Samsung Futures Inc. Financial statements for the years ended December 31, 2017 and 2016 with the independent auditors report Samsung Futures Inc.
Table of Contents Independent auditors report Financial statements Statements of financial position Statements of profit or loss and other comprehensive income Statements of changes in equity Statements of cash flows Notes to the financial statements Independent auditors review report on Internal control over financial reporting Report on the operations of the Internal Control Financial Reporting Page 1 2 3 4 6 54 55
Ernst & Young Han Young Taeyoung Building, 111, Yeouigongwon-ro, Yeongdeungpo-gu, Seoul 07241 Korea Tel: +82 2 3787 6600 Fax: +82 2 783 5890 ey.com/kr Independent auditors report The Shareholders and Board of Directors Samsung Futures Inc. We have audited the accompanying financial statements of Samsung Futures Inc. (the Company ), which comprise the statement of financial position as at December 31, 2017, and the statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management's responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Korean International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error. Auditors responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2017, and its financial performance and cash flows for the year then ended in accordance with Korean International Financial Reporting Standards. Other matter The financial statements of the Company as at December 31, 2016 and for the year then ended were audited by Deloitte Anjin LLC who expressed an unqualified opinion on those statements on February 15, 2017. February 14, 2018 This audit report is effective as at February 14, 2018, the independent auditors report date. Accordingly, certain material subsequent events or circumstances may have occurred during the period from the date of the independent auditors report to the time this report is used. Such events and circumstances could significantly affect the accompanying financial statements and may result in modifications to this report. A member firm of Ernst & Young Global Limited
Samsung Futures Inc. Financial statements for the years ended December 31, 2017 and 2016 The accompanying financial statements, including all footnotes and disclosures, have been prepared by, and are the responsibility of, the Company. Cha, Young Soo President and Chief Executive Officer Samsung Futures Inc.
Statements of financial position as at December 31, 2017 and 2016 Assets December 31, December 31, 2017 2016 (Korean won in thousands) Cash and cash equivalents and deposits (Notes 4, 5, 6, 28 and 30) 1,676,652,730 1,714,108,175 Financial assets at fair value through profit or loss ( FVTPL ) (Notes 7, 29 and 30) 9,962,002 14,998,507 Available-for-sale ( AFS ) financial assets (Notes 6, 8, 27, 29 and 30) 74,664,021 80,502,978 Loans and receivables (Notes 9, 28, 29 and 30) 183,109,572 208,402,230 Property and equipment (Note 10) 2,342,529 2,906,591 Intangible assets (Note 11) 2,921,051 3,014,812 Other assets (Note 12) 494,810 622,594 Total assets 1,950,146,715 2,024,555,888 Liabilities Depository liabilities (Notes 13, 28, 29 and 30) 1,731,870,158 1,842,997,912 Other liabilities (Notes 15, 28, 29 and 30) 42,471,328 12,746,460 Defined benefit liabilities, net (Note 14) 151,883 289,770 Current tax liabilities 1,797,867 2,903,615 Deferred tax liabilities (Note 25) 714,704 915,845 Total liabilities 1,777,005,940 1,859,853,602 Equity Capital stock (Note 16) 25,000,000 25,000,000 Other components of equity (Note 17) 5,444,267 5,824,910 Retained earnings (Note 18) 142,696,508 133,877,376 Total equity 173,140,775 164,702,286 Total liabilities and equity 1,950,146,715 2,024,555,888 The accompanying notes are an integral part of the financial statements. 1-1-
Statements of profit or loss and other comprehensive income for the years ended December 31, 2017 and 2016 2017 2016 (Korean won in thousands) Operating revenues: Commission income (Notes 19 and 28) 39,429,803 48,746,666 Interest income (Notes 20 and 28) 16,522,872 14,796,029 Gains related to financial assets at FVTPL 349,632 305,675 Gains on disposal of AFS financial assets 492,961 749,009 Gains on disposal of derivatives 3,522 28,139 Other income (Note 21) 145,156 417,331 56,943,945 65,042,850 Operating expenses: Commission expense (Note 19) 13,216,215 16,936,964 Interest expense (Notes 20 and 28) 3,569,329 4,050,306 Losses on valuation of financial assets at FVTPL 37,998 17,108 Losses on disposal of AFS financial assets 302,786 - Losses on disposal of derivatives 61,318 132,722 Selling, general and administrative expenses (Notes 22, 27 and 28) 23,427,570 24,890,173 Other expenses (Note 21) 242,579 133,685 40,857,794 46,160,957 Operating income (Note 23) 16,086,152 18,881,892 Non-operating income (Note 24) 25,548 1,055,274 Non-operating expenses (Note 24) 8,751 443,749 Net income before income tax expense 16,102,948 19,493,416 Income tax expense (Note 25) 3,533,817 4,329,238 Net income (Note 18) 12,569,132 15,164,178 Other comprehensive income, net of tax: Item not subsequently reclassified to profit or loss: Remeasurement of the net defined benefit liabilities (Note 14) 73,167 (93,000) Items subsequently reclassified to profit or loss: Gains (losses) on valuation of AFS financial assets (Note 8) (453,810) (461,135) (380,643) (554,135) Total comprehensive income 12,188,489 14,610,043 Earnings per share (Korean won): Basic and diluted earnings per share (Note 26) 5,028 6,066 The accompanying notes are an integral part of the financial statements. 2-2-
