for financial statements of Samsung Heavy Industries (Ningbo) Co., Ltd. and three other consolidated subsidiaries, whose total assets and profit for the year before elimination of intercompany transactions amount to \ 865,170 million and \ 421,954 million respectively. Auditing standards and their application in practice vary among countries. The procedures and practices used in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries. Seoul, Korea March 5, 2015 This report is effective as of March 5, 2015, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that 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
Consolidated Statements of Financial Position (In thousands of Korean won) Notes 2014 2013 Assets Current assets Cash and cash equivalents 4,7,9 \ 340,828,995 \ 818,362,588 Short-term financial instruments 5,7,9 552,286,821 321,586,915 Trade receivables 7,9,10 766,105,470 468,425,575 Due from customers for contract work 6 5,468,236,344 5,300,555,498 Other receivables 7,9,10 34,565,557 28,238,199 Advance payments 1,204,339,397 1,345,104,799 Prepaid expenses 113,569,546 96,944,321 Current derivative financial instruments 7,8,9,11,33 332,651,727 728,499,475 Current firm commitment assets 11 387,032,381 578,555,241 Inventories 12 1,168,817,779 841,635,451 Other current financial assets 7,13 67,399,191 60,020,740 Other current assets 145,370,678 129,008,339 10,581,203,886 10,716,937,141 Non-current assets Long-term available-for-sale financial assets 7,8,14 97,777,954 145,291,143 Investments in associates and joint ventures 15 5,358,357 6,055,262 Property, plant and equipment 16 5,273,010,241 5,253,828,208 Investment properties 17 20,593,114 44,580,848 Intangible assets 18 128,529,131 136,849,562 Long-term prepaid expenses 97,112,810 56,938,358 Derivative financial instruments 7,8,9,11,33 183,431,052 517,100,379 Firm commitment assets 11 209,890,507 210,672,664 Non-current trade receivables 7,9,10 165,321,704 165,520,903 Deferred income tax assets 30 307,599,590 119,782,136 Other financial assets 5,7,13 52,405,736 53,589,921 6,541,030,196 6,710,209,384 Total assets \ 17,122,234,082 \ 17,427,146,525 3
Consolidated Statements of Financial Position (In thousands of Korean won) Notes 2014 2013 Liabilities Current liabilities Trade payables 7,33 \ 1,494,781,646 \ 1,621,593,200 Short-term borrowings 7,19,33 2,213,523,762 1,422,067,254 Other payables 7,33 112,314,639 129,618,842 Advance receipts 765,595,353 632,123,080 Due to customers for contract work 6 3,033,834,646 3,252,820,145 Accrued expenses 33 666,216,189 533,680,933 Current income tax liabilities 86,415,035 294,975,807 Current derivative financial instruments 7,8,11,33 345,463,333 373,809,474 Current firm commitment liabilities 11 343,105,018 621,214,125 Current portion of long-term debts 7,19,33 653,624,706 256,751,657 Provisions 21 202,887,356 163,295,071 Other current liabilities 90,602,019 141,725,408 10,008,363,702 9,443,674,996 Non-current liabilities Debentures 7,19,33 598,924,336 1,197,432,829 Long-term debts 7,19,33 360,575,783 60,660,114 Net defined benefit liabilities 20 81,148,863 46,496,220 Other provisions 21 64,806,409 66,718,517 Derivative financial instruments 7,8,11,33 213,182,803 211,478,090 Firm commitment liabilities 11 191,500,624 518,640,891 Other financial liabilities 7,13,33 15,888,741 21,527,589 Deferred income tax liabilities 30 14,681,526 14,721,474 1,540,709,085 2,137,675,724 Total liabilities 11,549,072,787 11,581,350,720 Equity attributable to owners of the Company Capital stock 22 Common stock 1,154,376,930 1,154,376,930 Preferred stock 574,225 574,225 Premium on capital stock 22 417,172,244 417,172,244 Accumulated other comprehensive income 24 56,789,076 82,228,564 Other components of equity 23,24 (963,896,146) (649,229,604) Retained earnings 25 4,872,462,896 4,840,681,990 5,537,479,225 5,845,804,349 Non-controlling interest 35,682,071 (8,544) Total equity 5,573,161,296 5,845,795,805 Total liabilities and equity \ 17,122,234,083 \ 17,427,146,525 The accompanying notes are an integral part of these consolidated financial statements. 4
Consolidated Statements of Income Years Ended (In thousands of Korean won, except per share amounts) Notes 2014 2013 Revenue 6 \ 12,879,061,899 \ 14,834,500,942 Cost of sales 26 12,116,358,003 13,037,656,340 Gross profit 762,703,896 1,796,844,602 Selling and administrative expenses 26,27 579,683,917 882,630,317 Operating profit 183,019,979 914,214,285 Other income 28 2,631,044,864 3,342,827,938 Other expenses 28 2,536,611,498 3,179,171,681 Financial income 29 258,710,431 482,518,524 Financial costs 29 345,709,070 741,410,272 Share of gain (loss) of associates and joint ventures 15 (700,266) 304,043 Profit before income tax 189,754,440 819,282,837 Income tax expense 30 42,434,231 187,077,380 Profit for the year \ 147,320,209 \ 632,205,457 Profit attributable to: Equity holders of the Company 149,224,549 632,204,495 Non-controlling interest (1,904,340) 962 Earnings per share for profit attributable to the equity holders of the Company during the year 31 Basic earnings per share \ 693 \ 2,914 Diluted earnings per share \ 693 \ 2,913 The accompanying notes are an integral part of these consolidated financial statements. 5
