Financial Statements (With Independent Auditors Report Thereon)
Table of Contents Page Independent Auditors Report Statements of Financial Position 2 Statements of Income 3 Statements of Appropriation of Retained Earnings 4 Statements of Changes in Equity 5 Statements of Cash Flows 6 7 Internal Accounting Control System Review Report 27 Report on the Operations of Internal Accounting Control System 29
Independent Auditors Report Based on a report originally issued in Korean The Board of Directors and Stockholders Samsung Futures, Inc.: We have audited the accompanying statements of financial position of Samsung Futures, Inc. (the Company ) as of, and the related statements of income, appropriation of retained earnings, changes in equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. 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 provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Samsung Futures, Inc. as of, the results of its operations, the appropriation of retained earnings, the changes in its equity and its cash flows for the years then ended in conformity with accounting principles generally accepted in the Republic of Korea. Without qualifying our opinion, we draw attention to following: As discussed in note 2(a) to the financial statements, accounting principles and auditing standards and their application in practice vary among countries. The accompanying financial statements are not intended to present the financial position, results of operations, changes in equity and cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying financial statements are for use by those knowledgeable about Korean accounting principles and auditing standards and their application in practice. KPMG Samjong Accounting Corp. Seoul, Korea June 2, 2011 This report is effective as of June 2, 2011, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying 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.
Statements of Financial Position As of (In thousands of won, except share data) Note 2011 2010 Assets Cash and cash equivalents 3,23 W 453,091 2,406,267 Deposit 4,5,13 901,365,728 737,039,478 Available-for-sale securities 2,6 39,685,380 9,558,977 Held-to-maturity securities 2,7-41,262,370 Loans - less allowance for doubtful accounts of W2,896 in 2011 and W3,183 in 2010 2,8,21 576,353 633,427 Property and equipment, net 2,9 2,068,475 1,456,210 Accounts receivable - less allowance for doubtful accounts of W8,176 in 2011 and W856 in 2010 2,8,13,21 1,055,988 170,294 Accrued income - less allowance for doubtful accounts of W17,931 in 2011 and W27,327 in 2010 8,13 3,568,359 5,620,071 Prepaid expenses 408,629 301,698 Guarantee deposits 927,802 904,484 Collective funds for default loss 2 4,014,804 5,287,186 Intangible assets 2,10 936,778 217,054 Other 4,21 4,134,658 3,782,602 Total assets W 959,196,045 808,640,118 Liabilities Customers marginal deposits 12,13,14 W 832,486,565 701,896,869 Retirement and severance benefits 2,4,11,21 30,154 - Income tax payable 3,450,337 2,690,943 Accrued expenses 13,21 4,113,106 2,267,851 Deferred tax liabilities 2,18 1,828,611 1,349,921 Total liabilities 841,908,773 708,205,584 Stockholders equity Common stock of W10,000 par value 25,000,000 25,000,000 Authorized 5,000,000 shares Issued and outstanding 2,500,000 shares in 2011 and 2010 Accumulated other comprehensive income 6,22 6,936,163 5,116,002 Retained earnings 15 85,351,109 70,318,532 Total stockholders equity 117,287,272 100,434,534 Total liabilities and stockholders equity W 959,196,045 808,640,118 See accompanying notes to financial statements. 2
Statements of Income For the years ended (In thousands of won, except earnings per share ) Note 2011 2010 Operating revenue Brokerage commissions 21 W 43,584,280 40,677,417 Interest income 21 21,166,258 19,034,399 Reversal of allowance for doubtful accounts 8 12,189 212,191 Gain on foreign currency transactions 87,502 12,180 Dividend income 339,702 281,743 Gain on derivatives transactions 82,741 88,827 Gain on valuation of available-for-sale securities 297,976 - Others 5,939 39,641 65,576,587 60,346,398 Operating expense Brokerage fees 9,544,383 8,291,119 Interest expenses 5,867,581 5,306,538 Loss on foreign currency transactions 130,193 308,950 Loss on derivatives transactions 335,431 188,249 General and administrative expense 16,17,21 22,935,927 22,720,432 Others 187,495 191,979 39,001,010 37,007,267 Operating income 26,575,577 23,339,131 Non - operating income (expense) Gain (loss) on disposition of property and equipment, net - (4,421) Donations (18,000) (10,000) Other, net 477 40,075 (17,523) 25,654 Income before income taxes 26,558,054 23,364,785 Income taxes 18 6,525,477 5,856,905 Net income 22 W 20,032,577 17,507,880 Earnings per share Basic and diluted earnings per share 19 W 8,013 7,003 See accompanying notes to financial statements. 3
Statements of Appropriation of Retained Earnings For the years ended Date of Appropriation for 2011: June 21, 2011 Date of Appropriation for 2010: May 19, 2010 (In thousands of won) Note 2011 2010 Unappropriated retained earnings Balance at beginning of year W 62,124,296 50,116,416 Net income 20,032,577 17,507,880 Balance at end of year before appropriation 82,156,873 67,624,296 Appropriation of retained earnings Legal reserve 15 500,000 500,000 Dividends - 20% on par value at W10,000 per share in 2011 and 20% on par value at W10,000 per share in 2010 20 5,000,000 5,000,000 Unappropriated retained earnings to be carried over to subsequent year W 76,656,873 62,124,296 See accompanying notes to financial statements. 4