Statements of changes in equity for the years ended December 31, 2017 and 2016 Capital stock Other components of equity Retained earnings Total equity (Korean won in thousands) Balances as at January 1, 2016 25,000,000 6,379,045 122,463,197 153,842,242 Dividends (Note 18) - - (3,750,000) (3,750,000) Net income - - 15,164,178 15,164,178 Remeasurement of the net defined benefit liabilities - (93,000) - (93,000) Losses on valuation of AFS financial assets - (461,135) - (461,135) Balances as at December 31, 2016 25,000,000 5,824,910 133,877,376 164,702,286 Balances as at January 1, 2017 25,000,000 5,824,910 133,877,376 164,702,286 Dividends (Note 18) - - (3,750,000) (3,750,000) Net income - - 12,569,132 12,569,132 Remeasurement of the net defined benefit liabilities - 73,167-73,167 Losses on valuation of AFS financial assets - (453,810) - (453,810) Balances as at December 31, 2017 25,000,000 5,444,267 142,696,508 173,140,775 The accompanying notes are an integral part of the financial statements. 3-3-
Statements of cash flows for the years ended December 31, 2017 and 2016 2017 2016 (Korean won in thousands) Cash flows from operating activities: Net income 12,569,132 15,164,178 Adjustments: Interest income (16,522,872) (14,796,029) Gains on valuation of financial assets at FVTPL - (15,615) Gains on disposal of financial assets at FVTPL (349,632) - Gains on disposal of AFS financial assets (492,961) (749,009) Reversal of bad debt allowance (19,622) (76) Reversal of other allowances - (187,507) Gains on foreign currency translation (31) (48,284) Dividend income (106,530) (115,756) Gains on disposal of property, plant and equipment (531) (54) Reversal of impairment losses on intangible assets (16,000) - Interest expense 3,569,329 4,050,306 Losses on valuation of financial assets at FVTPL 37,998 17,108 Losses on disposal of AFS financial assets 302,786 - Losses on foreign currency translation 44,205 2,460 Retirement benefits 695,371 689,105 Fringe benefits 32,389 105,532 Rent 33,811 51,069 Depreciation 927,794 639,458 Amortization 410,946 405,127 Losses on disposal of property, plant and equipment - 417,607 Impairment losses on intangible assets - 22,000 Income tax expense 3,533,817 4,329,238 (7,919,734) (5,183,320) Changes in operating assets and liabilities: Increase in deposits (1,996,101) (187,186,649) Decrease in financial assets at FVTPL 5,348,139 5,225,434 Decrease (increase) in collective fund for default loss 30,750,107 (24,543,341) Decrease in loans 33,740 35,480 Decrease in payments made on behalf of others - 76 Decrease (increase) in accounts receivable 21,247,862 (50,914,972) Decrease (increase) in accrued income 99,866 (295,823) Decrease in prepayments - 74,800 Decrease in prepaid expenses 85,169 49,851 Increase (decrease) in depository liabilities (69,604,039) 243,549,278 Increase (decrease) in accounts payable 33,715,395 (11,291,094) Increase (decrease) in accrued expenses (4,010,485) 738,052 Increase (decrease) in withheld depository liabilities 19,958 (11,378) Payment of retirement benefits (381,114) (532,930) Increase in plan assets (390,730) (250,227) 14,917,767 (25,353,443) Interest received 16,409,533 13,773,566 Dividends received 106,530 115,756 Interest paid (3,569,329) (4,199,599) Income taxes paid (4,733,344) (4,165,871) Net cash provided by (used in) operating activities 27,780,555 (9,848,732) (Cont d) 4-4-
Statements of cash flows for the years ended December 31, 2017 and 2016 (Cont d) 2017 2016 (Korean won in thousands) Cash flows from investing activities: Proceeds from disposal of AFS financial assets 33,718,321 16,473,400 Proceeds from disposal of tangible assets 535 55 Decrease in deposits 1,761,343 39,081 Proceeds from disposal of intangible assets 49,056 - Acquisition of AFS financial assets (58,765,000) - Acquisition of tangible assets (363,736) (542,063) Acquisition of intangible assets (350,240) (192,040) Increase in deposits (100,915) (2,152,802) Net cash provided by (used in) investing activities (24,050,637) 13,625,631 Cash flows from financing activities: Payment of dividends (3,750,000) (3,750,000) Net cash used in financing activities (3,750,000) (3,750,000) Net increase (decrease) in cash and cash equivalents (20,082) 26,899 Cash and cash equivalents at the beginning of the year 128,474 101,575 Cash and cash equivalents at the end of the year 108,392 128,474 The accompanying notes are an integral part of the financial statements. 5-5-
