Consolidated Financial Statements

Transcription

1 Consolidated Financial Statements (With Independent Auditors Report Thereon)

2 Contents Page Independent Auditors Report 1 Consolidated Statements of Financial Position 3 Consolidated Statements of Income (Loss) 5 Consolidated Statements of Comprehensive Income (Loss) 6 Consolidated Statements of Changes in Equity 7 Consolidated Statements of Cash Flows 9 11

3 Independent Auditors Report Based on a report originally issued in Korean The Board of Directors and Shareholders GS Caltex Corporation: Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of GS Caltex Corporation and its subsidiaries (the Group ), which comprise the consolidated statements of financial position as at, the consolidated statements of income (loss), comprehensive income (loss), changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated 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 consolidated 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 consolidated financial statements based on our audits. We conducted our audits in accordance with Korean Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the consolidated 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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of and of its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with Korean International Financial Reporting Standards. Other Matter The accompanying consolidated statement of financial position of the Group as of December 31, 2013, and the related consolidated statements of income (loss), comprehensive income (loss), changes in equity and cash flows for the year then ended, were audited by us in accordance with the previous Korean auditing standards. The procedures and practices utilized in the Republic of Korea to audit such consolidated financial statements may differ from those generally accepted and applied in other countries.

4 Seoul, Korea February 6, 2015 This report is effective as of February 6, 2015, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that the above audit report has not been updated to reflect the impact of such subsequent events or circumstances, if any.

5 Consolidated Statements of Financial Position As of (In millions of won) Assets Note Cash and cash equivalents 6,7,27 W 509, ,721 Accounts and notes receivable ,714,803 3,266,605 Short-term financial assets 7,27 982,721 1,130,636 Inventories 8 3,593,104 5,210,040 Prepaid income taxes 4, Other current assets 25,26 487, ,085 Total current assets 8,291,304 10,802,451 Long-term financial assets 7,27 352, ,028 Investments in associates , ,860 Property, plant and equipment 5,9,12,25 10,372,965 10,655,481 Investment property 5,10 36,534 44,969 Intangible assets 5,11 62,762 64,392 Deferred income tax assets 17 1,027 2,375 Other non-current assets 5,26 34,697 33,740 Total non-current assets 11,134,873 11,482,845 Total assets W 19,426,177 22,285,296 See accompanying notes to the consolidated financial statements. 3

6 Consolidated Statements of Financial Position, Continued As of (In millions of won) Liabilities Note Accounts payable-trade 7,23,27 W 2,250,137 3,346,710 Short-term financial liabilities 7,9,23,27,28 3,438,786 3,763,590 Income taxes payable 5,133 69,019 Other current liabilities , ,096 Total current liabilities 5,807,388 7,324,415 Long-term financial liabilities 7,9,25,27,28 5,184,413 5,541,949 Employee benefits 15 87,645 32,057 Deferred income tax liabilities , ,823 Other non-current liabilities 14,16,26 66,090 97,386 Total non-current liabilities 5,475,735 5,951,215 Total liabilities 11,283,123 13,275,630 Equity Common stock 1,18 260, ,000 Capital surplus 66,270 66,270 Capital adjustments 18 (59,129) (58,926) Accumulated other comprehensive income (loss) 7,18 (1,340) 14,193 Retained earnings 18 7,877,253 8,728,129 Equity attributable to owners of the Parent Company 8,143,054 9,009,666 Non-controlling interests - - Total equity 8,143,054 9,009,666 Total liabilities and equity W 19,426,177 22,285,296 See accompanying notes to the consolidated financial statements. 4

7 Consolidated Statements of Income (Loss) For the years ended (In millions of won) Note Sales 5,19,23 W 40,258,357 45,659,771 Cost of sales 15,22,23 (39,896,451) (43,919,469) Selling, general and administrative expenses 15,20,22,23 (818,231) (840,222) Operating profit (loss) 5 (456,325) 900,080 Share of loss of equity method accounted investees 13 (12,203) (7,677) Finance income 7,23 1,160,144 1,197,077 Finance costs 7 (1,535,928) (1,455,374) Other income 7,10,21 544, ,890 Other expenses 7,10,21 (498,065) (371,701) Profit (loss) before income taxes (798,054) 527,295 Income tax benefit (expense) ,840 (153,628) Profit (loss) for the year W (676,214) 373,667 Profit (loss) attributable to: Owners of the Parent Company W (676,214) 373,667 Non-controlling interests - - See accompanying notes to the consolidated financial statements. 5

