HYUNDAI CARD CO., LTD. AND ITS SUBSIDIARIESCONSOLIDATED FINANCIAL STATEMENTS FOR THETHREE MONTHS ENDED MARCH 31, 2011 AND 2010AND INDEPENDENT ACCOUNTANTS’ REVIEW REPORT
Independent Accountants’ Review ReportEnglish Translation of a Report Originally Issued in KoreanTo the Shareholders and Board of Directors ofHyundai Card Co., Ltd. and its subsidiaries:We have reviewed the accompanying consolidated financial statements of Hyundai Card Co., Ltd. and itssubsidiaries (collectively the “Company”). The financial statements consist of the consolidated statements offinancial position as of March 31, 2011 and December 31, 2010, and the related consolidated statements ofcomprehensive income, changes in shareholders’ equity and cash flows for the three months ended March 31, 2011and 2010, and a summary of significant accounting policies and other explanatory information.Management’s responsibility for the consolidated financial statementsThe Company’s management is responsible for the preparation and fair presentation of the accompanyingconsolidated financial statements and for such internal control as management determines is necessary to enable thepreparation of financial statements that are free from material misstatement, whether due to fraud or error.Independent accountants’ responsibilityOur responsibility is to express a conclusion on the accompanying consolidated financial statements based on ourreview.We conducted our reviews in accordance with standards for review of interim financial statements in the Republicof Korea. A review is limited primarily to inquiries of company personnel and analytical procedures applied tofinancial data, and this provides less assurance than an audit. We have not performed an audit and, accordingly, wedo not express an audit opinion.Review conclusionBased on our reviews, nothing has come to our attention that causes us to believe that the accompanyingconsolidated financial statements of the Company are not presently fairly, in all material respects, in accordancewith K-IFRS 1034, Interim Financial Reporting, and the requirements of K-IFRS 1101, First-time Adoption ofKorean International Financial Reporting Standards, relevant to interim financial reporting.May 30, 2011 Notice to ReadersThis report is effective as of May 30, 2011, the review report date. Certain subsequent events or circumstancesmay have occurred between the review date and the time the review report is read. Such events or circumstancescould significantly affect the accompanying financial statements and may result in modifications to the reviewreport.
HYUNDAI CARD CO., LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS OF MARCH 31, 2011 AND DECEMBER 31, 2010 March 31, 2011 December 31, 2010 (Korean won in millions)ASSETSCASH AND BANK DEPOSITS (Notes 6, 32 and 33): Cash and cash equivalents (Note 31) ￦ 878,975 ￦ 797,048 Bank deposits 33,031 23,131 Total cash and bank deposits 912,006 820,179INVESTMENT FINANCIAL ASSETS (Notes 7, 32and 33): Financial assets available-for-sale 1,768 1,776CARD ASSETS (Notes 8, 9, 28, 29, 32 and 33): Card receivables, net of present value discounts and allowance for doubtful accounts 5,884,312 5,961,380 Cash advances, net of allowance for doubtful accounts 1,133,911 1,115,700 Card loans, net of deferred loan origination fees and allowance for doubtful accounts 1,932,979 1,928,688 Total card assets 8,951,202 9,005,768LOANS (Notes 9, 32 and 33) Other loans, net of allowance for doubtful accounts 944 992PROPERTY, PLANT AND EQUIPMENT (Notes 10and 12): Land 82,267 80,414 Buildings, net of accumulated depreciation 39,052 34,494 Vehicles, net of accumulated depreciation 489 293 Fixtures and equipment, net of accumulated depreciation 36,256 36,617 Assets under construction 667 698 Total property and equipment 158,731 152,516OTHER ASSETS (Notes 32 and 33): Other accounts receivable, net of allowance for doubtful accounts (Notes 9 and 29) 32,620 15,054 Accrued revenue, net of allowance for doubtful accounts (Note 9) 44,254 47,638 Advanced payments, net of allowance for doubtful accounts (Note 9) 31,462 76,319 Prepaid expenses 9,709 11,634 Guarantee deposits 50,669 48,129 Intangible assets (Note 11) 49,437 48,966 Deferred income tax assets (Note 25) 126,953 125,064 Derivative assets (Note 18) 2,998 13,748 Memberships 21,484 21,484 Others 27,414 27,307 Total other assets 397,000 435,343 Total Assets ￦ 10,421,651 ￦ 10,416,574 (Continued)