Notes to financial statements as at and for the years ended December 31, 2017 and 2016 1. General Samsung Futures Inc. (the Company ) was established on October 8, 1992, to engage primarily in exchange-traded derivatives dealing and brokerage on behalf of customers. On December 31, 1998, the Company obtained an approval by the Ministry of Strategy and Finance for the services and commenced its operations in 1999. The Company is wholly owned by Samsung Securities Co., Ltd. as at December 31, 2017. Shareholder Amount of shares Percentage Samsung Securities Co., Ltd. 2,500,000 100.00% 2. Summary of significant accounting policies (1) Basis of preparation The Company prepares statutory financial statements in the Korean in accordance with Korean International Financial Reporting Standards (KIFRS) enacted by the Act on External Audit of Stock Companies. The accompanying financial statements have been translated into English from the Korean language financial statements. In the event of any differences in interpreting the financial statements or the independent auditors report thereon, the Korean version, which is used for regulatory reporting purposes, shall prevail. The principal accounting policies are set out below. Except for the effect of the amendments to KIFRSs and new interpretations set out below, the principal accounting policies used to prepare the financial statements as at and for the year ended December 31, 2017, are consistent with the accounting policies used to prepare the financial statements as at and for the year ended December 31, 2016. The accompanying financial statements have been prepared on the historical cost basis, except for certain non-current assets and financial instruments that are measured at fair values, as explained in the accounting policies below. Historical cost is based on the fair values of the consideration given. 1) Amendments to KIFRS and new interpretations that affected the Company s accounting policies for the current year are as follows. Amendments to KIFRS 1007 Statement of Cash Flows The amendments require that changes in liabilities arising from financial activities are disclosed. The amendments have no material impact on the Company s financial statements. Amendments to KIFRS 1012 Income Taxes The amendments clarify that unrealized losses on fixed-rate debt instruments measured at fair value and measured at cost for tax purposes give rise to a deductible temporary difference, regardless of whether the holder expects to recover the carrying amount of the debt instrument by sale, or by use, and that the estimate of probable future taxable profit may include the recovery of some of assets for more than their carrying amount. When an entity assesses whether there will be sufficient taxable profit, it should compare the deductible temporary differences with future taxable profit that excludes tax deductions resulting from the reversal of those deductible temporary differences. The amendments have no material impact on the Company s financial statements. 2) New and revised KIFRSs in issue, but not yet effective. The Company has not applied the following new and revised KIFRSs that have been issued, but are not yet effective. 6-6-
2. Summary of significant accounting policies (cont d) Amendments to KIFRS 1102 Share-Based Payment The amendments include 1) when measuring the fair value of share-based payment, the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payment should be consistent with the measurement of equity-settled share-based payment, 2) share-based payment transaction in which an entity settles the share-based payment arrangement, net by withholding a specified portion of the equity instruments per statutory tax withholding requirements would be classified as equity-settled in its entirety, if otherwise, would be classified as equity-settled without the net settlement feature and 3) when a cash-settled share-based payment changes to an equity-settled share-based payment because of modifications of the terms and conditions, the original liability recognized is derecognized and the equity-settled share-based payment is recognized at the modification date fair value. Any difference between the carrying amount of the liability at the modification date and the amount recognized in equity at the same date would be recognized in profit and loss immediately. The amendments are effective for annual periods beginning on or after January 1, 2018. Amendments to KIFRS 1109 Financial Instruments This standard will supersede KIFRS 1039, Financial Instruments: Recognition and Measurement. The amendments are effective for annual periods beginning on or after January 1, 2018. KIFRS 1109 will generally be applied retrospectively; however, the Company plans to take advantage of the exemption allowing it not to restate the comparative information for prior periods with respect to classification and measurement, including impairment changes. New hedge accounting requirements will generally be applied prospectively, except for certain exemptions including the accounting for the time value of options. Key features of the new standard, KIFRS 1109, are 1) classification and measurement of financial assets that reflects the business model, in which the assets are managed and their cash flow characteristics; 2) impairment methodology that reflects expected credit loss (ECL) model for financial assets; and 3) expanded scope of hedged items and hedging instruments, which qualify for hedge accounting and changes in assessment method for effect of hedging relationships. With the introduction of KIFRS 1109, necessary implementation procedures include preparation of the financial impact analysis, establishment of accounting policies and system and its stabilization. The financial statements of the year of adoption is affected not only by the accounting policies judgmentally set forth by the management, but also by financial instruments that the Company holds or the economic conditions during the period. The Company prepared for the initial adoption of KIFRS 1109 in accordance with the following schedule: Stage 1 Stage 2 Stage 3 Plans Financial impact analysis and the establishment of accounting policies Modification of internal management process and the establishment and change of system Stabilization of system and the calculation of financial information in accordance with KIFRS 1109 Periods July, 2016 March, 2017 April, 2017 June, 2017 After July, 2017 7-7-