8 Consolidated Statements of Comprehensive Income (Loss) For the years ended (In millions of won) Note Profit (loss) for the year W (676,214) 373,667 Other comprehensive income (loss), net of tax: Items that will not be reclassified to profit or loss: Remeasurements of defined benefit liability, net of tax 17 (25,170) 3,168 Changes in equity method accounted investee s retained earnings, net of tax Items that will be reclassified subsequently to profit or loss: Net change in unrealized fair value of available-for-sale financial assets, net of tax (3,243) 7,388 Changes in equity method accounted investee s capital, net of tax Effective portion of changes in unrealized fair value of cash flow hedges, net of tax 7 (19,958) (6,637) Foreign currency translation differences, net of tax 7,282 (2,266) Total other comprehensive loss for the year, net of tax (15,533) (1,388) Total comprehensive income (loss) for the year W (716,909) 376,004 Total comprehensive income (loss) attributable to: Owners of the Parent Company W (716,909) 376,004 Non-controlling interests - - See accompanying notes to the consolidated financial statements. 6

9 Consolidated Statements of Changes in Equity For the years ended (In millions of won) Common stock Capital surplus Capital adjustments Accumulated other comprehensive Income (loss) Retained earnings Owners of the Parent Company Noncontrolling interests Total equity Balance at January 1, 2014 W 260,000 66,270 (58,926) 14,193 8,728,129 9,009,666-9,009,666 Comprehensive loss: loss for the year (676,214) (676,214) - (676,214) Other comprehensive income (loss), net of tax: Net change in unrealized fair value of available-for-sale financial assets (3,243) - (3,243) - (3,243) Changes in equity method accounted investee s capital Changes in equity method accounted investee s retained earnings Effective portion of changes in unrealized fair value of cash flow hedges (19,958) - (19,958) - (19,958) Remeasurements of defined benefit liability (25,170) (25,170) - (25,170) Foreign currency translation differences ,282-7,282-7,282 Total other comprehensive loss (15,533) (25,162) (40,695) - (40,695) Total comprehensive loss (15,533) (701,376) (716,909) - (716,909) Transactions with owners and other, recorded directly in equity: Annual dividends (149,500) (149,500) - (149,500) Others - - (203) - - (203) - (203) Total transactions with owners and other, recorded directly in equity - - (203) - (149,500) (149,703) - (149,703) Balance at December 31, 2014 W 260,000 66,270 (59,129) (1,340) 7,877,253 8,143,054-8,143,054 See accompanying notes to the consolidated financial statements. 7

10 Consolidated Statements of Changes in Equity, Continued For the years ended (In millions of won) Common stock Capital surplus Capital adjustments Accumulated other comprehensive Income (loss) Retained earnings Owners of the Parent Company Noncontrolling interests Total equity Balance at January 1, 2013 W 260,000 66,270 (58,639) 15,581 8,844,737 9,127, ,127,978 Comprehensive income: Profit for the year , , ,667 Other comprehensive income (loss) net of tax: Net change in unrealized fair value of available-for-sale financial assets ,388-7,388-7,388 Changes in equity method accounted investee s capital Changes in equity method accounted investee s retained earnings Effective portion of changes in unrealized fair value of cash flow hedges (6,637) - (6,637) - (6,637) Remeasurements of defined benefit liability ,168 3,168-3,168 Foreign currency translation differences (2,266) - (2,266) - (2,266) Total other comprehensive income (loss) (1,388) 3,725 2,337-2,337 Total comprehensive income (loss) (1,388) 377, , ,004 Transactions with owners and other, recorded directly in equity: Annual dividends (293,600) (293,600) - (293,600) Interim dividends (200,400) (200,400) - (200,400) Additional acquisition of subsidiaries - - (287) - - (287) (29) (316) Total transactions with owners and other, recorded directly in equity - - (287) - (494,000) (494,287) (29) (494,316) Balance at December 31, 2013 W 260,000 66,270 (58,926) 14,193 8,728,129 9,009,666-9,009,666 See accompanying notes to the consolidated financial statements. 8