Consolidated Statements of Comprehensive Income Years Ended (In thousands of Korean won) Notes 2014 2013 Profit for the year \ 147,320,209 \ 632,205,457 Other comprehensive income (loss) Items that will not be reclassified to profit or loss Remeasurements of net defined benefit liabilities 20 (11,813,589) 24,206,228 Income tax 2,858,889 (5,857,907) Items that will be reclassified to profit or loss Changes in value of available-for-sale financial assets 7,14,24 (35,683,861) 1,186,444 Currency translation differences 24 (280,724) 18,553,403 Changes in equity method investees with accumulated comprehensive income 24 3,360 (52,217) Tax effects of other comprehensive Income (loss) 24 8,635,494 (287,120) Other comprehensive income (loss) for the year, net of tax (36,280,431) 37,748,831 Total comprehensive income for the year \ 111,039,778 \ 669,954,288 Attributable to: Equity holders of the Company 114,830,361 669,933,632 Non-controlling interest (3,790,583) 20,656 Total comprehensive income for the year \ 111,039,778 \ 669,954,288 The accompanying notes are an integral part of these consolidated financial statements. 6
Consolidated Statements of Changes in Equity Years Ended (In thousands of Korean won) Capital stock Capital surplus Attributable to equity holders of the Company Accumulated Other Other Components Comprehensive of Equity income Retained earnings Total Non-controlling interest Total equity Balance at January 1, 2013 \1,154,951,155 \ 417,172,244 \ 62,847,748 \ (650,927,722) \4,298,558,717 \5,282,602,142 \ 346,922 \ 5,282,949,064 Comprehensive income Profit for the year - - - - 632,204,495 632,204,495 962 632,205,457 Change in value of available-for-sale financial assets - - 899,325 - - 899,325-899,325 Currency translation differences - - 18,533,708 - - 18,533,708 19,694 18,553,402 Remeasurement of net defined benefit liabilities - - - - 18,348,321 18,348,321-18,348,321 Change in equity method investments - - (52,217) - - (52,217) - (52,217) Transactions with equity holders of the Company Dividends relating to 2012 - - - - (108,429,543) (108,429,543) - (108,429,543) Gain on disposal of treasury stock - - - 176,233-176,233-176,233 Disposal of treasury stock - - - 1,613,888-1,613,888-1,613,888 Stock purchase options - - - (92,003) - (92,003) - (92,003) Transactions with non-controlling interests Changes in scope of consolidation - - - - - - (376,122) (376,122) Balance at December 31, 2013 \ 1,154,951,155 \ 417,172,244 \ 82,228,564 \ (649,229,604) \ 4,840,681,990 \ 5,845,804,349 \ (8,544) \ 5,845,795,805 Balance at January 1, 2014 \ 1,154,951,155 \ 417,172,244 \ 82,228,564 \ (649,229,604) \ 4,840,681,990 \ 5,845,804,349 \ (8,544) \ 5,845,795,805 Comprehensive income Profit for the year - - - - 149,224,549 149,224,549 (1,904,341) 147,320,208 Change in value of available-for-sale financial assets - - (27,048,367) - - (27,048,367) - (27,048,367) Currency translation differences - - 1,605,519 - - 1,605,519 (1,886,243) (280,724) Remeasurement of net defined benefit liabilities - - - - (8,954,700) (8,954,700) - (8,954,700) Change in equity method investments - - 3,360 - - 3,360-3,360 Transactions with equity holders of the Company Acquisition of non-controlling interests - - - - - - 39,481,198 39,481,198 Dividends relating to 2013 - - - - (108,488,943) (108,488,943) - (108,488,943) Gain on disposal of treasury stock - - - 182,903-182,903-182,903 Disposal of treasury stock - - - 806,949-806,949-806,949 Acquisition of treasury stock - - - (315,527,199) - (315,527,199) - (315,527,199) Stock purchase options - - - (129,195) - (129,195) - (129,195) Balance at December 31, 2014 \ 1,154,951,155 \ 417,172,244 \ 56,789,076 \ (963,896,146) \ 4,872,462,896 \ 5,537,479,225 \ 35,682,070 \ 5,573,161,295 The accompanying notes are an integral part of these consolidated financial statements. 7
Consolidated Statements of Cash Flows Years Ended (In thousands of Korean won) Notes 2014 2013 Cash flows from operating activities Cash generated from operations 32 \ 49,404,755 \ 855,910,276 Interest received 45,096,881 41,947,485 Interest paid 19 (126,329,110) (116,499,412) Dividends received 1,084,181 1,091,011 Income tax paid 30 (426,718,091) (192,232,087) Net cash generated from (used in) operating activities (457,461,384) 590,217,273 Cash flows from investing activities Changes in short-term financial instruments (238,003,345) (88,247,402) Acquisition of long-term available-for -sale financial assets 14 - (658,839) Disposal of long-term available-for -sale financial assets 14 16,600,461 1,418,569 Acquisition of associates and joint ventures 15 - (1,000,000) Acquisition of property, plant and equipment 16 (366,500,051) (409,682,528) Disposal of property, plant and equipment 16 43,960,193 25,338,694 Acquisition of investment properties 17 - (2,385,453) Disposal of investment properties 17 27,129,530 52,931,992 Acquisition of intangible assets 18 (2,500,660) (1,219,675) Disposal