Samsung Life Insurance Co., Ltd. and Subsidiaries Consolidated Financial Statements
Index Page(s) Report of Independent Auditors 1-2 Consolidated Financial Statements Consolidated Statements of Financial Position 3-4 Consolidated Statements of Comprehensive Income 5-6 Consolidated Statements of Changes in Equity 7-8 Consolidated Statements of Cash Flows 9 10-142
Report of Independent Auditors To the Shareholders and Board of Directors of Samsung Life Insurance Co., Ltd. We have audited the accompanying consolidated statements of financial position of Samsung Life Insurance Co., Ltd. and its subsidiaries ( the Group ) as of March 31, 2013, and 2012, and the related consolidated statements of comprehensive income, changes in equity and cash flows for the years ended, expressed in Korean won. These financial statements are the responsibility of the Group s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements for the years ended, of Samsung Life Investment (America), Ltd. and eight (2012 : four) other subsidiaries, whose statements represent 0.42% and 0.40% of the Group's consolidated total assets as of March 31, 2013 and 2012, respectively, and 0.43% and 0.45% of the Group's consolidated total operating revenue for the years ended, respectively. These financial statements were audited by other auditors whose reports have been furnished us and our opinion expressed herein, insofar as it relates to the amounts included for Samsung Life Investment (America), Ltd. and the other subsidiaries, is based solely on the reports of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements, referred to above, present fairly, in all material respects, the financial position of Samsung Life Insurance Co., Ltd. and its subsidiaries as of March 31, 2013 and 2012, and their financial performance and cash flows for the years then ended, in accordance with International Financial Reporting Standards as adopted by the Republic of Korea( Korean IFRS ). 1
Consolidated Statements of Financial Position (In millions of Korean won) Notes 2013 2012 Assets Cash and cash equivalents 37 \ 2,286,005 \ 1,644,198 Financial assets at fair value through profit or loss 4,9 2,071,993 452,461 Available-for-sale financial assets 5,9 110,074,775 93,864,063 Held-to-maturity financial assets 6,9 884,190 1,082,267 Loans receivable and other receivables 7,9 29,322,315 27,521,629 Derivative financial assets for hedge accounting 8,9 293,802 239,882 Investments in associates and joint venture 10 1,901,920 1,853,556 Assets held for sale 41 41,880 - Investment property 11 4,439,461 4,155,972 Property and equipment 12 1,696,041 1,635,810 Intangible assets 13 185,156 188,451 Current income tax assets 20 95,306 86,358 Deferred income tax assets 20 15 7 Other assets 14 4,584,916 4,546,024 Separate account assets 15 28,161,584 23,801,700 Total assets \ 186,039,359 \ 161,072,378 Liabilities and Equity Liabilities Insurance contract liabilities 16 \ 121,265,739 \ 106,655,592 Policyholders' equity adjustment 18 7,514,387 6,072,849 Financial liabilities at fair value through profit or loss 9,19 183,336 284,372 Other financial liabilities 9,19 999,612 976,042 Liabilities held for sale 41 735 - Derivative financial liabilities for hedge accounting 8,9 813,166 1,283,285 Current income tax liabilities 20 7 216 Deferred income tax liabilities 20 4,509,536 3,360,688 Provisions 21 97,593 93,656 Other liabilities 22 647,005 248,834 Separate account liabilities 15 28,277,936 23,983,652 Total liabilities 164,309,052 142,959,186 3
Consolidated Statements of Financial Position (In millions of Korean won) Notes 2013 2012 Equity Equity attributable to owners of the parent Capital stock 23 100,000 100,000 Capital surplus 23 6,131 6,131 Capital adjustments 23 (560,318) (266,474) Accumulated other comprehensive income 23 12,970,531 9,658,387 Retained earnings 23 9,155,266 8,564,937 Non-controlling interests 58,697 50,211 Total equity 21,730,307 18,113,192 Total liabilities and equity \ 186,039,359 \ 161,072,378 The accompanying notes are an integral part of these consolidated financial statements. 4
Consolidated Statements of Comprehensive Income Years ended (In millions of Korean won) Notes 2013 2012 Operating revenue Premium income 24 \ 22,051,300 \ 14,726,219 Reinsurance income 25 215,293 264,401 Interest income 26 5,469,579 5,386,185 Gains on financial assets at fair value through profit or loss 27 175,846 48,767 Realized gains on available-for-sale financial assets 27 238,342 186,003 Gains on loans receivable and other receivables 27 6,672 13,160 Gains on derivative financial instruments for hedge accounting 27 403,952 112,334 Gains on foreign currency transactions 42,028 324,795 Fee and commission income 34,399 31,498 Dividend income 198,456 158,885 Rental income 320,755 292,368 Separate account commission received 829,557 700,494 Separate account revenue 15 350,497 387,917 Other operating income 28 46,049 56,768 Operating expenses 30,382,725 22,689,794 Increase in policy reserves 16 14,418,228 7,341,593 Insurance claims paid 9,363,179 9,171,226 Reinsurance expenses 25 228,445 280,452 Acquisition and administration expenses 29 1,475,891 1,490,420 Amortization of deferred acquisition costs 14 2,146,773 1,840,398 Asset management expenses 30 403,681 380,404 Interest expenses 35,304 36,522 Losses on financial assets at fair value through profit or losses 27 27,550 104,386 Realized losses on available-for-sale financial assets 27 95,673 37,687 Losses on loans receivable and other receivables 27 1,231 - Losses on derivative financial instruments for hedge accounting 27 32,293 300,388 Losses on foreign currency transactions 418,317 114,584 Separate account expense 15 350,497 387,917 Other operating expense 28 180,727 142,602 29,177,789 21,628,579 Operating income 1,204,936 1,061,215 5