11 Consolidated Statements of Cash Flows For the years ended (In millions of won) Cash flows from operating activities Profit (loss) for the year W (676,214) 373,667 Adjustments for: Depreciation 527, ,144 Amortization 14,749 16,210 Retirement benefit costs 30,768 30,988 Bad debt expense (reversal of allowance doubtful accounts) 21,247 (5,910) Loss on valuation of inventories 216,152 - Interest expense 301, ,342 Foreign exchange translations loss (gain), net 96,167 (39,970) Loss (gain) on valuation of derivative instruments, net (150,780) 30,885 Gain on transaction of derivative instruments, net (510) (8,483) Loss (gain) on disposal of property, plant and equipment, net 30,680 (11,177) Income tax expense (benefit) (121,840) 153,628 Interest income (32,873) (50,026) Dividends income (242) (584) Share of loss of equity method accounted investees, net 12,203 7,677 Others, net 4,285 (1,196) Changes in assets and liabilities: Accounts and notes receivable 571, ,752 Short-term financial assets 213,878 (262,506) Inventories 1,400,082 (150,025) Other current assets 115, ,101 Long-term financial assets 1, Other non-current assets (1,157) 1,568 Accounts payable-trade (1,108,600) 390,256 Short-term financial liabilities (341,513) 11,332 Other current liabilities (29,786) (17,191) Long-term financial liabilities 3,054 (4,972) Other non-current liabilities (31,290) (15,363) Payment of retirement and severance benefits (5,020) (16,774) Plan assets (4,295) (50,820) Others, net Interest received 35,203 22,062 Interest paid (297,037) (336,107) Dividends received 1,851 2,515 Income tax paid (71,103) (200,077) Net cash provided by operating activities W 725,979 1,111,142 See accompanying notes to the consolidated financial statements. 9

12 Consolidated Statements of Cash Flows, Continued For the years ended (In millions of won) Cash flows from investing activities Decrease in short-term financial assets W 216, ,898 Decrease in long-term financial assets 79,580 31,212 Proceeds from sale of investments in associates ,342 Proceeds from sale of property, plant and equipment 84, ,551 Proceeds from sale of investment property 7,995 - Increase in short-term financial assets (122,156) (11,281) Increase in long-term financial assets (62,992) (43,048) Purchases of investments in associates (4,915) - Purchases of property, plant and equipment (374,087) (556,915) Others, net (1,514) (283) Net cash used in investing activities (176,603) (298,524) Cash flows from financing activities Proceeds from short-term financial liabilities 28,468 47,917 Proceeds from long-term financial liabilities 704,270 1,127,007 Repayment of short-term financial liabilities (1,204,463) (1,532,966) Repayment of long-term financial liabilities - (4,368) Dividends paid (149,500) (494,000) Additional acquisition of subsidiaries - (272) Settlement of derivative instruments, net (26,701) (17,823) Net cash used in financing activities (647,926) (874,505) Net decrease in cash and cash equivalents (98,550) (61,887) Cash and cash equivalents at beginning of year 600, ,278 Effect of conversion of foreign currency financial statements to local currency financial statements 6,834 (670) Cash and cash equivalents at end of year W 509, ,721 See accompanying notes to the consolidated financial statements. 10