of intangible assets 18 169,934 165,455 Disposal of other current financial assets 15,876,987 22,064,660 Acquisition of other current financial assets (17,999,192) (52,689) Disposal of other non-current financial assets 5,804,123 68,006,416 Acquisition of other non-current financial assets (5,887,399) (13,135,087) Net cash used in investing activities (521,349,419) (346,455,887) Cash flows from financing activities Acquisition of non-controlling interests 39,481,197 - Proceeds from short-term borrowings 19 791,367,692 176,081,052 Repayments of current portion of long-term debts 19 (255,321,917) (207,195,342) Proceeds from long-term borrowings 19 351,220,526 301,743,475 Repayments of long-term borrowings 19 - (529,641,000) Acquisition of treasury stock 24 (315,527,199) - Disposal of treasury stock 24 320,760 610,920 Dividends paid 25 (108,488,943) (108,429,543) Net cash (used in) provided by financing activities 503,052,116 (366,830,438) Net decrease in cash and cash equivalents (475,758,687) (123,069,052) Cash and cash equivalents at beginning of year 818,362,588 928,919,870 Effect of exchange rate change on cash and cash equivalents (1,774,906) 12,511,770 Cash and cash equivalents at the end of year \ 340,828,995 \ 818,362,588 The accompanying notes are an integral part of these consolidated financial statements. 8
1. General information 1.1 The Parent Company Samsung Heavy Industries Co., Ltd. was incorporated in 1974 under the Commercial Code of the Republic of Korea to shipbuilding contracts and off-shore plants. The Company listed its shares on the Korea Exchange in January 28, 1994. The consolidated financial statements, which include those of the Parent Company, Samsung Heavy Industries Co., Ltd. (the Company ), and its 14 controlled subsidiaries including Samsung Heavy Industries(Ningbo) Co., Ltd. (collectively referred to as the Group ), have been prepared and presented according to Korean IFRS 1110, Consolidated Financial Statements. 1.2 Consolidated Subsidiaries Details of the consolidated subsidiaries as of December 31, 2014, are as follows: Subsidiaries Percentage of ownership (%) Location Closing Month Main business Samsung Heavy Industries (Ningbo) Ship parts manufacturing, 100 China December Co., Ltd. construction Samsung Heavy Industries (Rongcheng) Co., Ltd. 100 China December Ship parts manufacturing Rongcheng Gaya Heavy Industries Co., Ltd. 100 China December Ship parts manufacturing Samsung Heavy Industries India Pvt. Ltd. 100 India December Engineering Camellia Consulting Corporation 100 USA December Engineering Samsung Heavy Industries (M) SDN.BHD 100 Malaysia December Market research SVIC 13 New Technology Business Investment 99 Korea December Investment Samsung Wind Energy, Inc. 100 USA December Sales of wind energy equipment Samsung Heavy Industries Brazil 100 Brazil December Market research SHI Brazil Construction 100 Brazil December Construction Samsung Heavy Industries Trade (Shanghai) Co.,Ltd. 100 China December Ship parts trading Samsung Heavy Industries Nigeria Co. Ltd 100 Nigeria December Construction Samsung Heavy Industries Hamburg GmbH 100 Germany December Engineering SHI-MCI FZE 1 70 Nigeria December Construction Although the Group owns 50.1%, 51.0% and 50.0% of the voting rights in Daejung Offshore Wind Power Co., Ltd., Offshore 1 Consulting Corporation and Jeongam Wind Power Co., Ltd., respectively, they are excluded from the consolidated subsidiaries and classified as joint ventures because the Group exercises joint control with other shareholders. 1 The Group is considered to have control over SHI-MCI FZE, since the Group newly invested in SHI-MCI FZE with 70% ownership interest during the year ended December 31, 2014. 9
1.3 Summarized Financial Information of Subsidiaries Summary of the subsidiaries statements of financial position as of, and statements of comprehensive income for the years ended, are as follows: (In thousands of Korean won) 2014 Subsidiaries Assets Liabilities Equity Sales Profit (loss) for the year Total comprehensive income (loss) for the year Samsung Heavy Industries (Ningbo) Co., Ltd. \ 314,500,055 \ 78,356,149 \ 236,143,906 \ 171,935,803 \ 1,098,122 \ 1,098,122 Samsung Heavy Industries (Rongcheng) Co., Ltd. 391,050,181 208,110,835 182,939,346 146,324,809 11,232,361 11,232,361 Rongcheng Gaya Heavy Industries Co., Ltd. 68,306,192 28,207,773 40,098,419 9,633,964 (9,851,921) (9,851,921) Samsung Heavy Industries India Pvt. Ltd. 12,701,084 4,330,388 8,370,696 14,607,194 602,610 602,610 Camellia Consulting Corporation 248,141-248,141 1,326,825 128,537 128,537 Samsung Heavy Industries(M) SDN.BHD 4,654,882 4,389,585 265,297 11,830,257 205,812 205,812 SVIC 13 New Technology Business investment 14,495 871,628 (857,133) - (2,715) (2,715) Samsung Wind Energy, Inc. 116,144-116,144 - (6,858,420) (6,858,420) Samsung Heavy Industries Brazil 389,966 18,373 371,593 457,640 (24,604) (24,604) SHI Brazil Construction 472,594 145 472,449 - (16,862) (16,862) Samsung Heavy Industries Trade (Shanghai) Co., Ltd. 282,004 19,998 262,006 945,773 