2. Summary of significant accounting policies (cont d) A. Classification and measurement of financial assets When the Company adopts new standard of KIFRS 1109, the Company classifies financial assets as seen in the table below, based on the entity s business model for managing the financial assets and the contractual cash flow characteristics of the financial asset: as measured at amortized cost, fair value through other comprehensive income ( FVTOCI ) or FVTPL. If the host contract is determined in a hybrid contract, an entity may classify the entire hybrid contract as a financial asset rather than separating the embedded derivative from the host contract. Business model Objective is to hold financial assets in order to collect contractual cash flows The financial asset is held within a business model, whose objective is achieved by both collecting contractual cash flows and selling financial assets Objective is to sell financial assets and others Contractual cash flow characteristic Solely payments of principal Otherwise and interest Measured at amortized cost (*1) FVTOCI (*1) FVTPL FVTPL (*2) (*1) An entity may designate as measured at FVTPL to eliminate or significantly reduce an accounting mismatch (irrevocable). (*2) An entity may designate as FVTOCI for investments in equity instruments that are not held for trading (irrevocable). As under KIFRS 1109, the conditions of financial assets to be measured at amortized cost or FVTOCI are stricter than under the existing standard, KIFRS 1039, the adoption of KIFRS 1109 would potentially increase the proportion of financial assets that are measured at FVTPL, it may increases volatility in the Company s profit or loss. A debt instrument is measured at amortized cost, if it meets both of the following conditions and is not designated as at FVTPL: 1) the asset is held within a business model, whose objective is to hold assets to collect contractual cash flows; and 2) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Also, a debt instrument is measured at FVTOCI, if it meets both of the following conditions and is not designated as at FVTPL: 1) the asset is held within a business model, whose objective is achieved by both collecting contractual cash flows and selling financial assets; and 2) the contractual terms of the financial asset give rise on specified dates to cash flow that are solely payments of principal and interest on the principal amount outstanding. On initial recognition of equity investment that is not held for trading, the Company may irrevocably elect to present subsequent changes in fair value in other comprehensive income, and will not reclassify those items in other comprehensive income to profit or loss subsequently. A financial asset is measured at FVTPL, if debt instrument meets either of the following conditions and the equity investment is not designated as at FVTOCI: 1) the asset is held within a business model, whose objective is achieved by selling financial assets; or 2) the contractual terms of the financial asset give rise on specified dates to cash flow that are not solely payments of principal and interest on the principal amount outstanding. B. Classification and measurement of financial liabilities. For financial liabilities designated as at FVTPL using the fair value option, KIFRS 1109 requires the effects of changes in fair value attributable to an entity s credit risk to be recognized in other comprehensive income. The amounts presented in other comprehensive income are not subsequently transferred to profit or loss, unless this treatment of the credit risk component creates or enlarges a measurement mismatch. 8-8-
2. Summary of significant accounting policies (cont d) As a portion of fair value change, which was recognized in profit or loss under the existing standard, KIFRS 1039 will be presented in other comprehensive income under KIFRS 1109, profit or loss related to valuation of financial liabilities is likely to decrease. C. Impairment: Financial assets and contract assets Under KIFRS 1039, the impairment is recognized only when there is an objective evidence of impairment, based on incurred loss model, but under KIFRS 1109, impairment is recognized based on expected credit loss model for debt instrument, lease receivables, contract assets, loan contracts and financial guarantee contracts that are measured at amortized cost or FVOCI. In KIFRS 1109, financial assets are classified into three stages depending on the extent of increase in the credit risk on financial instruments since initial recognition. The loss allowance is measured at an amount equal to 