13 1. General Information 1.1 The Parent Company GS Caltex Corporation ( GS Caltex or the Parent Company ) was organized under a joint venture agreement between Caltex Petroleum Corporation and Lucky Limited in 1966 and incorporated as Honam Oil Refinery Co., Ltd. in 1967 under the laws of the Republic of Korea. The Parent Company s principal business activities consist of petroleum refining and marketing, the production of petrochemicals, including paraxylene, benzene, toluene and polypropylene, and the blending of lubricant oils. Such activities (with the exception of lubricant oil blending, which takes place at facilities located in Incheon) are carried out at the Group s Yeosu refinery complex located in southern Korea, and the headquarters of the Parent Company is located at Yeoksam-dong, Gangnam-gu in Seoul. On July 1, 2004, LG Corp. (which had owned 50% of the Parent Company s shares as of June 30, 2004) was split into two separate holding companies, LG Corp. and GS Holdings Corporation. As a result, the Parent Company became a subsidiary of GS Holdings Corporation. On March 31, 2005, the Parent Company changed its name from LG-Caltex Oil Corporation to GS Caltex Corporation. On January 1, 2013, GS Energy Corporation was established through the drop-down of the energy holding business unit of GS Holdings Corporation, in which 50% of the shares in the Parent Company were transferred to the newly-established company. Therefore, GS Energy Corporation became a new shareholder of the Parent Company. As of December 31, 2014, the ownership of the Parent Company is as follows: Shareholders Number of common shares held Percentage of ownership Chevron Corporation: Chevron (Overseas) Holdings Ltd. 10,400,000 40% Chevron Global Energy Inc. 2,600,000 10% GS Energy Corporation 13,000,000 50% 26,000, % Certain agreements with Chevron Global Energy Inc. (the CGEI ) provide that CGEI is to supply a portion of the Parent Company s crude oil and other feed-stock as well as technical assistance in the manufacturing, importing and selling of petroleum products. The Parent Company is registered under the Foreign Capital Inducement Law of the Republic of Korea. Under this registration, profits accruing to Chevron (Overseas) Holdings Ltd. and CGEI are fully remittable. Further, repatriation of capital is guaranteed after satisfying certain conditions. 11

14 1. General Information, Continued 1.2 Subsidiaries (a) Details of subsidiaries as of are as follows: Ownership Subsidiaries Headquarters Business GS Mbiz Co., Ltd.(*) (Formerly, GS Green Tech Co., Ltd.) Seoul % % Marketing services and sales of petroleum products (Formerly) GS Mbiz Co., Ltd. (*) Seoul % Electronic merchandising GS Caltex Singapore Pte., Ltd. Singapore % % International trading GS Caltex (Langfang) Plastics Co., Ltd. China % % Production and sales of compound polypropylene GS Caltex (Qingdao) Petroleum Co., Ltd. China % % Sales of petroleum products and operation of gas stations GS Caltex (Qingdao) Energy Co., Ltd. China % % Sales of petroleum products and operation of gas stations GS Caltex (Yantai) Energy Co.,Ltd. China % % Sales of petroleum products and operation of gas stations GS Caltex (Jinan) Energy Co., Ltd. China % % Sales of petroleum products and operation of gas stations InnoPolytech Co., Ltd. Jinju % % Sales of plastics instrument GS Caltex India Pte., Ltd. India % % Sales of petroleum products Sangji Shipping Co., Ltd. Yeosu % % Shipping GS Bio Co., Ltd. Yeosu % % Petroleum substitute fuel manufacturing GS EcoMetal Co., Ltd. Ulsan % % Recycling and restoration of disposed catalysts GS Caltex (Suzhou) Plastics Co., Ltd. China % % Production and sales of compound polypropylene GS Caltex Czech, s.r.o. Czech % % Production and sales of compound polypropylene GS Caltex China Co., Ltd. China % % Sales of lubricating oil (*) On July 31, 2014, GS Mbiz Co., Ltd. (formerly, GS Green Tech Co., Ltd.), one of the Parent Company s subsidiaries, merged with GS Mbiz Co., Ltd., which is a wholly-owned subsidiary of the Parent Company.. 12

15 1. General Information, Continued 1.2 Subsidiaries, Continued (b) Condensed financial information of main subsidiaries Condensed financial information of main subsidiaries as of and for the year ended December 31, 2014 is as follows: Subsidiaries Assets Liabilities Sales Net profit or loss GS Mbiz Co., Ltd. W 128,939 85, ,538 (1,410) GS Caltex Singapore Pte., Ltd. 1,807,107 1,649,842 29,286,070 21,686 GS Caltex (Langfang) Plastics Co., Ltd. 152, , ,068 6,220 GS Caltex (Qingdao) Petroleum Co., Ltd. 10, , GS Caltex (Qingdao) Energy Co., Ltd. 9, , InnoPolytech Co., Ltd. 6,523 2,237 15,744 2,210 GS Caltex India Pte., Ltd. 10,611 10,007 25,013 (654) GS Bio Co., Ltd. 48,749 30, ,171 6,825 GS EcoMetal Co., Ltd. 7,097 7,612 28,730 2,634 GS Caltex (Suzhou) Plastics Co., Ltd. 86,495 61, ,179 4,886 GS Caltex Czech, s.r.o. 47,082 42,483 52,897 1,268 13