Statements of Changes in Equity For the years ended Accumulated (In thousands of won) Note Common stock other comprehensive income Retained earnings Total stockholders equity Balance at April 1, 2009 W 25,000,000 4,307,349 57,810,652 87,118,001 Dividends 20 - - (5,000,000) (5,000,000) Net income - - 17,507,880 17,507,880 Change in fair value of available-for-sale securities, net of tax 6,22-808,653-808,653 Balance at March 31, 2010 W 25,000,000 5,116,002 70,318,532 100,434,534 Balance at April 1, 2010 W 25,000,000 5,116,002 70,318,532 100,434,534 Dividends 20 - - (5,000,000) (5,000,000) Net income - - 20,032,577 20,032,577 Change in fair value of available-for-sale securities, net of tax 6,22-1,820,161-1,820,161 Balance at March 31, 2011 W 25,000,000 6,936,163 85,351,109 117,287,272 See accompanying notes to financial statements. 5
Statements of Cash Flows For the years ended (In thousands of won) Note 2011 2010 Cash flows from operating activities Net income W 20,032,577 17,507,880 Adjustments for: Accrual for retirement and severance benefits 11,16 729,349 531,228 Depreciation 9,16 585,668 454,348 Amortization 10,16 153,291 100,794 Loss on disposition of property and equipment, net - 4,421 Reversal of allowance for doubtful accounts 8 (12,189) (212,191) Interest income from held-for-maturity securities, net 181,874 (83,046) Interest income from available-for-sale securities (62,133) - Gain on sale of held-for-maturity securities (297,977) - Loss on foreign currency transactions, net 9,876 30,726 1,287,759 826,280 Changes in assets and liabilities Deposits (164,330,115) 15,462,396 Loans 57,360 493,780 Accounts receivable (883,959) 149,093 Accrued income 2,055,869 (2,209,307) Collective funds for default loss 1,272,382 (708,479) Prepaid expenses (106,930) 416,746 Customers marginal deposits 130,589,696 (35,623,274) Income tax payable 759,394 (2,372,083) Accounts payable - (11,351) Accrued expenses 1,845,254 (140,849) Deferred tax liabilities (34,690) (53,339) Payment of retirement and severance benefits 11 (397,116) (473,724) Transfer to National Pension Fund - 208 Pension plan assets (302,079) (63,726) Net cash used in operating activities (8,154,596) (6,799,749) Cash flows from investing activities Collection of guarantee deposits - 480,183 Sale of held-to-maturity securities 41,378,472 50,000,000 Acquisition of property and equipment (1,197,933) (1,180,926) Payment of guarantee deposits (23,317) (903,365) Acquisition of intangible assets (873,015) (212,300) Acquisition of available-for-sale securities (27,730,731) - Acquisition of held-to-maturity securities - (36,420,117) Other, net (352,056) (22,075) Net cash provided by investing activities 11,201,420 11,741,400 Cash flows from financing activities Dividends paid 20 (5,000,000) (5,000,000) Net cash used in financing activities (5,000,000) (5,000,000) Net decrease in cash and cash equivalents (1,953,176) (58,349) Cash and cash equivalents at beginning of year 2,406,267 2,464,616 Cash and cash equivalents at end of year 3,23 W 453,091 2,406,267 See accompanying notes to financial statements. 6
1. Organization and Description of Business Samsung Futures, Inc. (the Company ), a majority-owned subsidiary of Samsung Securities Co., Ltd. (the Parent ), carries on exchange-traded derivatives dealing and brokerage on behalf of customers. Founded in 1992, the Company s principal office is located in Seoul, Korea and the Company is a member of the Korea Exchange, which commenced its trading in April 1999. As of March 31, 2011, the Company currently carries on exchange-traded derivatives dealing and brokerage permitted by the Financial Investment Services and Capital Markets Act ( FSCMA ), including the receipt of exchange-traded derivatives transactions, and is required by relevant laws to report any change in paid-in capital, major stockholders, members of the board of directors to the Financial Services Commission. The Company is required to maintain its net capital ratio at or above 100% in accordance with the FSCMA and Financial Investment Services Regulations. Also, it is prohibited from owning securities issued by major investors and acting as a guarantor for another party. As of March 31, 2011, the Company s capital stock totals W25,000 million and its stockholders comprise as follows: Number of shares Ownership ratio (%) Samsung Securities Co., Ltd. 1,275,000 51.00 Samsung Life Insurance Co., Ltd. 1,025,000 41.00 Samsung Fire & Marine Insurance Co., Ltd. 100,000 4.00 Samsung Life Public Welfare Foundation 50,000 2.00 Employee Stock Ownership Association 18,013 0.72 Others 31,987 1.28 2,500,000 100.00 2. Basis of Presenting Financial Statements and Summary of Significant Accounting Policies (a) Basis of Presenting Financial Statements The Company maintains its accounting records in Korean won and prepares statutory financial statements in the Korean language in conformity with the accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these financial statements are solely intended for use by only those who are informed about Korean accounting principles and practices. The accompanying financial statements have been condensed, restructured and translated into English from the Korean language financial statements. Certain information included in the Korean language financial statements, but not required for a fair presentation of the Company's financial position, results of operations, cash flows or changes in equity is not presented in the accompanying financial statements. 7