19,525 19,525 Samsung Heavy Industries Nigeria Co. Ltd 375,868,155 308,525,555 67,342,600 372,886,892 (19,664,108) (19,664,108) SHI-MCI FZE 160,021,440 41,052,634 118,968,806 - (6,347,711) (6,347,711) Samsung Heavy Industries Hamburg GmbH 556,361 297,743 258,618 3,082,524 (1,039,447) (1,039,447) \1,329,181,694 \ 674,180,806 \ 655,000,888 \ 733,031,681 \ (30,518,821) \ (30,518,821) (In thousands of Korean won) 2013 Subsidiaries Assets Liabilities Equity Sales Profit (loss) for the year Total comprehensive income (loss) for the year Samsung Heavy Industries (Ningbo) Co., Ltd. \ 279,820,063 \ 48,428,003 \ 231,392,060 \ 138,279,698 \ (3,091,997) \ (3,091,997) Samsung Heavy Industries (Rongcheng) Co., Ltd. 409,843,065 241,164,634 168,678,431 120,112,587 (14,614,753) (14,614,753) Rongcheng Gaya Heavy Industries Co., Ltd. 91,931,460 42,410,054 49,521,406 43,372,716 (1,331,974) (1,331,974) Samsung Heavy Industries India Pvt. Ltd. 9,348,347 1,699,789 7,648,558 12,807,081 3,369,289 3,369,289 Camellia Consulting Corporation 109,375-109,375 2,049,518 (1,038,700) (1,038,700) Samsung Heavy Industries(M) SDN.BHD 188,240 122,683 65,557 319,759 83,242 83,242 SVIC 13 New Technology Business investment 17,376 871,794 (854,418) - (39,883) (39,883) Samsung Wind Energy, Inc. 6,986,879-6,986,879 - (4,653) (4,653) Samsung Heavy Industries Brazil 479,148 53,265 425,883 1,031,109 178,047 178,047 SHI Brazil Construction 527,340 240 527,100 - (41,039) (41,039) Samsung Heavy Industries Trade (Shanghai) Co., Ltd. 275,745 37,667 238,078 904,538 12,536 12,536 Samsung Heavy Industries Nigeria Co. Ltd 83,575,682 90,622,870 (7,047,188) 120,188,664 (7,727,488) (7,727,488) Samsung Heavy Industries Hamburg GmbH 1,827,323 463,058 1,364,265 5,058,878 546,551 546,551 \ 884,930,043 \ 425,874,057 \ 459,055,986 \ 444,124,548 \ (23,700,822) \ (23,700,822) 10
2. Significant Accounting Policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of Preparation The Group maintains its accounting records in Korean won and prepares statutory financial statements in the Korean language (Hangul) in accordance with the International Financial Reporting Standards as adopted by the Republic of Korea ( Korean IFRS ). The accompanying consolidated financial statements have been condensed, restructured and translated into English from the Korean language financial statements. Certain information attached to the Korean language financial statements, but not required for a fair presentation of the Group's financial position, financial performance or cash flows, is not presented in the accompanying consolidated financial statements. The consolidated financial statements of the Group for the annual period beginning on January 1, 2011, have been prepared in accordance with Korean IFRS. These are the standards, subsequent amendments and related interpretations issued by the International Accounting Standards Board ("IASB") that have been adopted by the Republic of Korea. The preparation of the consolidated financial statements requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Group s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 3. 2.2 Changes in Accounting Policy and Disclosures (a) New and amended standards adopted by the Group The Group newly applied the following amended and enacted standards for the annual period beginning on January 1, 2014: - Enactment of Korean IFRS 2121, Levies Korean IFRS 2121, Levies, is applied to a liability to pay a levy imposed by the government in accordance with the legislation. The interpretation requires that the liability to pay a levy is recognized when the activity that triggers the payment of the levy occurs, as identified by the legislation. The application of this interpretation does not have a material impact on the consolidated financial statements. - Amendment to Korean IFRS 1102, Share-based payment Korean IFRS 1102, Share-based payment, clarifies the definition of vesting conditions such as performance condition, service condition and others. This amendment is applied to share-based payment transactions for which the grant date is on or after July 1, 2014. The application of this amendment does not have a material impact on the consolidated financial statements. 11
- Amendment to Korean IFRS 1032, Financial Instruments: Presentation Amendment to Korean IFRS 1032, Financial Instruments: Presentation, provides that the right to offset must not be contingent on a future event and must be legally enforceable in all of circumstances; and if an entity can settle amounts in a manner such that outcome is, in effect, equivalent to net settlement, the entity will meet the net settlement criterion. - Amendment to Korean IFRS 1036, Impairment of Assets Amendment to Korean IFRS 1036, Impairment of Assets, removed certain disclosures of the recoverable amount of cash-generating units which had been included in this amendment by the issuance of Korean IFRS 1113. - Amendment to Korean IFRS 1039, Financial Instruments: Recognition and Measurement Amendment to Korean IFRS 1039, Financial Instruments: Recognition and Measurement, allows the continuation of hedge accounting for a derivative that has been designated as a hedging instrument in a circumstance in which that derivative is novated to a central counterparty (CCP) as a consequence of laws or regulations. Other standards, amendments and interpretations which are effective for the annual period beginning on January 1, 2014, do not have a material impact on the financial statements of the Group. (b) New standards and interpretations not yet adopted by the Group The Group expects that new standards, amendments and interpretations issued but not effective for the financial year beginning January 1, 2014 and not early adopted would not have a material impact on its consolidated financial statements. 