HYUNDAI CARD CO., LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (CONTINUED) AS OF MARCH 31, 2011 AND DECEMBER 31, 2010 March 31, 2011 December 31, 2010 (Korean won in millions)LIABILITIES AND SHAREHOLDERS’ EQUITYBORROWINGS : Borrowings (Notes 13,32 and 33) ( ￦ 810,551 ￦ 1,581,766 Bonds payable, net (Notes 14,32 and 33) 6,395,136 5,594,406 Total borrowings 7,205,687 7,176,172OTHER LIABILITIES (Notes 32 and 33): Accounts payable (Note 29) 731,931 795,721 Withholdings 64,500 73,572 Accrued expenses (Note 27) 173,293 209,976 Unearned revenue 296,730 287,440 Retirement benefit obligation (Note 15) 10,054 9,609 Provisions (Note 17) 84,382 81,426 Derivatives liabilities (Notes 18 and 33) 33,007 35,085 Other liabilities 11,332 10,463 Total other liabilities 1,405,229 1,503,292 Total Liabilities 8,610,916 8,679,464SHAREHOLDERS’ EQUITY : Share capital (Note 19) 802,326 802,326 Share premium (Note 20) 57,704 57,704 Retained earnings (Notes 21 and 23) 954,260 880,210 Reserves (Note 22) (3,585) (3,150) Non-controlling Interest 30 20 Total shareholders’ equity 1,810,735 1,737,110 Total Liabilities and Shareholders’ Equity ￦ 10,421,651 ￦ 10,416,574 See accompanying notes to consolidated financial statements.
HYUNDAI CARD CO., LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010 Three months ended March 31, 2011 2010 (Korean won in millions, except for per share amount)OPERATING REVENUE: Card income (Notes 29 and 35) ￦ 578,424 ￦ 484,425 Interest income (Note 34) 4,884 3,558 Gain on disposal of financial assets available-for-sale (Note 36) - 3,174 Reversal of impairment loss on financial assets available-for-sale (Note 36) 67 67 Dividends income 294 430 Other operating revenue (Note 29) 24,113 52,477 Total operating revenue 607,782 544,131OPERATING EXPENSES: Card expenses (Note 29 and 35) 227,534 202,724 Interest expenses (Note 34) 90,361 73,043 General and administrative expenses (Notes 16,24 and 29) 113,693 90,706 Securitization expenses 107 200 Bad debt expense and loss on disposal of loans 52,827 31,206 Transfer to provision for unused credit limits (Note 17) 2,621 1,026 Impairment loss on financial assets available-for-sale (Note 36) 8 - Other operating expenses (Note 29) 22,479 51,306 Total operating expenses 509,630 450,211OPERATING INCOME 98,152 93,920NON-OPERATING INCOME: Rental revenue 299 167 Miscellaneous gains 2,443 6,808 2,742 6,975NON-OPERATING EXPENSES: Donations 73 23 Miscellaneous losses 5,718 6,008 5,791 6,031INCOME BEFORE INCOME TAX 95,103 94,864INCOME TAX EXPENSE (Note 25) 21,053 26,271PROFIT FROM THE PERIOD 74,050 68,593(Continued)
HYUNDAI CARD CO., LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010 Three months ended March 31, 2011 2010 (Korean won in millions, except for per share amount)OTHER COMPREHENSIVE INCOME FOR THE PERIOD (Note 30) Gain on fair value of financial assets available-for-sale ￦ - ￦ 4,939 Effective portion of changes in fair value of cash flow hedges (435) 2,580 Actuarial losses - (67) (435) 7,452TOTAL COMPREHENSIVE INCOME FOR THE PERIOD ￦ 73,615 ￦ 76,045Net income attributable to: Owners of the Company 74,050 68,593 Non-controlling interests - -Total comprehensive income attributable to: Owners of the Company 73,615 76,045 Non-controlling interests - -Earnings per share (In Unit Won) (Note 26) Basic earnings per share ￦ 461 ￦ 427 Diluted earnings per share ￦ 461 ￦ 427 See accompanying notes to consolidated financial statements.