2. Basis of Presenting Financial Statements and Summary of Significant Accounting Policies, Continued (b) Allowance for Doubtful Accounts The Company provides an allowance for doubtful accounts on loans and other assets based on the collectability of each asset and in accordance with the Regulation of the Financial Investment Services (the Regulation ). Under the Article 3-8 of the Regulation, the Company classifies those assets(loans, accounts receivable from customers, accrued income, dishonored bonds and others) as normal, precautionary, substandard, doubtful, or estimated less, and an allowance for doubtful accounts is then calculated on loans and other applicable assets using the percentage of more than 0.5%, 2%, 20%, 75%, and 100%, respectively. (c) Investments in Securities Classification Upon acquisition, the Company classifies debt and equity securities into the following categories: heldto-maturity, available-for-sale or trading securities. This classification is reassessed at the end of the reporting period. Investments in debt securities where the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity. Securities that are acquired principally for the purpose of selling in the short term are classified as trading securities. Investments not classified as either heldto-maturity or trading securities are classified as available-for-sale securities. Initial recognition Investments in securities are initially recognized at cost. Subsequent measurement and income recognition Trading securities are subsequently carried at fair value. Gains and losses arising from changes in the fair value of trading securities are included in the income statement in the period in which they arise. Available-for-sale securities are subsequently carried at fair value. Gains and losses arising from changes in the fair value of available-for-sale securities are recognized as accumulated other comprehensive income, net of tax, directly in equity. Investments in available-for-sale securities that do not have readily determinable fair values are recognized at cost less impairment, if any. Held-tomaturity investments are carried at amortized cost with interest income and expense recognized in the income statement using the effective interest method. Fair value information The fair value of marketable securities is determined using quoted market prices as of the period end. Non-marketable debt securities are fair valued by discounting cash flows using the prevailing market rates for debt with a similar credit risk and remaining maturity. Credit risk is determined using the Company s credit rating as announced by accredited credit rating agencies in Korea. The fair value of investments in money market funds is determined by investment management companies. 8
2. Basis of Presenting Financial Statements and Summary of Significant Accounting Policies, Continued (c) Investments in Securities, Continued Impairment The Company reviews investments in securities whenever events or changes in circumstances indicate that the carrying amount of the investments may not be recoverable. Impairment losses are recognized when the reasonably estimated recoverable amounts are less than the carrying amount and it is not obviously evidenced that impairment is unnecessary. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized and a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized in the asset in prior years. For financial assets measured at amortized cost and available-for-sale assets that are debt securities, the reversal is recognized in profit or loss. For available-for-sale financial assets that are equity securities, the reversal is recognized directly in equity. (d) Collective Funds for Default Loss As of March 31, 2011, in accordance with the Article 394 of the FSCMA, the Company has deposited collective funds for default loss up to W2,000,000 million with the Korea Exchange as guaranty for the payment of related exchange-traded derivatives transactions. The Company has W750 million of contribution to the joint compensation fund along with variable contribution using the Company s daily average margin ratio of the total derivatives market. (e) Property and Equipment Property and equipment are stated at cost. Significant additions or improvements extending the useful life of assets are capitalized. Normal maintenance and repairs are charged to expense as incurred. Depreciation is computed by straight-line method over the estimated useful lives of the assets as follows: Useful lives (years) Vehicles 4 Furniture and fixtures 4 ~ 40 (f) Intangible Assets Expenditure on development incurred in conjunction with new products or technologies, in which the elements of costs can be identified and future economic benefits are clearly expected, is capitalized and amortized on a straight-line basis over the expected periods to be benefited, generally four years. The expenditure capitalized includes the cost of materials, direct labor and an appropriate proportion of overheads. Other intangible assets are stated at cost less accumulated amortization and impairment losses. Such intangible assets are amortized using the straight-line method over a reasonable period, generally four years, based on the nature of the asset. 9
2. Basis of Presenting Financial Statements and Summary of Significant Accounting Po licies, Continued (g) Leases The Company classifies and accounts for leases as either operating or capital leases, depending on the terms of the lease. Leases where the Company assumes substantially all the risks and rewards of ownership are classified as capital leases. All other leases are classified as operating leases. Where the Company is a lessee under a capital lease, the present value of future minimum lease payments is capitalized and a corresponding liability is recognized. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease. (h) Retirement and Severance Benefits The Company defined benefit plan and defined contribution plan as employees benefits since 2007 The Company introduced a defined benefit pension plan, where each eligible employee receives a fixed amount of pension after retirement. The Company accrued, as the liability for retirement and severance benefits, lump-sum payments payable to employees who are currently in service, assuming that they left the Company at the end of the reporting period. All employees with a minimum of one year of service are eligible to participate and must elect to participate in the plan. Participants accrue estimated benefits based on actuarial assumptions measured on the end of the reporting period at the discounted present value. Pension plan assets with the deposit previously made to the National Pension Fund under old National Pension Law, is reflected in the accompanying statements of financial position as a reduction of the liability for retirement and severance benefits. The Company sponsors a defined contribution plan in which contributions in the amount of 1/12 of employees annual salary is made by the Company. The amount of benefit payments depends on the performance of the plan assets and is not guaranteed. (i) Foreign Currency Translation Monetary assets and liabilities denominated in foreign currencies are translated into Korean won at the foreign exchange rate on the end of the reporting period, with the resulting gains and losses recognized in the income statement. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated into Korean Won at the foreign exchange rate ruling at the date of the transaction. (j) Derivatives Derivative instruments are recorded either as an asset or a liability principally at the fair value of rights or obligations associated with the derivative contracts. The unrealized gain or loss from derivative transactions is recognized in current operations. 10
2. Basis of Presenting Financial Statements and Summary of Significant Accounting Po licies, Continued (k) Revenue Recognition Commissions due from the brokerage of futures transactions are recorded as revenue when the brokerage services have been rendered and the service fees are determined. The Company performs trading of dollar futures, KTB futures, MSB futures, KOSPI futures, CD futures, gold futures and others through the Korea Exchange for clients and the Company s own accounts. Deposits for customers futures trading kept by the external custodian institution are accounted for separately from the Company s own account and related valuation gains or losses directly adjust deposits. Deposits for the Company s proprietary trading are also in custodian institution and valuation gains or losses from the proprietary trading are recorded in current operations. (l) Income Taxes Income tax on the income or loss for the year comprises current and deferred tax. Income tax is recognized in the statement of income except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted. Deferred tax is provided using the asset and liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the end of the reporting period. A deferred tax asset is recognized only to the extent that it is probable that future taxable income will be available against which the unused tax losses and credits can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized. The deferred tax amounts are presented as a net asset or liability. Changes in deferred taxes due to a change in the tax rate except for those related to items initially recognized outside profit or loss are recognized as income in the current year. (m) Earnings Per Share Earnings per share are calculated by dividing net income attributable to stockholders of the Company by the weighted-average number of shares outstanding during the period. Diluted earnings per share are determined by adjusting net income attributable to stockholders and the weighted-average number of shares outstanding for the effects of all dilutive potential shares, which comprise callable preferred stock and stock options granted to employees. (n) Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the Republic of Korea requires management to make estimates and assumptions that affect the amounts reported in the financial statements and related notes to financial statements. Actual results could differ from those estimates. 11
3. Cash and Cash Equivalents Cash and cash equivalents as of are as follows: Demand deposits W 453,091 2,406,267 4. Restricted Deposits Deposits which are restricted in use as of are summarized as follows: Reference W 595,450,096 526,454,256 Deposits for customers Deposits Warrant money for exchangetraded derivatives 233,380,836 175,231,030 Other deposits - 3,000 Pledged as security for maintaining checking account Pension plan assets (*) 1,857,795 1,558,736 Retirement pension Collective funds for default loss 4,014,804 5,287,186 W 834,703,531 708,534,208 (*) Excess pension plan assets of retirement and severance benefits amounting to W3,020 thousand were accounted for as other assets in 2010. 5. Deposits Deposits as of are summarized as follows: (In thousands of won) Depository 2011 2010 Deposits for customers (*1, 2) KSFC W 558,705,381 498,517,556 Other 39,642,522 29,802,194 Warrant money for exchange-traded Korea Exchange 186,281,988 123,292,453 Derivatives (*1, 2) Other 50,635,837 52,424,275 Other deposits (*1, 2) 66,100,000 33,003,000 W 901,365,728 737,039,478 (*1) The Company places deposits with financial institutions or futures commission merchants (FCM) of which the amount is equal to the customers marginal deposits for its transactions of exchangetraded derivatives received from clients who are transacting exchange-traded derivatives through the Company. Accordingly, marginal deposits are restricted in use under the Financial Investment Services and Capital Markets Act. (*2) A portion of deposits for self-dealing amounting to W72,535 million are not restricted. 12