12- month expected credit losses or the lifetime expected credit losses, and therefore, credit losses will be recognized earlier than under the incurred loss model of KIFRS 1039. Stage 1 Stage 2 Stage 3 Case (*1) Non-significant increase in credit risk since initial recognition (*2) Significant increase in credit risk since initial recognition Credit-impaired financial assets The loss allowance Twelve-month expected credit losses: The portion of lifetime expected credit losses that represent the expected credit losses that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Lifetime expected credit losses: The expected credit losses that result from all possible default events over the expected life of a financial instrument. (*1) A loss allowance for lifetime expected credit losses is required for a financial instrument if the credit risk on that financial instrument has increased significantly since initial recognition. It is also required for contract assets or trade receivables that are not, according to KIFRS 1115 Revenue from Contracts with Customers, considered to contain a significant financing component. Additionally, the Company can elect an accounting policy of recognizing lifetime expected credit losses for all contract assets and/or all trade receivables, including those that contain a significant financing component or lease receivables. (*2) If the financial instrument has low credit risk at the reporting date, the Company may assume that the credit risk has not increased significantly since initial recognition. Under KIFRS 1109, an entity shall only recognize the cumulative changes in lifetime expected credit losses since initial recognition as a loss allowance for purchased or originated credit-impaired financial assets. D. Hedge Accounting The new standard, KIFRS 1109, retains the mechanics of hedge accounting in KIFRS 1039 (fair value hedge, cash flow hedge and hedge of a net investment in a foreign operation). Under the new model, it is possible for an entity to reflect its risk management activities on the financial statements by focusing on principlebased hedge effectiveness assessment instead of simply complying with a rule-based approach under the KIFRS 1039. As at December 31, 2016, the Company does not apply hedge accounting, and thus the application of these amendments has no impact on the disclosures or the amounts recognized in the Company s financial statements. 9-9-
2. Summary of significant accounting policies (cont d) Amendments to KIFRS 1115 Revenue from Contracts with Customers The core principle under KIFRS 1115 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments introduce a five-step approach to revenue recognition and measurement: 1) identify the contract with a customer, 2) identify the performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract and 5) recognize revenue when (or as) the entity satisfies a performance obligation. This standard will supersede KIFRS 1011, Construction Contracts; KIFRS 1018, Revenue; KIFRS 2113, Customer Loyalty Programs; KIFRS 2115, Agreements for the Construction of Real Estate; KIFRS 2118, Transfers of Assets from Customers; and KIFRS 2031, Revenue-Barter Transactions Involving Advertising Services. The amendments are effective for annual periods beginning on or after January 1, 2018. Existing KIFRS standards and interpretations, including KIFRS 1018, provide revenue recognition guidance by transaction types, such as sales of goods, rendering of services, interest income, royalty income, dividend income and construction revenue; however, under the new standard, KIFRS 1115, the five-step approach (Step 1: Identify the contract(s) with a customer, Step 2: Identify the performance obligations in the contract, Step 3: Determine the transaction price, Step 4: Allocate the transaction price to the performance obligations in the contract and Step 5: Recognize revenue when the entity satisfied a performance obligation) is applied for all types of contracts or agreements. The application of these amendments has no material impact on the disclosures or the amounts recognized in the Company s financial statements. The Company is expecting that the application of these amendments has no material impact on the Company s financial statements. The Company s financial statements were approved by the Board of Directors on January 22, 2018, and can be adjusted and approved by the general meeting of shareholders. (2) Revenue recognition 1) Commission income Commissions are recognized on the contract date. Financial service fees are recognized in accordance with the applicable accounting standard of financial instruments based on the nature of the fees applied and categorized as follows: fees that are an integral part of the effective interest of a financial instrument; the fees are generally recognized with effective interest rate method fees earned as services are provided; the fees are recognized as revenue as the services are provided fees that are earned on the execution of a significant act; the fees are recognized as revenue when the significant act has been completed 2) Interest income and expenses Interest income and expense for all interest-bearing financial instruments, except for held for trading or designated at FVTPL, are recognized within interest income and interest expenses in the statements of comprehensive income using the effective interest rate method. The effective interest rate is the rate that exactly discounts estimated future cash receipts to the net carrying amount through the expected maturity of the financial instrument. Interest on impaired financial assets is recognized using the original effective interest rate. 3) Net gains and losses on financial instruments classified as held for trading Net gains and losses on financial instruments classified as held for trading consist of gains and losses arising from changes in fair value, and selling financial assets and liabilities held for trading. 10-10-