2.3 Consolidation The Group has prepared the consolidated financial statements in accordance with Korean IFRS 1110, Consolidated Financial Statements. (a) Subsidiaries Subsidiaries are all entities over which the Company has control. The Company controls the corresponding investee when it 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. The consolidation of a subsidiary begins from the date the Company obtains control of a subsidiary and ceases when the Company loses control of the subsidiary. The Group applies the acquisition method to account for business combinations. The consideration transferred is measured at the fair values of the assets transferred, and identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are initially measured at their fair values at the acquisition date. The Group recognizes any non-controlling interest in the acquiree on an acquisition-byacquisition basis in the event of liquidation, either at fair value or at the non-controlling interest s proportionate share of the recognized amounts of acquiree s identifiable net assets. All other non-controlling interests are measured at their acquisition-date fair values, unless another measurement basis is required by IFRSs. Acquisition-related costs are expensed as incurred. 12
Goodwill is recognized as the excess of the aggregate of the consideration transferred, the amount of any noncontrolling interest in the acquiree, and the acquisition-date fair value of the acquirer s previously held equity interest in the acquiree over the identifiable net assets acquired. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in profit or loss. Balances of receivables and payables, income and expenses and unrealized gains on transactions between the Group subsidiaries are eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. In transactions with non-controlling interests that do not result in loss of control, any difference between the adjustment to the carrying amount of non-controlling interest and consideration paid or received is recognized directly in equity attributable to the controlling interest. (b) Associates Associates are all entities over which the Group has significant influence, and investments in associates are initially recognized at acquisition cost using the equity method. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group s interest in the associates. If there is any objective evidence that the investment in the associate is impaired, the Group recognizes the difference between the recoverable amount of the associate and its book value as impairment loss. (c) Joint Arrangements A joint arrangement of which two or more parties have joint control is classified as either a joint operation or a joint venture. A joint operator has rights to the assets, and obligations for the liabilities, relating to the joint operation and recognizes the assets, liabilities, revenues and expenses relating to its interest in a joint operation. A joint venturer has rights to the net assets relating to the joint venture and accounts for that investment using the equity method. 2.4 Segment Reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker (Note 34). The chief operating decision-maker is responsible for allocating resources and assessing performance of the operating segments. 2.5 Foreign Currency Translation (a) Functional and presentation currency Items included in the financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in Korean won, which is the Controlling Company s functional and presentation currency. (b) Transaction and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of 13
monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss. Exchange differences arising on non-monetary financial assets and liabilities such as equity instruments at fair value through profit or loss and available-for-sale equity instruments are recognized in profit or loss and included in other comprehensive income, respectively, as part of the fair value gain or loss. 2.6 Financial Assets (a) Classification and measurement The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss, available-for-sale financial assets, loans and receivables, and held-to-maturity financial assets. Regular purchases and sales of financial assets are recognized on the trade date. Regular purchases and sales of financial assets are recognized on the trade date. At initial recognition, financial assets are measured at fair value plus, in the case of financial assets not carried at fair value through profit or loss, transaction costs. Transaction costs of financial assets carried at fair value through profit or loss are expensed in the statement of income. After the initial recognition, available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables, and held-to-maturity investments are subsequently carried at amortized cost using the effective interest rate method. Changes in fair value of financial assets at fair value through profit or loss are recognized in profit or loss and changes in fair value of available-for-sale financial assets are recognized in other comprehensive income. When the available-for-sale financial assets are sold or impaired, the fair value adjustments recorded in equity are reclassified into profit or loss. (b) Impairment The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or a group of financial assets that can be reliably estimated. Impairment of loans and receivables is presented as a deduction in an allowance account. Impairment of other financial assets is directly deducted from their carrying amount. The Group writes off financial assets when the assets are determined to be no longer recoverable. The objective evidence that a financial asset is impaired includes significant financial difficulty of the issuer or obligor; a delinquency in interest or principal payments over three months. A decline in the fair value of an available-for-sale equity instrument by more than 30% from its cost or a prolonged decline below its cost for more than six months is also objective evidence of impairment. 14
(c) Offsetting of financial instruments Financial assets and liabilities are offset and the net amount reported in the consolidated statements of financial position where there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the assets and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the Group or the counterparty. 2.7 Derivative Instruments Derivatives are initially recognized at fair value on the date when a derivative contract is entered into and are subsequently re-measured at their fair value. Changes in the fair value of the derivatives that are not qualified for hedge accounting are recognized in the statement of income within 'other income (expenses)' or 'finance income (costs)' according to the nature of transactions. The Group applies fair value hedge accounting for firm commitments. The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The fair values of various derivative instruments used for hedging purposes are disclosed in Note 8. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining hedged item is more than 12 months and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. The fair value of trading derivatives is classified as a non-current asset or liability when the remaining maturity is more than 12 months and as a current asset or liability when the remaining maturity is less than 12 months. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the statement of income, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The Group only applies fair value hedge accounting for hedging exchange risk of firm commitments. The gain or loss relating to the effective portion of derivative instruments hedging exchange risk of a firm commitment is recognized in the statement of income within other income (expenses). The gain or loss relating to the ineffective portion is recognized in the statement of income within finance income (costs). Changes in the fair value of the firm commitments attributable to exchange risk are recognized in the statement of income within other income (expenses). 2.8 Inventories Inventories are stated at the lower of cost and net realizable value. Raw materials for shipbuilding and plantbuilding business are determined using individual method and moving weighted average method and individual method is applied for evaluating unfinished housing, merchandise in transit and land held for housing. 15
2.9 Property, Plant and Equipment Property, plant and equipment is stated at its cost less accumulated depreciation and accumulated impairment losses. Historical cost includes expenditures that is directly attributable to the acquisition of the items. Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate the difference between their cost and their residual values over their estimated useful lives, as follows: Buildings Structures Machinery Vehicles Tools, furniture and fixtures 25 50 years 25-50 years 10-30 years 5-30 years 5 years The depreciation method, residual values and useful lives of property, plant and equipment are reviewed at each financial year-end and, if appropriate, accounted for as changes in accounting estimates. 