6. Available-for-sale Securities (a) Available-for-sale securities as of are summarized as follows: Book value (In thousands of won) Cost Fair value (*) 2011 2010 Equity securities Korea Exchange W 3,000,000 11,728,881 11,728,881 9,558,977 Book value (In thousands of won) Face value Fair value (*) 2011 2010 Dept securities Government & public bonds W 31,000,000 27,956,499 27,956,499 - (*) The fair value is estimated using price provided by NICE Pricing Service, Inc. (b) Changes in unrealized gains for the years ended were as follows: (In thousands of won) 2011 Beginning balance Increase Decrease Ending balance Unrealized gain W 6,558,977 2,365,940 32,400 8,892,517 Deferred tax effect (1,442,975) (520,507) (7,128) (1,956,354) W 5,116,002 1,845,433 25,272 6,936,163 2010 Beginning balance Increase Decrease Ending balance Unrealized gain W 5,522,243 1,036,734-6,558,977 Deferred tax effect (1,214,894) (228,081) - (1,442,975) 7. Held-to-maturity Securities W 4,307,349 808,653-5,116,002 (a) Held-to-maturity securities as of March 31, 2010 are summarized as follows: (In thousands of won) 2010 Face value Book value Corporate bond W 4,968,203 4,988,677 Government & public bonds 35,901,500 36,273,693 W 40,869,703 41,262,370 13
7. Held-to-maturity Securities, Continued (b) Maturities of debt securities as of March 31, 2010 are summarized as follows: (In thousands of won) 2010 Due within a year W - Due after one year through to two years 31,032,383 Due after two years through to three years 10,229,987 Due after three years through to four years - Due after four years - W 41,262,370 8. Allowance for Doubtful Accounts (a) The ratios of allowance for doubtful accounts as of are summarized as follows: Loans(*) W 5,229,703 6,455,158 Allowance for doubtful accounts 29,003 31,366 Ratio 0.55% 0.49% (*) Loans include accounts receivable and accrued income. (b) Changes in the allowance for doubtful accounts for the years ended were summarized as follows: Beginning balance W 31,366 173,372 Reversal of allowance for doubtful accounts (12,189) (212,191) Recovery of receivables 9,826 70,185 Ending balance W 29,003 31,366 14
9. Property and Equipment (a) Property and equipment at are summarized as follows: Property and equipment at cost W 4,169,736 2,971,803 Accumulated depreciation (2,101,261) (1,515,593) Property and equipment, net W 2,068,475 1,456,210 (b) Changes in property and equipment for the year ended March 31, 2011 were as follows: (In thousands of won) 2011 Book value as of Apr. 1, 2010 Acquisitions Disposals Depreciation Book value as of Mar. 31, 2011 Vehicles W 83,170 - - (28,516) 54,654 Furniture and fixtures 1,373,040 1,197,933 - (557,152) 2,013,821 W 1,456,210 1,197,933 - (585,668) 2,068,475 Changes in property and equipment for the year ended March 31, 2010 were as follows: (In thousands of won) 2010 Book value as of Apr. 1, 2009 Acquisitions Disposals Depreciation Book value as of Mar. 31, 2010 Vehicles W 111,685 - - (28,515) 83,170 Furniture and fixtures 622,368 1,180,926 (4,421) (425,833) 1,373,040 W 734,053 1,180,926 (4,421) (454,348) 1,456,210 10. Intangible Assets Changes in intangible assets for the year ended March 31, 2011 were as follows: (In thousands of won) 2011 Net balance at beginning of year Additions Amortization Net balance at beginning of year Development costs W 55,512 348,073 (74,384) 329,201 Other 161,542 524,942 (78,907) 607,577 W 217,054 873,015 (153,291) 936,778 15
10. Intangible Assets, Continued Changes in intangible assets for the year ended March 31, 2010 were as follows: (In thousands of won) 2010 Net balance at beginning of year Additions Amortization Net balance at beginning of year Development costs W 50,663 38,500 (33,651) 55,512 Other 54,885 173,800 (67,143) 161,542 11. Retirement and Severance Benefits W 105,548 212,300 (100,794) 217,054 (a) Changes in retirement and severance benefits for the years ended were as follows: Estimated retirement and severance benefits at W 1,558,805 1,501,301 beginning of year Accrual for retirement and severance benefits(*) 729,349 531,228 Payments (397,116) (473,724) Estimated retirement and severance benefits at end of year 1,891,038 1,558,805 Transfer to National Pension Fund (3,089) (3,089) Pension plan assets (1,857,795) (1,555,716) Net balance at end of year W 30,154 - (*) Accrual amount under defined benefit pension plan. (b) Details of accrual for retirement and severance benefits which was accounted for as general and administrative expenses for the years ended March, 31, 2011 and 2010 were as follows: Defined benefit pension W 729,349 531,228 Defined contribution pension 12,903 18,063 (c) Details of pension plan assets as of March, 31, 2011 and 2010 are as follows: W 742,252 549,291 (*) Deposits W 1,857,795 1,558,736 (*) Excess pension plan assets of retirement and severance benefits amounting to W3,020 thousand were accounted for as other assets in 2010. 16
12. Customers Marginal Deposits Customers marginal deposits as of are as follows: Domestic exchange-traded derivatives transactions W 607,584,476 613,265,214 Overseas exchange-traded derivatives transactions 221,246,456 88,419,972 Other 3,655,633 211,683 W 832,486,565 701,896,869 13. Assets and Liabilities Denominated in Foreign Currencies Assets and liabilities denominated in foreign currencies as of are summarized as follows: (In thousands of won except foreign currency) Foreign currency Translation into won 2011 2010 2011 2010 Assets: Deposits USD 188,090,347 65,858,033 W 208,253,632 74,472,264 JPY 475,205,246 521,501,968 6,329,211 6,350,225 EUR 1,856,592 2,721,974 2,902,744 4,132,528 GBP 321,578 1,026,524 572,174 1,750,306 HKD 22,510,175 12,043,855 3,201,622 1,754,067 CHF 476 10 574 10 SGD 56-49 - AUD 76,850 76,850 87,769 79,875 CAD 385-438 - Accounts receivable USD 926,907 35,569 1,026,272 40,221 JPY 9,500-127 - EUR 13,850 85,641 21,654 130,021 HKD 89,400-12,715 - Accrued income USD 672,425 1,288,263 744,509 1,456,768 JPY - 355,660-4,331 EUR - 2,968-4,507 GBP 76 2,058 135 3,509 HKD - 35,523-5,174 W 223,153,625 90,183,806 17