Consolidated Statements of Comprehensive Income Years ended (In millions of Korean won) Notes 2013 2012 Non-operating revenue 28 121,641 198,805 Non-operating expense 28 85,988 83,791 Profit before income tax 1,240,589 1,176,229 Income tax expense 31 256,967 228,859 Profit for the year 983,622 947,370 Other comprehensive income(losses), net of tax Change in value of available-for-sale financial assets 3,132,512 2,159,930 Change in value of held-to-maturity financial assets (639) (572) Change in value of derivative financial instruments for hedge 174,107 (58,691) accounting Shares of other comprehensive income of associates and joint ventures (12,701) (80,085) Other comprehensive income(loss) on separate account 58,433 12,312 Currency translation differences (41,676) 11,666 3,310,036 2,044,560 Total comprehensive income for the year \ 4,293,658 \ 2,991,930 Profit attributable to: Owners of the parent 984,329 948,397 Non-controlling interests (707) (1,027) \ 983,622 \ 947,370 Total comprehensive income attributable to: Owners of the parent 4,296,473 2,992,957 Non-controlling interests (2,815) (1,027) \ 4,293,658 \ 2,991,930 Earnings per share attributable to owners of the parent(in Korean won) 34 Basic earnings per share \ 5,058 \ 4,781 Diluted earnings per share \ 5,058 \ 4,781 The accompanying notes are an integral part of these consolidated financial statements. 6
Consolidated Statements of Changes in Equity Years ended (In millions of Korean won) Capital stock Capital surplus Capital adjustments Accumulated other comprehensive income Retained earnings Equity attributable to the owners of the parent Noncontrolling interest Total April 1, 2011 \ 100,000 \ 6,131 \ 13,493 \ 7,613,827 \ 8,016,540 \ 15,749,991 \ 4,420 \ 15,754,411 Comprehensive income Profit for the year - - - - 948,397 948,397 (1,027) 947,370 Gains(Losses) on valuation of available-for-sale financial assets - - - 2,159,930-2,159,930-2,159,930 Gains(Losses) on valuation of held-to-maturity financial assets - - - (572) - (572) - (572) Gains(Losses) on valuation of derivative financial instruments for - - - (58,691) - (58,691) - (58,691) hedge accounting Shares of other comprehensive income(losses) of associates and - - - (80,085) - (80,085) - (80,085) joint ventures Other comprehensive income(losses) on separate - - - 12,312-12,312-12,312 account Currency translation differences - - - 11,666-11,666-11,666 Transactions with shareholders Cash dividends - - - - (400,000) (400,000) - (400,000) Acquisition of treasury stock - - (275,853) - - (275,853) - (275,853) Others - - (4,114) - - (4,114) 46,818 42,704 March 31, 2012 \ 100,000 \ 6,131 \ (266,474) \ 9,658,387 \ 8,564,937 \ 18,062,981 \ 50,211 \ 18,113,192 7
Consolidated Statements of Changes in Equity Years ended (In millions of Korean won) Capital stock Capital surplus Capital adjustments Accumulated other comprehensive income Retained earnings Equity attributable to the owners of the parent Noncontrolling interest Total April 1, 2012 \ 100,000 \ 6,131 \ (266,474) \ 9,658,387 \ 8,564,937 \ 18,062,981 \ 50,211 \ 18,113,192 Comprehensive income Profit for the year - - - - 984,329 984,329 (707) 983,622 Gains(Losses) on valuation of available-for-sale financial assets - - - 3,132,512-3,132,512-3,132,512 Gains(Losses) on valuation of held-to-maturity financial assets - - - (639) - (639) - (639) Gains(Losses) on valuation of derivative financial instruments for - - - 174,107-174,107-174,107 hedge accounting Shares of other comprehensive income(losses) of associates and - - - (12,701) - (12,701) - (12,701) joint ventures Other comprehensive income(losses) on separate - - - 58,433-58,433-58,433 account Currency translation differences - - - (39,568) - (39,568) (2,108) (41,676) Transactions with shareholders - Cash dividends - - - (394,000) (394,000) - (394,000) Acquisition of treasury stock - - (287,227) - - (287,227) - (287,227) Business combination - - - - - - 11,301 11,301 Others - - (6,617) - - (6,617) - (6,617) March 31, 2013 \ 100,000 \ 6,131 \ (560,318) \ 12,970,531 \ 9,155,266 \ 21,671,610 \ 58,697 \ 21,730,307 The accompanying notes are an integral part of these consolidated financial statements. 8