16 2. Basis of Preparation (a) Statement of Compliance The consolidated financial statements have been prepared in accordance with Korean International Financial Reporting Standards ( K-IFRS ) as prescribed in the Act on External Audit of Corporation in the Republic of Korea. Certain information included in the Korean language consolidated financial statements, but not required for a fair presentation of the Group's financial position, results of operations, results of comprehensive operations and changes in equity or cash flows, is not presented in the accompanying consolidated financial statements. These consolidated financial statements were authorized for issue on February 6, 2015 by management and are expected to be submitted to shareholders meeting for approval on February 27, (b) Basis of Measurement The consolidated financial statements have been prepared on the historical cost basis, except for the following material items in the statement of financial position: derivative financial instruments are measured at fair value financial instruments at fair value through profit or loss are measured at fair value available-for-sale financial assets are measured at fair value liabilities for defined benefit plans are recognized at the net of the total present value of defined benefit obligations less the fair value of plan assets. (c) Functional and Presentation Currencies These consolidated financial statements are presented in Korean Won, which is the Parent Company s functional currency and the currency of the primary economic environment in which the Parent Company operates. All financial information presented in Korean Won has been rounded to the nearest million. (d) Use of Estimates and Judgments The preparation of the consolidated financial statements in conformity with K-IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expense. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. 14

17 2. Basis of Preparation, Continued (d) Use of Estimates and Judgments, Continued Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year are included in the following notes: Note 7 Financial Instruments Note 14 Provisions Note 15 Employee Benefits Note 16 Deferred Revenue Note 17 Income Taxes Note 24 Commitments and Contingencies Fair Value Measurement A number of the Group s accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities. When measuring the fair value of an asset or a liability, the Group uses market observable data as far as possible. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows. Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). If the inputs used to measure the fair value of an asset or a liability might be categorized in different levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The Group recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred. Further information about the assumptions made in measuring far values is included in the following note: Note 7 Financial Instruments 15

18 3. Changes in Accounting Policies Except as described below, the accounting policies applied by the Group in these consolidated financial statements are the same as those applied by the Group in its financial statements as of and for the year ended December 31, Management believes the impact of the amendments on the Group s consolidated financial statements is not significant. (a) Amendments to K-IFRS No Financial Instruments: Presentation The standard was amended for the purpose of clarifying its conditions of offsetting financial assets and financial liabilities. Under the amendments, a financial asset and a financial liability shall be offset and the net amount presented in the statement of financial position when, an entity currently has a legally enforceable right to set off the recognized amounts; and intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously. A legally enforceable right of set-off must not be contingent on a future event and must be legally enforceable in the normal course of business, in an event of default, and in the event of insolvency or bankruptcy, of the Group and all of the counterparties. For an financial instrument to meet the net settlement criterion, the Group can settle in a manner such that the outcome is, in effect, equivalent to net settlement such as when the gross settlement mechanism has features that eliminate or result in insignificant credit and liquidity risk, and that will process receivables and payables in a single settlement process or cycle. (b) Amendments to K-IFRS No Impairment of Assets Under the amendments, recoverable amount is required to be disclosed only when an impairment loss has been recognized or reversed. (c) K-IFRS No Levies The interpretation confirms that the obligating event that gives rise to a liability to pay a levy is the activity that triggers the payment of the levy, as identified by the legislation. The liability to pay a levy is recognized progressively if the obligating event occurs over a period of time and if the obligating event is the reaching of a minimum activity threshold, the corresponding liability is recognized when that minimum activity threshold is reached. The Group shall recognize an asset if it has prepaid a levy but does not yet have a present obligation to pay that levy. The interpretation clarifies that a levy is not recognized until the obligating event specified in the legislation occurs, even if there is no realistic opportunity to avoid the obligation. 16