13. Assets and Liabilities Denominated in Foreign Currencies, Continued (In thousands of won except foreign currency) Liabilities: Customers marginal deposits (exchangetraded derivatives transactions) Customers marginal deposits (other) Foreign currency Translation into won 2011 2010 2011 2010 USD 188,049,591 65,640,556 W 208,208,507 74,226,341 JPY 470,995,126 521,223,428 6,273,137 6,346,833 EUR 1,863,393 2,807,615 2,913,378 4,262,550 GBP 312,648 1,026,524 556,286 1,750,306 HKD 22,543,676 12,043,855 3,206,387 1,754,067 SGD 56-49 - AUD 76,850 76,850 87,768 79,875 CAD 370-422 - CHF 434-522 - USD - 69,154-78,199 JPY 1,809,990 276,590 24,107 3,368 GBP 7,500-13,345 - Accrued expenses USD 131,984 260,850 146,133 294,969 EUR 1 21 1 33 HKD - 261-38 CAD - 1-1 14. Commitments and Contingencies W 221,430,042 88,796,580 (a) As of March 31, 2011, the Company has entered into a secured loan agreement with the Korea Securities Finance Corporation up to 50% of customers marginal deposits. (b) As of March 31, 2011, the customers securities are deposited in the Korea Exchange with the substitute price amounting to W664,162 million. (c) As of March 31, 2011, the Company carries a professional indemnity liability insurance up to W500 million with Samsung Fire & Marine Insurance Co., Ltd. (d) The Company has a guarantee agreement with Kookmin Bank and Industrial Bank of Korea in relation to customers marginal deposits. The Company recognized commissions and fees amounted to W221 million for the year ended March 31, 2011. (e) The Company has a credit-line agreement amounts W6,000 million with Woori Bank. (f) The Company s significant pending litigation as of March 31, 2011 are as follows: (In thousands of won) Court Plaintiff Defendant Descriptions Amount of damage claim Progress Busan Eastern District Court Park Hyo Man Samsung Futures, Inc. Claim for Damages 650,000 In progress The Company forecasts there would be no material effect on the financial statements as a consequence of the litigation. 18
15. Retained Earnings Retained earnings as of are summarized as follows: Legal reserve W 2,375,000 1,875,000 Voluntary reserve 819,236 819,236 Unappropriated retained earnings 82,156,873 67,624,296 (g) Legal reserve as of are summarized as follows: W 85,351,109 70,318,532 Legal reserve W 1,875,000 1,375,000 Reserve for electronic banking incident 500,000 500,000 (i) Legal reserve W 2,375,000 1,875,000 The Korean Commercial Code requires the Company to appropriate as legal reserve an amount equal to at least 10% of cash dividends for each accounting period until the reserve equals 50% of stated capital. The legal reserve may be used to reduce a deficit or may be transferred to common stock in connection with a free issue of shares. (ii) Reserve for electronic banking incidents The Electronic Banking Trading Act requires the Company to appropriate retained earnings or be insured for loss resulting from electronic banking incidents. Accordingly, the Company has reserved W500 million as reserve for electronic banking incidents. (h) Voluntary reserve as of are summarized as follows: Reserve for business improvement W 670,000 670,000 Reserve for loss on futures transactions 149,236 149,236 W 819,236 819,236 19
15. Retained Earnings, Continued (i) Reserve for business improvement Until 2002, the corporate tax law required the Company to appropriate into a reserve an excess amount of retained income over reasonable retained income. Effective 2003, the above requirement has been removed and the Company is no longer required to appropriate a reserve for business development. (ii) Reserve for loss on futures transactions Until 2008 under the provisions of Article 50 of the Korea Futures Trading Act, the Company has reserved 0.1% of the brokerage commission as a reserve for loss on futures transactions. Effective February, 2009 under the Financial Investment Services and Capital Markets Act, the Company is no longer required to establish the reserve for loss on futures transactions. 16. General and Administrative Expenses Details of general and administrative expenses for the years ended were as follows: Salaries W 11,544,713 10,289,851 Accrual for retirement and severance benefits 742,252 549,291 Employee welfare 1,469,815 1,363,373 Depreciation 585,668 454,348 Amortization 153,291 100,794 Travel 320,800 276,768 Supplies 23,023 47,904 Taxes and dues 1,000,469 908,379 Electronic data processing 2,642,017 2,589,673 Commissions and fees 882,721 1,244,943 Rent 1,793,586 1,271,566 Entertainment 771,244 819,464 Other 1,006,328 2,804,078 W 22,935,927 22,720,432 20
17. Value Added Information The components of general and administrative expense which are necessary in calculating added value for the years ended were as follows: Salaries W 11,544,713 10,289,851 Provision for retirement and severance benefits 742,252 549,291 Employee welfare 1,469,815 1,363,373 Rent 1,793,586 1,271,566 Depreciation 585,668 454,348 Amortization 153,291 100,794 Taxes and dues 1,000,469 908,379 18. Income Taxes (a) The Company is subject to income taxes on taxable income at the following normal tax rates. Tax rate Taxable income 2008 2009 2010 & 2011 Thereafter Up to \200 million 12.1% 12.1% 11.0% 11% Over \200 million 27.5% 24.2% 24.2% 22% (b) The components of income taxes for the years ended were as follows: Current W 6,560,167 5,830,132 Deferred 478,689 174,742 Additional income taxes for prior periods - 83,555 Income tax refunds - (3,443) Tax expense directly charged to capital adjustments (513,379) (228,081) Income taxes W 6,525,477 5,856,905 21