HYUNDAI CARD CO., LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010 Capital surplus Other comprehensive income Net change in fair value of Other financial assets Cash flow Attributable to Non- Share Share capital Treasury Retained available-for hedging owners of the controlling capital premium surplus shares earnings -sale reserve Company Interests Total (Korean won in millions)Balance at January 1, 2010 ￦ 802,326 ￦45,399 ￦12,305 ￦ - ￦734,778 ￦ 53,801 ￦ (16,278) ￦1,632,332 ￦ 20 ￦1,632,352Dividends paid - - - - (104,302) - - (104,302) - (104,302)Comprehensive income Net income - - - - 68,594 - - 68,594 - 68,594 Other comprehensive income - - - - (67) 4,939 2,579 7,451 - 7,451Balance at March 31, 2010 802,326 45,399 12,305 - 699,002 58,740 (13,699) 1,604,075 20 1,604,095Balance at January 1, 2011 802,326 45,399 12,305 - 880,210 - (3,150) 1,737,090 20 1,737,110Comprehensive income Net income - - - - 74,050 - - 74,050 - 74,050 Other comprehensive income - - - - - - (435) (435) - (435)Additional non-controllinginterest of associate - - - - - - - - 10 10Balance at March 31, 2011 802,326 45,399 12,305 - 954,260 - (3,585) 1,810,705 30 1,810,735 See accompanying notes to consolidated financial statements.
HYUNDAI CARD CO., LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010 Three months ended March 31, 2011 2010 (Korean won in millions)CASH FLOWS FROM OPERATING ACTIVITIES: Profit from the period ￦ 74,050 ￦ 68,594 Income tax expense 21,053 26,271 Interest income (4,884) (3,558) Interest expense 90,361 73,043 Loss on fair value change of financial assets designated at fair value through profit or loss 2,143 48,849 Loss from disposal of financial assets designated at fair value through profit or loss 2,621 1,026 Impairment loss of financial assets available-for-sale 8 - Gain on disposals of financial assets available-for-sale - (3,174) Net foreign exchange gain (2,252) (49,398) Amortization of card asset present value discounts (5,564) (5,736) Bad debt expense and loss on disposal of loans 52,827 17,143 Depreciation 4,573 3,692 Amortization 2,403 3,053 Loss from sale of property, plant and equipment - 67 Miscellaneous losses 129 -Changes in working capital: Decrease (increase) in trade and other receivables 39,231 (38,586) Decrease in other financial assets 20,358 3,574 Decrease (increase) in other assets 34,359 (12,197) Increase (decrease) in provisions (32,933) 284 Increase in retirement benefit obligations 446 1,914 Increase (decrease) in other financial liabilities (14,198) 562 Increase (decrease) in other liabilities (99,240) 143,014Cash generated from operating activities Interest received 4,242 3,152 Interest paid (90,189) (72,746) Income tax paid (23,010) (18,256)Net cash provided by operating activities 76,534 190,317CASH FLOWS FROM INVESTING ACTIVITIES: Disposal of other financial assets 4,329 169 Acquisition of property and equipment (10,787) (839) Acquisition of intangible assets (2,875) (2,688) Acquisition of other financial assets (16,489) (14,760) Cash flows from other investing activities 10 -Net cash used in investing activities (25,812) (18,118)CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issue of bonds payable 1,330,027 320,000 Repayment of borrowings (781,191) (59,980) Repayment of bonds payable (517,631) (303,000)Net cash provided by (used in) financing activities 31,205 (42,980) (Continued)
HYUNDAI CARD CO., LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010 Three months ended March 31, 2011 2010 (Korean won in millions)NET INCREASE IN CASH AND CASH EQUIVALENTS ￦ 81,927 ￦ 129,219CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 797,048 487,515CASH AND CASH EQUIVALENTS, END OF THE PERIOD ￦ 878,975 ￦ 616,734 See accompanying notes to consolidated financial statements.