19 4. Significant Accounting Policies The significant accounting policies applied by the Group in preparation of its consolidated financial statements are included below. The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements. (a) Operating segments An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group s other components. All operating segments operating results are reviewed regularly by the Group s chief operating decision maker in deciding how to allocate resources in assessing its performance, and for which discrete financial information is available. The prices agreed between the Group companies for intra-group transactions are based on normal commercial practices which would apply between independent businesses. (b) Basis of Consolidation Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights, to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date that on which control ceases. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated. Unrealized gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group s interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. Changes in the Parent Company s ownership Changes in the Parent Company s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions with owners in their capacity as owners. Interests in equity-accounted investees The Group s interests in equity-accounted investees comprise interests in associates and a joint venture. Associates are those entities in which the Group has significant influence, but not control or joint control, over the financial and operating policies. A joint venture is an arrangement in which the Group has joint control, whereby the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities. Interests in associates and the joint venture are accounted for using the equity method. They are recognized initially at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Group s share of the profit or loss and OCI (Other Comprehensive Income) of equity-accounted investees, until the date on which significant influence or joint control ceases. 17

20 4. Significant Accounting Policies, Continued (b) Basis of Consolidation, Continued Business combinations under common control Business combinations under common control are accounted for in the consolidated accounts prospectively from the date the group obtains the ownership interest. Assets and liabilities are recognized upon consolidation at their carrying amount in the consolidated financial statements of the ultimate parent entity. Any difference between the fair value of the consideration paid and the amounts at which the assets and liabilities are recorded is recognized directly in equity in the business combinations under common control reserve. (c) Cash and Cash Equivalents Cash and cash equivalents comprise cash balances and call deposits with maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments. Equity investments are excluded from cash and cash equivalents. (d) Inventories The Group determines its cost of inventories on the moving average method for all supplies, on the specific identification method for goods in transit and on the weighted average method for all other inventories. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating capacity. Inventories are measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The amount of any write-down of inventories to net realizable value and all losses of inventories are recognized as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realizable value, are recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs. (e) Non-derivative Financial Assets The Group recognizes and measures a non-derivative financial asset by the following four categories: financial assets at fair value through profit or loss, held-to-maturity investments, loans and receivables or available-for-sale financial assets. The Group recognizes financial assets in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of the instrument. 18

21 4. Significant Accounting Policies, Continued (e) Non-derivative Financial Assets, Continued Upon initial recognition, non-derivative financial assets are measured at their fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the asset s acquisition or issuance. Financial assets at fair value through profit or loss A financial asset is carried at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Upon initial recognition, transaction costs are recognized in profit or loss when incurred. Held-to-maturity investments A non-derivative financial asset with a fixed or determinable payment and fixed maturity, for which the Group has the positive intention and ability to hold to maturity, are classified as held-to-maturity investments. Subsequent to initial recognition, held-to-maturity investments are measured at amortized cost using the effective interest method. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method except for loans and receivables of which the effect of discounting is immaterial. Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as available for sale or are not classified as financial assets at fair value through profit or loss, held-tomaturity investments or loans and receivables. Subsequent to initial recognition, they are measured at fair value, which changes in fair value, net of any tax effect, recorded in other comprehensive income in equity. Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments are measured at cost. When the financial asset is derecognized or impairment losses are recognized, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss. Dividends on an available-for-sale equity instrument are recognized in profit or loss when the Group s right to receive payment is established. De-recognition of financial assets The Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognized as a separate asset or liability. If the Group retains substantially all the risks and rewards of ownership of the transferred financial assets, the Group continues to recognize the transferred financial assets and recognizes financial liabilities for the consideration received. Offsetting between financial assets and financial liabilities Financial assets and financial liabilities are offset and the net amount is presented in the consolidated statement of financial position only when the Group currently has a legally enforceable right to offset the recognized amounts, and there is the intention to settle on a net basis or to realize the asset and settle the liability simultaneously. 19