18. Income Taxes, Continued (c) The income tax expense calculated by applying statutory tax rates to the Company s income before income taxes for the year differs from the actual tax expense in the statements of income for the years ended for the following reasons: Income before income taxes W 26,558,054 23,364,785 Expense for income taxes at normal tax rates 6,400,649 5,630,078 Tax effects of permanent differences 124,527 144,584 Change in the income tax rate - (1,498) Additional income taxes for prior periods - 83,555 Other 301 186 Income tax expense W 6,525,477 5,856,905 Effective tax rate 24.57% 25.07% (d) Deferred tax assets have been recognized as the Company has determined it is probable that future profits will be available against which the Company can utilize the related temporary difference. (e) Deferred liabilities that were directly charged or credited to accumulate other comprehensive income as of are as follows: (In thousands of won) Temporary differences 2011 2010 Deferred tax liabilities Temporary differences Deferred tax liabilities Unrealized gain on valuation of available-for-sale securities W 8,892,517 (1,956,354) 6,558,977 (1,442,975) (f) As of March 31, 2011, details of gross deferred tax assets (liabilities) are as follows: (In thousands of won) Temporary differences at Mar. 31, 2011 Deferred tax assets (liabilities) Assets Retirement and severance benefits W 1,320,638 290,540 Uncollectible account 739,738 162,742 Gain on foreign currency transactions 9,876 2,390 2,070,252 455,672 Liabilities Accrued income (154,501) (37,389) Pension plan assets (1,320,638) (290,540) Available-for-sale securities (8,892,517) (1,956,354) (10,367,656) (2,284,283) Net deferred tax liability W (8,297,404) (1,828,611) 22
19. Earnings Per Share (a) Basic earnings per share for the years ended were as follows: (In won, except share information) 2011 2010 Net income W 20,032,577,059 17,507,880,423 Weighted-average number of common shares outstanding 2,500,000 2,500,000 Earnings per share W 8,013 7,003 (b) The Company has no shares or bonds which would be able to be converted into common stock and diluted earning per shares is equal to basic earning per share. 20. Dividends Dividends as a percentage of net income and par value for the years ended were as follows: (In thousands of won, except par value) 2011 2010 Dividend amount W 5,000,000 5,000,000 Net income W 20,032,577 17,507,880 Dividends as a percentage of net income 24.96% 28.56% Par value per share in won W 10,000 10,000 Dividends as a percentage of par value 20% 20% 23
21. Related Party Transactions (a) Details of parent and subsidiary relationships as of March 31, 2011 were as follows: Parent Samsung Securities Co., Ltd. Control relationship Parent (b) Significant transactions which occurred in the normal course of business with related companies for the years ended March 31, 2011and 2010 were summarized as follows: (In thousands of won) 2011 Brokerage commissions Interest income General and administrative expense Name Parent: Samsung Securities Co., Ltd. W 1,608,141 140 391,848 Other: Samsung Life Insurance Co., Ltd 325,508 9,532 1,737,523 Samsung Fire & Marine Insurance Co., Ltd. 480-200,219 Samsung SDS Co., Ltd - - 2,167,617 imarket Korea Inc. - - 2,500 Samsung Card Co., Ltd. - - 112,330 Samsung Everland Co., Ltd. - - 8,672 Samsung Heavy Industries Co., Ltd. 9,599 242,777 - Other affiliated companies - - 18,038 W 1,943,728 252,449 4,638,747 (In thousands of won) 2010 Brokerage commissions Interest income General and administrative expense Name Parent: Samsung Securities Co., Ltd. W 810,449 55 169,489 Other: Samsung Life Insurance Co., Ltd 194,638 7,531 733,673 Samsung Fire & Marine Insurance Co., Ltd. - - 170,533 Samsung SDS Co., Ltd - - 1,169,101 imarket Korea Inc. - - 5,750 Samsung Networks Inc. - - 17,096 Samsung Card Co., Ltd. - - 114,233 Samsung Everland Co., Ltd. - - 1,520,350 Samsung Heavy Industries Co., Ltd. - 290,240 - Other affiliated companies - - 32,669 W 1,005,087 297,826 3,932,894 24
21. Related Party Transactions, Continued (c) Account balances with related companies as of March 31, 2011and 2010 are summarized as follows: (In thousands of won) 2011 Receivables Payables Name Loans Pension plan assets Other Accrued expenses Parent: Samsung Securities Co., Ltd. W - 1,531,500 6,001 8,356 Other: Samsung Life Insurance Co., Ltd - 326,295 928,500 4,201 Samsung SDS Co., Ltd - - - 1,536,489 Samsung Everland Co., Ltd. - - 860,000 - Samsung Fire & Marine Insurance Co., Ltd. - - - 1 Officers and employees 579,250 - - - W 579,250 1,857,795 1,794,501 1,549,047 (In thousands of won) 2010 Receivables Payables Name Loans Pension plan assets Other Accrued expenses Parent: Samsung Securities Co., Ltd. W - 1,282,770 6,720 20,705 Other: Samsung Life Insurance Co., Ltd - 275,966 899,749 13,097 Samsung SDS Co., Ltd - - - 71,174 Samsung Everland Co., Ltd. - - 600,000 - Samsung Heavy Industries Co., Ltd. - - 4,994,394 - Officers and employees 636,610 - - - W 636,610 1,558,736 6,500,863 104,976 22. Comprehensive Income Comprehensive income for the years ended were as follows: Net income W 20,032,577 17,507,880 Change in fair value of available-for-sale securities, net of tax effect of W(-)513,379 thousand in 2011 and W(-)228,081 thousand in 2010 1,820,161 808,653 Comprehensive income W 21,852,738 18,316,533 25