Consolidated Statements of Cash Flows Years ended (In millions of Korean won) Notes 2013 2012 Cash flows from operating activities Cash generated from operations Profit for the year \ 983,622 \ 947,370 Adjustments in expenses and revenues 37 10,966,950 3,828,608 Changes in operating assets and liabilities 37 (5,056,324) (21,843) 6,894,248 4,754,135 Interests received 5,338,747 5,247,557 Interests paid (21,454) (19,618) Dividends received 226,053 186,378 Income taxes paid (266,123) (461,706) Net cash provided by operating activities 12,171,471 9,706,746 Cash flows from investing activities Proceeds from disposal of available-for-sale financial assets 10,473,406 9,508,770 Payment for acquisition of available-for-sale financial assets (21,123,450) (17,459,649) Proceeds from disposal of held-to-maturity financial assets 204,140 186,838 Settlement of derivative financial instruments for hedge accounting 77,311 (5,203) Proceeds from disposal of investments in associates and joint ventures 26,644 59,601 Payment for acquisition of investments in associates and joint ventures (38,376) (21,228) Payment for acquisition of investment properties (431,913) (532,111) Proceeds from disposal of investment properties 20,020 13,605 Payment for acquisition of property and equipment (56,734) (97,613) Proceeds from disposal of property and equipment 15,727 7,662 Payment for acquisition of intangible assets (41,257) (24,259) Proceeds from disposal of intangible assets 23,069 25 Others 3,205 42,796 Net cash used in investing activities (10,848,208) (8,320,766) Cash flows from financing activities Payment of dividends (394,000) (400,000) Payment for acquisition of treasury stocks (287,227) (275,853) Net cash used in financing activities (681,227) (675,853) Net increase in cash and cash equivalents 642,036 710,127 Cash and cash equivalents at the beginning of the year 1,644,198 933,889 Exchange losses on cash and cash equivalents (229) 182 Cash and cash equivalents at the end of the year 37 \ 2,286,005 \ 1,644,198 The accompanying notes are an integral part of these consolidated financial statements. 9
1. The Group The consolidated financial statements of Samsung Life Insurance Co., Ltd. ( the Company ) and its subsidiaries (collectively referred to as the Group ) have been prepared in accordance with Korean IFRS 1027, Consolidated and separate financial statements. Samsung Life Insurance Co., Ltd. (the "Company") was incorporated under the laws of the Republic of Korea on April 24, 1957. The Group is engaged in life insurance business as permitted by the Insurance Business Law of the Republic of Korea. On May 12, 2010, the Company was listed on the Korea Exchange. The following table lists numbers of available and discontinued products as of March 31, 2013: Products Available Discontinued Total Annuity with tax benefits 18 223 241 Annuity 2 44 46 Whole life, Term life insurance 21 470 491 Endowment insurance 5 149 154 Group insurance 11 285 296 57 1,171 1,228 As of March 31, 2013, major shareholders of the Company and their respective shareholdings are as follows: Name of Shareholder Number of Shares (in thousands) Percentage of Ownership (%) Lee Kun-Hee 41,519 20.76 Samsung Everland Inc. 38,688 19.34 E-MART Co., Ltd. 14,763 7.38 Samsung Foundation of Culture 9,360 4.68 Samsung Life Public Welfare Foundation 9,360 4.68 SHINSEGAE Co., Ltd 7,381 3.69 Employee stock ownership association 6,435 3.22 CJ CheilJedang Corp 5,986 2.99 Others 60,583 30.30 194,075 97.04 Treasury stock 5,925 2.96 200,000 100.00 10
List of Samsung Life Insurance s consolidated subsidiaries The Company s major consolidated subsidiaries as of March 31, 2013, are as follows: Name of Corporate 1 Capital (inmillionsof Koreanwon) Number of Shares Percentage of ownership(%) Primary Business Location Fiscal YearEnd Samsung Life Investment (America), Ltd. 17,570 1,200 100 Financing U.S.A. Dec. 31 Samsung Life Properties Real estate 45,010 400,000 100 China, Ltd. lease China Dec. 31 Samsung Life Investment (UK), Ltd. 25,232 10,000,000 100 Financing U.K. Dec. 31 SSI Capital Holding 2 11,915 16,718,228 49 Other financing Thailand Dec. 31 Park Capital Holding 3 23,208 32,586,567 49 Other financing Thailand Dec. 31 Thai Samsung Life Insurance Co., Ltd 4 34,335 36,165,049 28.7 Insurance Thailand Dec. 31 Samsung Life Service Claim Adjustment Co., Ltd 16,014 3,152,919 99.8 Service Korea Mar. 31 Beijing Samsung Real Real estate 461,952-90.0 Estate Co., Ltd. lease China Dec. 31 Samsung SRA Asset Management Co., Ltd. 18,104-100 Non-residential property supply Korea Mar. 31 1 For consolidating financial statements, the Group used financial statements audited by other auditors. 2 The Group acquired 49% equity shares of the SSI Capital Holding during the reporting period. Considering the Group can control investee by nominating the majority of members of board of directors, SSI Capital Holding is classified as subsidiary even though the Group owns less than 50% of the equity shares. 3 The Group acquired 49% equity shares of Park Capital Holding. In addition, SSI Capital Holding, the subsidiary of the Group, has 51% equity shares of Park Capital Holding. Accordingly, Park Capital Holding is classified as the subsidiary of the Group since the Group has control over the Park Capital Holding. 4 The corporate name of Siam Samsung Life Insurance Co., Ltd. was changed to Thai Samsung Life Insurance Co., Ltd. during the reporting period. Even though the Group owns less than 50% equity shares of Thai Samsung Life Insurance Co., Ltd., Park Capital Holding, a subsidiary of the Group, acquired additional 51% shares during the reporting period. Thus, Thai Samsung Life Insurance Co., Ltd. is classified as subsidiary considering the Group has control over Thai Samsung Life Insurance Co., Ltd. Beneficiary certificates, KDB High-end Investment Trust No.1(percentage of ownership: 80%) is also one of the subsidiaries. 11