HYUNDAI CARD CO., LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 20101. GENERAL: Hyundai Card Co., LTD (the “Parent”) is engaged in the credit card business under the Specialized Credit Financial Business Law of Korea. On June 15, 1995, the Parent acquired the credit card business of Korea Credit Circulation Co., Ltd. and on June 16, 1995, the Korean government granted permission to the Parent to engage in the credit card business. As of March 31, 2011, the Parent has approximately 9.88 million card members, 1.83 million registered merchants, and 181 marketing centers, branches and posts. Its head office is located in Yoido, Seoul. As of March 31, 2011, the total common stock of the Parent is ￦802,326 million. The shareholders of the Parent and their respective ownerships as of March 31, 2011 and December 31, 2010 are as follows: Mar. 31, 2011 Dec. 31, 2010 Shareholder Number of shares % of ownership Number of shares % of ownership Hyundai Motor Co., Ltd. 50,572,187 31.52 50,572,187 31.52 Kia Motors Co., Ltd. 18,422,142 11.48 18,422,142 11.48 Hyundai Steel Co., Ltd. 8,729,750 5.44 8,729,750 5.44 GE Capital Intl Holdings 69,000,073 43.00 69,000,073 43.00 Hyundai Commercial Inc. 8,889,622 5.54 8,889,622 5.54 Others 4,851,512 3.02 4,851,512 3.02 Totals 160,465,286 100.00 160,465,286 100.002. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The Company maintains its official accounting records in Republic of Korean won (“Won”) and prepares consolidated financial statements in conformity with Korean statutory requirements and Korean International Reporting Standards (“K-IFRS”), in the Korean language (Hangul). Accordingly, these consolidated financial statements are intended for use by those who are informed about K-IFRS and Korean practices. The accompanying consolidated financial statements have been condensed, restructured and translated into English with certain expanded descriptions from the Korean language financial statements. Certain information included in the Korean language financial statements, but not required for a fair presentation of the Company’s financial position, comprehensive income, changes in stockholders’ equity or cash flows, is not presented in the accompanying consolidated financial statements. (1) Basis of Preparation The Parent and its subsidiaries (the “Company”) have adopted the Korean International Financial Reporting Standards (“K-IFRS”) for the annual period beginning on January 1, 2011. In accordance with K-IFRS 1101 First-time adoption of International Financial Reporting Standards, the transition date to K-IFRS is January 1, 2010. The significant accounting policies under K-IFRS followed by the Company in the preparation of its consolidated financial statements are summarized in Note 4. The Company’s interim consolidated financial statements for the three months ended March 31, 2011 are prepared in accordance with K-IFRS 1034 Interim Financial Reporting. The interim financial statements are prepared in accordance with the K-IFRS that are effective as of March 31, 2011. There may be newly or amended K-IFRSs and interpretations that are effective subsequent to the current period-end during 2011 or during 2012 which early-adoption is permitted during 2011. Accordingly, accounting policies that are used for the preparation of the interim consolidated financial statements may be
different from the policies that are used for the preparation of the first annual consolidated financial statementsin accordance with K-IFRS as of and for the period ending December 31, 2011. Currently, enactments andamendments of the K-IFRSs are in progress, and the financial information presented in the interim financialstatements may change accordingly in the future.The interim consolidated financial statements have been prepared on the historical cost basis except for certainproperties and financial instruments that are measured at revalued amounts or fair values, as explained in theaccounting policies below. Historical cost is generally based on the fair value of the consideration given inexchange for assets.Major accounting policies used for the preparation of the interim consolidated financial statements are statedbelow. Unless stated otherwise, these accounting policies have been applied consistently to the financialstatements for the current period and accompanying comparative period.(2) Basis of ConsolidationThe consolidated financial statements incorporate the financial statements of the Company and entities(including special purpose entities) controlled by the Company (and its subsidiaries). Control is achieved wherethe Company has the power to govern the financial and operating policies of an entity so as to obtain benefitsfrom its activities.Income and expenses of subsidiaries acquired or disposed of during the year are included in the consolidatedstatement of comprehensive income from the effective date of acquisition and up to the effective date ofdisposal, as appropriate. Total comprehensive income of subsidiaries is attributed to the owners of theCompany and to the non-controlling interests even if this results in the non-controlling interests having a deficitbalance.When necessary, adjustments are made to the financial statements of subsidiaries to bring their accountingpolicies into line with those used by the Company.All intra-group transactions, balances, income and expenses are eliminated in full on consolidation.Changes in the Company’s ownership interests