2.10 Borrowing Costs Borrowing costs incurred in the acquisition or construction of a qualifying asset are capitalized in the period when it is prepared for its intended use, and investment income earned on the temporary investment of borrowings made specifically for the purpose obtaining a qualifying asset is deducted from the borrowing costs eligible for capitalization during the period. Other borrowing costs are recognized as expenses for the period in which they are incurred. 2.11 Government Grants Government grants are recognized at their fair values when there is reasonable assurance that the grant will be received and the Group will comply with the conditions attaching to it. Government grants related to assets are presented by deducting the grants in arriving at the carrying amount of the assets, and grants related to income are deferred and presented by deducting the related expenses for the purpose of the government grants. 2.12 Intangible Assets Goodwill is measured as explained in Note 2.3.(1) and carried at its cost less accumulated impairment losses. Intangible assets, except for goodwill, are initially recognized at its historical cost and carried at its cost less accumulated amortization and accumulated impairment losses. Other intangible assets such as software which meet the definition of an intangible asset are amortized using the straight-line method over their estimated useful lives when the asset is available for use. Membership rights are regarded as intangible assets with indefinite useful life and not amortized because there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity. 16
Intangible assets with definite useful life that are amortized using the straight-line method over their estimated useful lives, are as follows: Other intangible assets 5 years 2.13 Investment Property Property held to earn rentals or for capital appreciation or both is classified as investment property. Investment property is measured initially at its cost. After recognition as an asset, investment property is carried at cost less accumulated depreciation and impairment losses. Investment property, except for land, is depreciated using the straight-line method over their useful lives from 25 to 50 years. 2.14 Impairment of Non-Financial Assets Goodwill or intangible assets with indefinite useful lives are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets, other than goodwill, that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. 2.15 Financial Liabilities (a) Classification and measurement Financial liabilities at fair value through profit or loss are financial instruments held for trading. Financial liabilities are classified in this category if incurred principally for the purpose of repurchasing them in the near term. Derivatives that are not designated as hedges or bifurcated from financial instruments containing embedded derivatives are also categorized as held-for-trading. The Group classifies non-derivative financial liabilities, except for financial liabilities at fair value through profit or loss, financial guarantee contracts and financial liabilities that arise when a transfer of financial assets does not qualify for derecognition, as financial liabilities carried at amortized cost and presented as trade payables, borrowings, and other financial liabilities in the statement of financial position. (b) Derecognition Financial liabilities are removed from the statement of financial position when it is extinguished, for example, when the obligation specified in the contract is discharged, cancelled or expired or when the terms of an existing financial liability are substantially modified. 17
2.16 Provisions Provisions are measured at the present value of the expenditures expected to be required to settle the obligation and the increase in the provision due to passage of time is recognized as interest expense. 2.17 Current and Deferred Tax The tax expense for the period consists of current and deferred tax. Tax is recognized on the profit for the period in the statement of income, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively. The tax expense is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period. Management periodically evaluates tax policies that are applied in tax returns in which applicable tax regulation is subject to interpretation. The Group recognizes current income tax on the basis of the amount expected to be paid to the tax authorities. Deferred tax is recognized for temporary differences arising between the tax bases of assets and liabilities and their carrying amounts as expected tax consequences at the recovery or settlement of the carrying amounts of the assets and liabilities. However, deferred tax assets and liabilities are not recognized if they arise from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences can be utilized. Deferred tax liability is recognized for taxable temporary differences associated with investments in subsidiaries, associates, and interests in joint ventures, except to the extent that the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. In addition, deferred tax asset is recognized for deductible temporary differences arising from such investments to the extent that it is probable the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. 18