Although the reporting date of Samsung Life Investment (America), Ltd. and six other subsidiaries is different from the reporting date of the Group, additional financial statements of subsidiaries as of March 31 have not been prepared because the period gap between the end of the reporting period of the subsidiaries and that of the parent is no more than three months. A summary of financial information as of and for the years ended March 31, 2013, and 2012, of the subsidiaries is as follows: March 31, 2013 (in millions of Korean won) Assets Liabilities Operating Revenue Net profit (loss) Samsung Life Investment (America), Ltd. 18,074 504 4,562 209 Samsung Life Properties China, Ltd. 45,745 735 6,416 3,378 Samsung Life Investment (UK), Ltd. 25,709 477 3,645 17 SSI Capital Holding 11,915 - - - Park Capital Holding 23,208 - - - Thai Samsung Life Insurance Co., Ltd. 113,400 79,065 - - Samsung Life Service Claim Adjustment Co., Ltd. 58,598 42,584 113,840 962 Beijing Samsung Real Estate Co., Ltd 462,146 194 533 (1,258) Samsung SRA Asset Management Co., Ltd. 18,515 411 850 (1,896) 12
2012 (in millions of Korean won) Assets Liabilities Operating Revenue Net profit or loss Samsung Life Investment (America), Ltd. Samsung Life Properties China, Ltd. Samsung Life Investment (UK), Ltd. Samsung Life Service Claim Adjustment co., Ltd Beijing Samsung Real Estate Co., Ltd 19,059 562 4,515 198 58,971 552 5,369 2,755 27,253 808 3,945 478 52,393 37,341 89,198 (4,061) 486,230 - - - For the year ended March 31, 2012, while two firms including Samsung Life Service Claim Adjustment Co., Ltd. and another subsidiary were consolidated, private offering funds, which include KDB First Shipping PF SA 3, were de-consolidated from the date of liquidation. For the year ended March 31, 2013, four subsidiaries, including Samsung SRA Asset Management Co., Ltd., were consolidated during the reporting period. 13
2. Summary of 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 conformity 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. The Group s financial statements for the annual period beginning on April 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 financial statements requires the use of certain critical accounting estimates. It also requires the 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. 2.1.1 Changes in Accounting Policy and Disclosures (a) New and amended standards adopted by the Group The Group has adopted the Korean-IFRS 1001, Presentation of Financial Statements, during the year and accordingly, the standard requires the Group s operating income to only include income and expense incurred from the major operating activities. The Group applies the accounting policy retroactively in accordance with the amended standards and the comparative consolidated statement of the comprehensive income is restated by reflecting adjustments resulting from the retrospective application. As a result of the changes in the accounting policy, other income and expenses of 12,892 million and 68,042 million, respectively, for the year ended March 31, 2013 (2012: 11,510 million and 69,111 million, respectively), which include gain and loss on disposal of property and equipment, classified as operating income under the previous standard, were excluded from operating income. Consequently, operating income for the years ended, is higher by 14
55,150 million and lower by 57,601 million, respectively, as compared to the amounts under the previous standard. However, there is no material impact on net income and earnings per share for the years ended. (b) New standards and interpretations not yet adopted New standards, amendments and interpretations issued but not effective for the financial year beginning April 1, 2012, and not early adopted by the Group are as follows: - Amendments to Korean-IFRS 1019, Employee Benefits According to the amendments to Korean-IFRS1019, Employee Benefits, use of a corridor approach is no longer permitted, and therefore all actuarial gains and losses incurred are immediately recognized in other comprehensive income. All past service costs incurred from changes in pension plan are immediately recognized, and expected returns on interest costs and plan assets that used to be separately calculated are now changed to calculating net interest expense(income) by applying discount rate used in measuring defined benefit obligation to net defined benefit liabilities(assets). This amendment will be effective for the Group as of January 1, 2013, and the Group is assessing the impact of application of the amended Korean-IFRS1019 on its consolidated financial statements as of the report date. - Enactment of Korean-IFRS 1113, Fair value measurement Korean-IFRS 1113, Fair value measurement, aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across Korean-IFRSs. Korean-IFRS 