23. Non-cash activities Significant non-cash activities for the years ended were as follows: Recovery of receivables W 9,826 70,184 Gain on valuation of available-for-sale securities 2,333,540 1,036,734 24. Date of Authorization for Issue The 2011 financial statements were authorized for issue on June 2, 2011, at the Board of Directors Meeting. 25. Adoption of Korean International Financial Report Standards(the K-IFRS ) (a) K-IFRS adoption plan and transition process The Company will prepare and disclose its financial statements in accordance with K-IFRS from the 2011 fiscal year. The Company formed a task force and has initiated the transition process toward K- IFRS such as analysis of K-IFRS impact on current accounting, financial reporting policies and system, establishment and improvement on accounting system and financial infrastructure and employee training. In addition, the Company has reported to the board of directors and the management on its updated plans and process in the course of K-IFRS adoption. (b) The significant expected differences between the accounting policies The significant expected difference between the accounting policies chosen by the Company under K- IFRS and under current Korean-GAAP are employee benefits, allowance for doubtful accounts, leasehold deposits, commission income/expenses on foreign currency exchange, and deferred taxes. Such differences would vary with the result of a supplementary analysis. (c) Summary of the effects of K-IFRS adoption on the Company s financial position and the results of its operation The company did not prepare financial impacts from K-IFRS adoption as of April 1, 2010(the transition date), and as of and for the year ended March 31, 2011. The Company will analyze the financial impact from K-IFRS in the fiscal year of 2011 26
Internal Accounting Control System Review Report English Translation of a Report Originally Issued in Korean To the President of Samsung Futures, Inc.: We have reviewed the accompanying Report on the Operations of Internal Accounting Control System ( IACS ) of Samsung Futures, Inc. (the Company ) as of March 31, 2011. The Company's management is responsible for designing and maintaining an effective IACS and for its assessment of the effectiveness of the IACS. Our responsibility is to review management's assessment and issue a report based on our review. In the accompanying report of management s assessment of the IACS, the Company s management stated: Based on the assessment of the operations of the IACS, no material weaknesses have been identified as of March 31, 2011, in all material respects, in accordance with the IACS Standards established by the IACS Operations Committee. We conducted our review in accordance with IACS Review Standards, issued by the Korean Institute of Certified Public Accountants. Those Standards require that we plan and perform the review to obtain assurance of a level less than that of an audit as to whether Report on the Operations of Internal Accounting Control System is free of material misstatement. A review consists principally of obtaining an understanding of the Company s IACS, inquiries of the Company personnel about the details of the report, and tracing to related documents we considered necessary in the circumstances. We have not performed an audit and, accordingly, we do not express an audit opinion. However, as the Company is a privately-held large enterprise, the design, operations and assessment of its IACS are limited compared with those of publicly-held large enterprise, under Chapter 5, Application for Small and Medium-sized Enterprises of the IACS Standards. As such, we performed our review in accordance with Chapter 14, Review Standards for Small and Medium-sized Enterprises. A Company's IACS is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, however, IACS may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on our review, nothing has come to our attention that the Report on the Operations of Internal Accounting Control System as of March 31, 2011 is not prepared, in all material respects, in accordance with Chapter 5, Application for Small and Medium-sized Enterprises of the IACS Standards. 27
This report applies to the Company s IACS in existence as of March 31, 2011. We did not review the Company s IACS subsequent to March 31, 2011. This report has been prepared for Korean regulatory purposes, pursuant to the External Audit Law, and may not be appropriate for other purposes or for other users. KPMG Samjong Accounting Corp. Seoul, Korea June 2, 2011 Notice to Readers This report is annexed in relation to the audit of the financial statements as of March 31, 2011 and the review of internal accounting control system pursuant to Article 2-3 of the Act on External Audit for Stock Companies of the Republic of Korea. 28
Report on the Operations of Internal Accounting Control System To the Board of Directors and Internal Auditor of Samsung Futures, Inc. I, as the Internal Accounting Control Officer ( IACO ) of Samsung Futures, Inc. (the Company ), have assessed the status of the design and operations of the Company s Internal Accounting Control System ( IACS ) as of March 31, 2011. The Company s management including IACO is responsible for the design and operations of its IACS. I, as the IACO, have assessed whether the IACS has been effectively designed and is operating to prevent and detect any error or fraud which may cause any misstatement of the financial statements, for the purpose of establishing the reliability of financial statement preparation and presentation for external uses. I, as the IACO, applied Chapter 5, Application for Small and Medium-sized Enterprises of IACS Standards for the assessment of the design and operations of the IACS. Based on the assessment of the operations of the IACS, no material weaknesses have been identified as of March 31, 2011, in all material respects, in accordance with the IACS Standards established by the IACS Operations Committee. So-Hyun, Jung, Internal Accounting Control Officer Yong Eum Ban, President and CEO May 2, 2011 29