22 4. Significant Accounting Policies, Continued (f) Derivative Financial Instruments, Including Hedge Accounting Derivatives are initially recognized at fair value. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below. Hedge accounting The Group holds forward exchange contracts, interest rate swaps, currency swaps and other derivative contracts to manage interest rate risk and foreign exchange risk. The Group designated derivatives as hedging instruments to hedge the risk of changes in the fair value of assets, liabilities or firm commitments (a fair value hedge) and foreign currency risk of highly probable forecasted transactions or firm commitments (a cash flow hedge). On initial designation of the hedge, the Group formally documents the relationship between the hedging instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both at the inception of the hedge relationship as well as on a quarterly basis, whether the hedging instruments are expected to be highly effective in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80%-125%. For a cash flow hedge of a forecasted transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately affect reported net income (loss). Cash flow hedge When a derivative is designated to hedge the variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecasted transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognized in other comprehensive income, net of tax, and presented in the hedging reserve in equity. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss on the hedging instrument that has been recognized in other comprehensive income is reclassified to profit or loss in the periods during which the forecasted transaction occurs. If the forecasted transaction is no longer expected to occur, then the balance in other comprehensive income is recognized immediately in profit or loss. Other derivative financial instruments Changes in the fair value of other derivative financial instrument not designated as a hedging instrument are recognized immediately in profit or loss. 20

23 4. Significant Accounting Policies, Continued (g) Impairment of Financial Assets A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. However, losses expected as a result of future events, regardless of likelihood, are not recognized. If financial assets have objective evidence that they are impaired, impairment losses should be measured and recognized. Financial assets measured at amortized cost An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of its estimated future cash flows discounted at the asset s original effective interest rate. If it is not practicable to obtain the instrument s estimated future cash flows, impairment losses would be measured by using prices from any observable current market transactions. The Group can recognize impairment losses directly or establish a provision to cover impairment losses. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss shall be reversed either directly or by adjusting an allowance account. Financial assets carried at cost If there is objective evidence that an impairment loss has occurred on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, the amount of the impairment loss is measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment losses shall not be reversed. Available-for-sale financial assets When a decline in the fair value of an available-for-sale financial asset has been recognized in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss that had been recognized in other comprehensive income shall be reclassified from equity to profit or loss as a reclassification adjustment even though the financial asset has not been derecognized. Impairment losses recognized in profit or loss for an investment in an equity instrument classified as available-for-sale shall not be reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss shall be reversed, with the amount of the reversal recognized in profit or loss. 21

24 4. Significant Accounting Policies, Continued (h) Property, Plant and Equipment Property, plant and equipment are initially measured at cost and after initial recognition, are carried at cost less accumulated depreciation and accumulated impairment losses. The cost of property, plant and equipment includes expenditures arising directly from the construction or acquisition of the asset, 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 and the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located. Subsequent to initial recognition, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses. Subsequent costs are recognized in the carrying amount of property, plant and equipment at cost or, if appropriate, as separate items if it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing are recognized in profit or loss as incurred. Property, plant and equipment, except for land, are depreciated on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Each part of property, plant and equipment with a cost that is significant in relation to the total cost are depreciated separately. The estimated useful lives for the current and comparative periods are as follows: Useful lives (years) Buildings 10 ~ 45 Structures 5 ~ 40 Machinery 8 ~ 33 Others 4 ~ 25 A component that is significant compared to the total cost of property, plant and equipment is depreciated over its separate useful life. Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate. 22