1113 does not extend the use of fair value accounting but provides guidance on how it should be applied where fair value measurement is already required or permitted by other standards within Korean-IFRSs. This amendment will be effective for the Group as of January 1, 2013, and the Group is assessing the impact of application of the enacted Korean IFRS 1113 on its consolidated financial statements as of the reporting date. - Amendment of Korean IFRS 1001, Presentation of Financial Statements Korean-IFRS 1001, Presentation of Financial Statements, was amended require other comprehensive income items to be presented into two groups on the basis of whether they are potentially reclassifiable to profit or loss subsequently. This is effective for annual periods beginning on or after July 1, 2012, with early adoption permitted. The Group expects that the application of this amendment would not have a material impact on its consolidated financial statements. 15
- Enactment of Korean IFRS 1110, Consolidated Financial Statements Korean IFRS 1110, Consolidated Financial Statements, builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included in the consolidated financial statements of the Parent Company. An investor controls an 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 standard provides additional guidance to assist in the determination of control where this is difficult to assess. This enactment will be effective for annual periods beginning on or after January 1, 2013, and the Group is reviewing the impact of this standard. - Enactment of Korean IFRS 1111, Joint Arrangements Korean IFRS 1111, Joint Arrangements, aims to reflect the substance of joint arrangements by focusing on the contractual rights and obligations that each party to the arrangement has rather than its legal form. Joint arrangements are classified as either joint operations or joint ventures. A joint operation is when joint operators have rights to the assets and obligations for the liabilities, and account for the assets, liabilities, revenues and expenses, while parties to the joint venture have rights to the net assets of the arrangement and account for their interest in the joint venture using the equity method. This enactment will be effective for annual periods beginning on or after January 1, 2013, and the Group is reviewing the impact of this standard. - Enactment of Korean IFRS 1112, Disclosures of Interests in Other Entities Korean IFRS 1112, Disclosures of Interests in Other Entities, provides the disclosure requirements for all forms of interests in other entities, including a subsidiary, a joint arrangement, an associate, a consolidated structured entity and an unconsolidated structured entity. This enactment will be effective for annual periods beginning on or after January 1, 2013, and the Group is reviewing the impact of this standard. 16
2.2 Consolidation (a) Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Company has the power to govern the financial and operating policies generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. The Group also assesses existence of control where it does not have more than 50% of the voting power but has de-facto control over subsidiaries financial and operating policies. De-facto control may arise in circumstances even though the Company has a less than 50% of voting power, de-facto control may arise in a circumstance where shares are distributed among numerous shareholders. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are de-consolidated upon a cessation of control over subsidiaries. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Profit or loss and each component of other comprehensive income are attributed to the owners of the parent and to the non-controlling interests. Total comprehensive income is attributed to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. The Group has invested in many special purpose entities ( SPE s). Such SPEs are consolidated when the risks and rewards and substance of the relationship between the Group and the SPE indicate that the SPE is controlled by the Group. These SPEs controlled by the Group are established with predetermined activities, so that the Group has the rights to obtain majority of the benefits from the activities of the SPEs and may be exposed to risks from or related to the activities of the SPE and the Group retains the majority of the residual or ownership risks related to the SPE or its assets in order to obtain the benefits from its activities. The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is measured as the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Company. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognizes any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the noncontrolling interest s proportionate share of the recognized amounts of acquiree s identifiable net assets. Acquisition-related costs are expensed as incurred. 17