2. Summary of significant accounting policies (cont d) (3) Lease Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. 1) The Company as lessor Amounts due from lessees under finance leases are recognized as receivables at the amount of the Company s net investment in the leases. Finance lease income is allocated to accounting periods, so as to reflect a constant periodic rate of return on the Company s net investment outstanding in respect of the leases. Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized on a straight-line basis over the lease term. 2) The Company as lessee Assets held under finance leases are initially recognized as assets of the Company at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statements of financial position as a finance lease obligation. Lease payments are apportioned between finance expenses and reduction of the lease obligation, so as to achieve a constant rate of interest on the remaining balance of the liability. Contingent rentals are recognized as expenses in the periods in which they are incurred. Operating lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognized as an expense in the period in which they are incurred. In the event that lease incentives are received to enter into operating leases, such incentives are recognized as a liability. The aggregate benefit of incentives is recognized as a reduction of rental expense on a straightline basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. (4) Foreign currencies The Company s financial statements are presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the financial statements, the results and financial position of the Company are expressed in Korean won, which is the functional currency of the entity and the presentation currency for the financial statements. In preparing the financial statements of the Company, transactions in currencies other than the entity s functional currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences are recognized in profit or loss in the period in which they arise, except for: exchange differences on foreign currency borrowings relating to assets under construction for future productive use, which are included in the cost of those assets when they are regarded as an adjustment to interest costs on those foreign currency borrowings and exchange differences on transactions entered into in order to hedge certain foreign currency risks (see Note 2 (14) below for hedging accounting policies) 11-11-
2. Summary of significant accounting policies (cont d) (5) Retirement benefit costs and termination benefits Contributions to defined contribution retirement benefit plans are recognized as an expense when employees have rendered service entitling them to the contributions. For defined benefit retirement benefit plans, the cost of providing benefits is determined using the projected unit credit method, with actuarial valuations being carried out at the end of each reporting period. Remeasurement, comprising actuarial gains and losses, the effect of the changes to the asset ceiling (if applicable) and the return on plan assets (excluding interest) is reflected immediately in the statements of financial position, with a charge or credit recognized in other comprehensive income in the period in which they occur. Remeasurement is recognized in other comprehensive income and will not be reclassified to profit or loss. Past service cost is recognized in profit or loss in the period of a plan amendment. Net interest is calculated by applying the discount rate at the beginning of the period to the net defined benefit liability or asset. Defined benefit costs are composed of service cost (including current service cost, past service cost, as well as gains and losses on curtailments and settlements), net interest expense (income) and remeasurement. The Company presents the service cost and net interest expense (income) components in profit or loss, and the remeasurement component in other comprehensive income. Curtailment gains and losses are accounted for as past service costs. The retirement benefit obligation recognized in the statements of financial position represents the actual deficit or surplus in the Company s defined benefit plans. Any surplus resulting from this calculation is limited to the present value of any economic benefits available in the form of refunds from the plans or reductions in future contributions to the plans. A liability for a termination benefit is recognized at the earlier of when the entity can no longer withdraw the offer of