25 4. Significant Accounting Policies, Continued (i) Borrowing Costs The Group capitalizes borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Other borrowing costs are recognized in expense as incurred. A qualifying asset is an asset that requires a substantial period of time to get ready for its intended use or sale. Financial assets and inventories that are manufactured or otherwise produced over a short period of time are not qualifying assets. Assets that are ready for their intended use or sale when acquired are not qualifying assets. To the extent that the Group borrows funds specifically for the purpose of obtaining a qualifying asset, the Group determines the amount of borrowing costs eligible for capitalization as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings. To the extent that the Group borrows funds generally and uses them for the purpose of obtaining a qualifying asset, the Group shall determine the amount of borrowing costs eligible for capitalization by applying a capitalization rate to the expenditures on that asset. The capitalization rate shall be the weighted average of the borrowing costs applicable to the borrowings of the Group that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs that the Group capitalizes during a period shall not exceed the amount of borrowing costs incurred during that period. (j) Intangible Assets Cost of intangible assets includes expenditure that is directly attributable to the acquisition of the assets. The cost of self constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use. Intangible assets are amortized on a straight-line basis over the estimated useful lives of intangible assets other than goodwill, from the date that they are available for use. The residual value of intangible assets is assumed to be zero. The estimated useful lives are as follows: Useful lives (years) Software 4 ~ 5 Other intangible assets 5 ~ 40 Amortization periods and the amortization methods for intangible assets with finite useful lives are reviewed at the end of each reporting period. If it is appropriate to change, such a change is accounted for as a change in an accounting estimate. Goodwill Goodwill that arises upon the acquisition of subsidiaries is included in intangible assets. The Group measures goodwill as the fair value of the consideration transferred including the recognised amount of any non-controlling interest in the acquiree, less the net recognised amount of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. Goodwill is measured at cost less accumulated impairment losses. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment, and an impairment loss on such an investment is not allocated to any asset, including goodwill, that forms part of the carrying amount of the equity accounted investee. 23

26 4. Significant Accounting Policies, Continued (j) Intangible Assets, Continued Research and development Expenditures on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognized in profit or loss as incurred. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Group intends to and has sufficient resources to complete development and to use or sell the asset. Other development expenditures are recognized in profit or loss as incurred. Subsequent expenditures Subsequent expenditures are capitalized only when they increase the future economic benefits embodied in the specific asset to which it relates. All other expenditures are recognized in profit or loss as incurred. (k) Government Grants Government grants are recognized initially as deferred revenue at fair value only when there is reasonable assurance that they will be received and the Group will comply with the conditions associated with the grant. Grants that compensate the Group for the cost of an asset are recognized in profit or loss on a systematic basis over the useful life of the asset. (l) Investment Property Property held for the purpose of earning rentals or benefiting from capital appreciation is classified as investment property. Investment property is initially measured at its cost. Transaction costs are included in the initial measurement. Subsequently, investment property is carried at depreciated cost less any accumulated impairment losses. Subsequent costs are recognized in the carrying amount of investment property at cost or, if appropriate, as separate items if it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing are recognized in profit or loss as incurred. Investment property except for land, are depreciated on a straight-line basis over 10 ~ 45 years as estimated useful lives. Depreciation methods, useful lives and residual values are reviewed at the end of each reporting date and adjusted, if appropriate. The change is accounted for as a change in an accounting estimate. 24

27 4. Significant Accounting Policies, Continued (m) Impairment of Non-financial Assets The carrying amounts of the Group s non-financial assets, other than assets arising from employee benefits, inventories, deferred tax assets and non-current assets held for sale, are reviewed at the end of the reporting period to determine whether there is any indication of impairment. If any such indication exists, then the asset s recoverable amount is estimated. Goodwill, irrespective of whether there is any indication of impairment, are tested for impairment annually by comparing their recoverable amount to their carrying amount. The Group estimates the recoverable amount of an individual asset, if it is impossible to measure the individual recoverable amount of an asset, then the Group estimates the recoverable amount of each cash-generating unit ( CGU ). A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. The value in use is estimated by applying a pre-tax discount rate that reflect current market assessments of the time value of money and the risks specific to the asset or CGU for which estimated future cash flows have not been adjusted, to the estimated future cash flows expected to be generated by the asset or CGU. An impairment loss is recognized if the carrying amount of an asset or a CGU exceeds its recoverable amount. Impairment losses are recognized in profit or loss. Goodwill arising from a business combination is allocated to CGUs or groups of CGUs that are expected to benefit from the synergies of the combination. An impairment losses in respect of CGU are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amounts of the other Assets in the CGU on a pro rata basis. Except for impairment losses in respect of goodwill which are never reversed, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. (n) Leases The Group classifies and accounts for leases as either a finance or operating lease, depending on the terms. Leases where the Group assumes substantially all of the risks and rewards of ownership are classified as finance leases. All other leases are classified as operating leases. 25