If the business combination is achieved in stages, the acquisition date fair value of the acquirer s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date and the resulting gain or loss is recognized in profit or loss. (b) Associates Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting. Under the equity method, the investment is initially recognized at cost, and the carrying amount is increased or decreased to recognize the investor s share of the profit or loss of the investee after the date of acquisition. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group s interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. After the Group s interest is reduced to zero, additional losses are provided for, and a liability is recognized, only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the investee. (c) Elimination of intergroup transaction Intercompany transactions, balances, income and expenses on transactions between Group companies are eliminated. Unrealized losses are also eliminated after recognizing impairment of transferred assets. 2.3 Segment Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the steering committee that makes strategic decisions. 18
2.4 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 entity s functional and presentation currency. (b) Transactions 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 monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, except when deferred in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges. Foreign exchange gains and losses that relate to monetary assets and liabilities are presented in the statement of comprehensive income within Gains(Losses) on foreign currency transactions Changes in the fair value of monetary securities denominated in foreign currency classified as available-for-sale are analyzed between translation differences resulting from changes in the amortized cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in amortized cost are recognized in profit or loss, and other changes in carrying amount are recognized in other comprehensive income. Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognized in profit or loss as part of the fair value gain or loss. Translation differences on non-monetary financial assets, such as equities classified as availablefor-sale, are included in other comprehensive income. 19
(c) Translation to presentation currency The results and financial position of all Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: Assets and liabilities for each statement of financial position presented are translated at the closing rate at the end of the reporting period; Income and expenses for each income statement are translated at average exchange rates; and All resulting exchange differences are recognized in other comprehensive income. When foreign operations are wholly or partially sold, exchange differences recognized in equity are transferred to profit or loss in the income statement. When the Group ceases to control the subsidiary, exchange differences that were recorded in equity are recognized in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. 2.5 Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks, and other shortterm highly liquid investments with original maturities of three months or less. 2.6 Financial instruments 2.6.1 Classification The Group classifies its financial instruments in the following categories: financial assets or liabilities at fair value through profit or loss, loans and receivables, available-for-sale financial assets, held-to-maturity financial assets and other financial liabilities at amortized cost. Management determines the classification of financial instruments at initial recognition. (a) Financial assets or liabilities at fair value through profit or loss Financial assets or liabilities at fair value through profit or loss are financial assets or liabilities held for trading. A financial asset and liability is classified in this category if acquired principally for the purpose of selling or repurchasing in the short term. Derivatives or embedded derivatives are also categorized as held for trading unless they are designated as hedges. Assets or liabilities in this category are classified as financial assets or liabilities at fair value through profit or loss. 20
(b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. (c) Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group intends and is able to hold to maturity. If the Group were to sell other than an insignificant amounts of held-to-maturity investments, the whole category would be tainted and reclassified as available-for-sale. (d) Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. (e) Financial liabilities measured at amortized cost The Group classifies non-derivative financial liabilities, except for financial liabilities at fair value through profit or loss and financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition, as financial liabilities carried at amortized cost and as trade payables, borrowings, and other financial liabilities in the statement of financial position. 2.6.2 Recognition and Measurement Regular purchases and sales of financial assets are recognized on the trade date. Investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognized at fair value, and transaction costs are expensed in the consolidated statements of comprehensive income. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are subsequently carried at amortized cost using the effective interest rate method. 21