the termination benefit and when the entity recognizes any related restructuring costs. Discretionary contributions made by employees or third parties reduce service cost upon payment of these contributions to the plan. When the formal terms of the plans specify that there will be contributions from employees or third parties, the accounting depends on whether the contributions are linked to service, as follows: If the contributions are not linked to services (e.g., contributions are required to reduce a deficit arising from losses on plan assets or from actuarial losses), they are reflected in the remeasurement of the net defined benefit liability (asset). If contributions are linked to services, they reduce service costs. For the amount of contribution that is dependent on the number of years of service, the entity reduces service cost by attributing the contributions to periods of service using the attribution method required by KIFRS 1019 - Employee Benefits, paragraph 70 for the gross benefits. For the amount of contribution that is independent of the number of years of service, the entity reduces service cost in the period in which the related service is rendered/reduces service cost by attributing contributions to the employees periods of service in accordance with KIFRS 1019, paragraph 70. (6) Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. 1) Current tax The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the statements of profit or loss and comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Company s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. 12-12-
2. Summary of significant accounting policies (cont d) 2) Deferred tax Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Such deferred tax assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where the Company is able to control the reversal of the temporary difference, and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset if, and only if, the Company has a legally enforceable right to set off current tax assets against current tax liabilities, and the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities that intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered. For the purpose of measuring deferred tax liabilities and deferred tax assets for investment properties that are measured using the fair value model, the carrying amounts of such properties are presumed to be recovered entirely through sale, unless the presumption is rebutted. The presumption is rebutted when the investment property is depreciable and is held within a business model, whose objective is to consume substantially all of the economic benefits embodied in the investment properties over time, rather than through sale. 3) Current and deferred taxes for the year Current and deferred taxes are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred taxes are also recognized in other comprehensive income or directly in equity, respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination. (7) Property, plant and equipment Property, plant and equipment are stated at cost, less subsequent accumulated depreciation and accumulated impairment losses. The cost of an item of property, plant and equipment is directly attributable to their purchase or construction, which includes any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. It also includes the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located. 13-13-
2. Summary of significant accounting policies (cont d) Subsequent costs are recognized in carrying amount of an asset or as a separate asset, if it is probable that future economic benefits associated with the assets will flow into the Company and the cost of an asset can be measured reliably. Routine maintenance and repairs are expensed as incurred. Depreciation expense is computed using the straight-line method, based on the estimated useful life of the assets as follows: Vehicles, furniture and fixtures Useful life 2 5 (Years) If each part of an item of property, plant and equipment has a cost that is significant in relation to the total cost of the item, it is depreciated separately. The Company reviews the depreciation method; the estimated useful life; and residual values of property, plant and equipment at the end of each annual reporting period. If expectations differ from previous estimates, the changes are accounted for as a change in an accounting estimate. An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the property (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the period in which the property is derecognized. (8) Intangible assets 1) Intangible assets acquired separately Intangible assets with finite useful lives that are acquired separately are carried at cost, less accumulated amortization and accumulated impairment losses. Amortization is recognized on a straight-line basis over their estimated useful lives. The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are carried at cost, less accumulated impairment losses. 2) Internally generated intangible assets - research and development expenditure Expenditure on research activities is recognized as an expense in the period in which it is incurred. Expenditure arising from development (or from the development phase of an internal project) is recognized as an intangible asset if, and only if, the development project is designed to produce new or substantially improved products, and the Company can demonstrate the technical and economical feasibility and measure reliably the resources attributable to the intangible asset during its development. The amount initially recognized for internally generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria. Where no internally generated intangible asset can be recognized, development expenditure is recognized in profit or loss in the period in which it is incurred. Subsequent to initial recognition, internally generated intangible assets are reported at cost, less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. 14-14-