2.18 Employee Benefits (a) Post-employment benefits The Group has both defined contribution and defined benefit plans. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The contributions are recognized as employee benefit expense when an employee has rendered service. A defined benefit plan is a pension plan that is not a defined contribution plan. Typically defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The liability recognized in the statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of highquality corporate bonds and that have terms to maturity approximating to the terms of the related pension obligation. The remeasurements of the net defined benefit liability are recognized in other comprehensive income. If any plan amendments, curtailments, or settlements occur, past service costs or any gains or losses on settlement are recognized as profit or loss for the year. (b) Share-based payments Equity-settled share-based payments granted to employees are estimated at the grant date fair value of equity instruments and recognized as employee benefit expenses over the vesting period. The number of equity instruments expected to vest is remeasured with consideration to non-market vesting conditions at the end of the reporting period, with any changes from the original measurement recognized in the profit for the year and equity. When the options are exercised, the Group issues new shares. The proceeds received, net of any directly attributable transaction costs, are recognized as share capital (nominal value) and share premium. 2.19 Revenue Recognition Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for goods and services supplied, stated net of value-added tax, returns, rebates and discounts, after elimination of intra-company transactions. The Group recognizes revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the entity; and when specific criteria have been met for each of the Group s activities, as described below. The revenue can be reliably measured only when any contingency related to sales is resolved. The Group bases its estimate on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. (a) Construction contracts A construction contract is defined by Korean IFRS 1011, Construction Contracts, as a contract specifically negotiated for the construction of an asset. When the outcome of a construction contract can be estimated reliably and it is probable that the contract will 19
be profitable, contract revenue is recognized over the period of the contract by reference to the stage of completion. Contract costs are recognized as expenses by reference to the stage of completion of the contract activity at the end of the reporting period. When it is probable that total contract costs will exceed total contract revenue, the expected loss on the construction contract is immediately recognized as an expense. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognized only to the extent of contract costs incurred that are likely to be recoverable. Variations in contract work, claims and incentive payments are included in contract revenue to the extent that may have been agreed with the customer and are capable of being reliably measured. Contract costs are recognized as an expense in the period in which they are incurred. The Group uses the percentage-of-completion method to determine the appropriate amount to recognize in a given period. The stage of completion is measured by reference to the contract costs incurred up to the end of the reporting period as a percentage of total estimated costs for each contract. Costs incurred in the year in connection with future activity on a contract are excluded from contract costs in determining the stage of completion. These amounts are recognized as inventory, prepaid expenses or other assets. On the statement of financial position, the Group reports the net contract position for each contract as either an asset or a liability. A contract represents an asset where costs incurred plus recognized profits (less recognized losses) exceed progress billings (due from customers for contract work); a contract represents a liability where the opposite is the case (due to customers for contract work). (b) Sales of goods Sales of goods are recognized when the products are delivered to the customer. (c) Interest income Interest income is recognized using the effective interest method according to the time passed. When receivables are impaired, the Group reduces the carrying amount to its recoverable amount and continues unwinding the discount as interest income. Interest income on impaired receivables is recognized using the original effective interest rate. (d) Dividend income Dividend income is recognized when the right to receive payment is established. 2.20 Approval of Issuance of the Financial Statements The issuance of the December 31, 2014 financial statements of the Company was approved by the Board of Directors on January 29, 2015, and is expected to be approved by the annual shareholder s meeting. 20