Gains or losses arising from changes in the fair value of the financial assets carried at fair value through profit or loss are presented in the consolidated statements of comprehensive income within Gains(Losses) on financial assets at fair value through profit or loss in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognized in the consolidated statements of comprehensive income as part of Dividend income when the Group s right to receive dividend payments is established. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognized in equity are included in the comprehensive income statement as Change in value of available-for-sale financial assets. Interest on available-for-sale and held-to-maturity securities calculated using the effective interest method is recognized in the consolidated statements of comprehensive income as part of Interest income. Dividends on available-for-sale equity instruments are recognized in the statement of comprehensive income as part of Dividend income when the Group s right to receive dividend payments is established. 2.6.3 Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position when 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 asset and settle the liability simultaneously. 2.6.4 Impairment of Financial Assets (a) Assets carried at amortized cost 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. 22
The criteria that the Group uses to determine that there is objective evidence of an impairment loss include: Significant financial difficulty of the issuer or obligor; A breach of contract, such as a default or delinquency in interest or principal payments For economic or legal reasons relating to the borrower s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider; It becomes probable that the borrower will enter bankruptcy or other financial reorganization; The disappearance of an active market for that financial asset because of financial difficulties; or Observable data suggesting that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, even though the decrease cannot be identified with respect to individual financial assets in the portfolio, Impairment loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted using the initial effective interest rate. The carrying amount of the asset is reduced by the impairment loss amount and the amount of the loss is recognized in the statement of comprehensive income. In practice, the Group may measure impairment loss based on the fair value of financial asset using an observable market price. If, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (for example, an improvement in debtor s credit rating), the reversal of the previously recognized impairment loss is recognized in the statement of comprehensive income. 23
(b) Assets classified as available-for-sale 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. For debt securities, the Group uses the criteria refer to in (1) above. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is also evidence that the asset is impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss is removed from equity and recognized in the income statement. Impairment losses recognized in the consolidated income statement on equity instruments are not reversed through the income statement. If, in a subsequent period, the fair value of a debt instrument classified as available-forsale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through the income statement. 2.7 Derivative Financial Instruments and Hedging Activities Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. 2.7.1 Derivative financial instruments for trading All derivative financial instruments, except for derivatives that are designated and qualify for hedge accounting, are classified as financial instruments held for trading and measured at fair value. A gains or losses arising from a change in fair value is recognized in the consolidated statements of comprehensive income as part of net gains on financial instruments at fair value through profit or loss. 24
2.7.2 Derivative financial instruments for hedge accounting (a) Fair value hedge If derivatives qualify for a fair value hedge, the gains or losses from remeasuring the hedging instrument at fair value is recognized in profit or loss as part of operating income and expense and the gain or loss on the hedged item attributable to the hedged risk adjusts the carrying amount of the hedged item and is recognized in the consolidated statements of comprehensive income as part of other operating income and expenses. Hedge accounting is discontinued prospectively if the hedging instrument expires or is sold, terminated or exercised, or the hedge no longer meets the criteria for hedge accounting or the Bank revokes the designation. Once hedge accounting is discontinued, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is fully amortized to profit or loss by the maturity of the financial instrument. (b) Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income, whereas the gains or losses relating to the ineffective portion is recognized immediately in the comprehensive income statement. Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss (for example, when the forecast sale that is hedged takes place). Hedge accounting is discontinued prospectively if the hedging instrument expires or is sold, terminated or exercised, or the hedge no longer meets the criteria for hedge accounting. Once hedge accounting is discontinued, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the forecast transaction is ultimately recognized in the consolidated statements of comprehensive income statement. However, when a forecast transaction is no longer expected to occur, the cumulative gains or losses that were reported in equity is immediately recognized in the consolidated statements of comprehensive income. 2.7.3 Embedded derivatives An embedded derivative is separated from the host contract and accounted for as a derivative if, and only if the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract and a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative and the hybrid(combined) instrument is not measured at fair value with changes in fair value recognized in profit or loss. A gains or losses arising from a change in the fair value of embedded derivative separated from host contract is recognized in the consolidated statements of comprehensive income as part of net gains on financial instruments at fair value through profit or loss. 25
2.8 Property and Equipment All property and equipment are stated at historical cost less depreciation and accumulated impairment loss. Historical cost includes expenditures directly attribute to the acquisition of the items. Subsequent costs are included in the asset s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Land is not depreciated. Depreciation is computed using the straight-line method for buildings and structures and the declining balance method for other property and equipment, based on the estimated useful lives of the assets as described below. Buildings Structures Vehicles Other property and equipment Estimated useful lives 15-60 years 5-40 years 5 years 5-20 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized within other gains and losses, net in the income statement. 2.9 Investment property Investment property is held to earn rentals or for capital appreciation or both. Investment property is measured initially at its cost including transaction costs incurred in acquiring the asset. After recognition as an asset, investment property is carried at cost less accumulated depreciation and impairment losses. 26
2.10 Intangible Assets Intangible assets are stated at cost, net of amortization calculated using the straight-line method based on the estimated useful lives of the assets as described below. The assets useful lives and amortization method are reviewed at the end of each reporting period. Development costs Software Trademark Other intangible assets Estimated useful lives 5 years 5 years 5-20 years 10-20 years An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized within other gains and losses, net in the income statement. 2.10.1 Goodwill Goodwill arises on the acquisition of subsidiaries, associates and business is included in intangible assets. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the CGUs, or group of CGUs, that is expected to benefit from the synergies of the combination. Goodwill is monitored at the operating segment level. Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs to sell. Any impairment is recognized immediately as an expense and is not subsequently reversed. 27
2.10.2 VOBA (Value Of Business Acquired) In business combination with insurance companies, the Group recognized the differences between the fair value of the acquired insurance liability and carrying amount measured using accounting policy of acquiree, as Value Of Business Acquired(intangible asset). The Value of Business Acquired is measured at present value of profit embedded in future cash flows from long- term insurance contract on acquisition date. Actuarial and economical assumptions on acquisition date are used for the calculation of cash flow. Since the intangible asset has unlimited insurance contract term like as useful lives, it is being systematically amortized in proportion to the expected pattern of consumption of the expected future economic benefits embodied in the asset. 2.11 Reinsurance assets The Group recognizes recoverable amount of ceded insurance from reinsurance companies as reinsurance assets, included in other assets of financial statements. The Group assesses at the end of each reporting period whether there are objective evidence that reinsurance assets are impaired. A reinsurance asset is impaired if, and only if that there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance assets, that the cedant may not receive all amounts due to it under the terms of the contract; and that event has a reliably measurable impact on the amounts that the cedant will receive from the reinsurer. When reinsurance assets are impaired the carrying amount of the asset is reduced by the impairment loss amount and the amount of the loss is recognized in the income statement. 28