2. Summary of significant accounting policies (cont d) 3) Intangible assets acquired in a business combination Intangible assets that are acquired in a business combination are recognized separately from goodwill, and are initially recognized at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost, less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. 4) Derecognition of intangible assets An intangible asset is derecognized on disposal, or when no future economic benefits are expected from its use. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognized in profit or loss when the asset is derecognized. (9) Impairment of tangible and intangible assets other than goodwill At the end of each reporting period, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). When it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise, they are allocated to the smallest group of cashgenerating units for which a reasonable and consistent allocation basis can be identified. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value, less costs to sell and value in use. If the recoverable amount of an asset (or a cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or the cash-generating unit) is reduced to its recoverable amount and the reduced amount is recognized in profit or loss. Where an impairment loss subsequently reverses, the carrying amount of the asset (or a cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or the cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss. (10) Collective fund for default loss Pursuant to Article 394, Section 1 of the Financial Investment Services and Capital Markets Act and its Enforcement Ordinance No. 362, collective fund for default loss is reserved to compensate losses arising from breach of securities contracts in the Korea Stock Exchange. Collective fund for default loss consists of a fixed reserve amounting to \1,000 million and a variable reserve. Variable reserve consists of the amount calculated by multiplying daily average securities transaction ratio of the Company in the securities market and the amount calculated by multiplying daily average margin of the Company in the derivatives market. Pursuant to Article 15 of Listed Securities Clearing Business Regulation of Korea Securities Depository, collective fund for default loss consist of a basic contribution amounting to \10 million and an intermittent contribution. An intermittent contribution consists of the amount calculated by the portion of the Company among the total settlement amounts, which is totalized just before three months. The Company recognizes a collective fund for default loss as AFS financial assets. 15-15-
2. Summary of significant accounting policies (cont d) (11) Provisions Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event; it is probable that the Company will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (where the effect of the time value of money is material). The discount rate used is a pretax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage is recognized in profit or loss as borrowing cost. When some, or all, of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. At the end of each reporting period, the remaining provision balance is reviewed and assessed to determine if the current best estimate is being recognized. If the existence of an obligation to transfer economic benefit is no longer probable, the related provision is reversed during the period. (12) Financial instruments Financial assets and financial liabilities are recognized when an entity becomes a party to the contractual provisions of the instruments. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities are added to, or deducted from, the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at FVTPL are recognized immediately in profit or loss. All regular-way purchases or sales of financial assets are recognized and derecognized on a trade-date basis. Regular-way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. Financial assets are classified into the following specified categories: financial assets at FVTPL, held-tomaturity investments, AFS financial assets and loans and receivables. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. 1) Effective interest method The effective interest method is a method of calculating the amortized cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. Income is recognized on an effective interest basis for debt instruments other than those financial assets classified as at FVTPL. 16-16-