in subsidiaries that do not result in the Company losing controlover the subsidiaries are accounted for as equity transactions. The carrying amounts of the Company’s interestsand the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries.Any difference between the amount by which the non-controlling interests are adjusted and the fair value of theconsideration paid or received is recognized directly in equity and attributed to owners of the CompanyWhen the Company loses control of a subsidiary, the profit or loss on disposal is calculated as the differencebetween (i) the aggregate of the fair value of the consideration received and the fair value of any retainedinterest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiaryand any non-controlling interests. When assets of the subsidiary are carried at revalued amounts or fair valuesand the related cumulative gain or loss has been recognized in other comprehensive income and accumulated inequity, the amounts previously recognized in other comprehensive income and accumulated in equity areaccounted for as if the Company had directly disposed of the relevant assets (i.e. reclassified to profit or loss ortransferred directly to retained earnings). The fair value of any investment retained in the former subsidiary atthe date when control is lost is recognized as the fair value on initial recognition for subsequent accountingunder K-IFRS 1039 Financial Instruments: Recognition and Measurement or, when applicable, the cost oninitial recognition of an investment in an associate or a jointly controlled entity.(3) Card assetsCard assets are amounts due from customers for services performed in the ordinary course of business. Cardassets are initially measured at a fair value including direct transaction cost, thereafter it will measuredamortized cost using the effective interest method except the financial assets classified as at fair value throughprofit or loss.
-3-1) Card ReceivablesThe Company records card receivables when its cardholders make purchases from domestic and foreign cardmerchants, and when card members of MasterCard International, Visa International and Diners ClubInternational make purchases from domestic card merchants. Merchant commission from card merchants foradvance payments to them and commission from cardholders for installments and cash advances are recognizedas revenue on an accrual basis.2) Card LoansThe Company extends the card loans to its cardholders in accordance with the Specialized Credit FinancialBusiness Law. The commission of constant rate is recognized as revenue on an accrual basis.(4) Financial assetsAll financial assets are recognized and derecognized on trade date where the purchase or sale of a financialasset is under a contract whose terms require delivery of the financial asset within the timeframe established bythe market concerned, and are initially measured at fair value, plus transaction costs, except for those financialassets classified as at fair value through profit or loss, which are initially measured at fair value.Financial assets are classified into the following specified categories: financial assets at ‘fair value throughprofit or loss’ (FVTPL), ‘held-to-maturity’, ‘available-for-sale’ and ‘loans and receivables’. The classificationdepends on the nature and purpose of the financial assets and is determined at the time of initial recognition.1) Effective interest rate methodThe effective interest rate method is a method of calculating the amortized cost of a debt instrument and ofallocating interest income over the relevant period. The effective interest rate is the rate that exactly discountsestimated future cash receipts (including all fees and points paid or received that form an integral part of theeffective interest rate, transaction costs and other premiums or discounts) through the expected life of the debtinstrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.Income is recognized on an effective interest rate method for debt instruments other than those financial assetsclassified as at FVTPL.2) Financial assets at fair value through profit or loss (FVTPL)Financial assets are classified as at FVTPL when the financial asset is either held for trading or it is designatedas at FVTPL.A financial asset is classified as held for trading if: • it has been acquired principally for the purpose of selling it in the near term; or • on initial recognition it is part of a portfolio of identified financial instruments that the Company manages together and has a recent actual pattern of short-term profit-taking; or • it is a derivative that is not designated and effective as a hedging instrument.A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initialrecognition if: • such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or • the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Companys documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or • it forms part of a contract containing one or more embedded derivatives, and K-IFRS 1039 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be
-4- designated as at FVTPL.Financial assets at FVTPL are stated at fair value, and any gains or losses arising on remeasurement arerecognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any dividend orinterest earned on the financial asset and is included in the ‘other revenue or expenses’ line item in theconsolidated statement of comprehensive income. And transaction cost from acquisition of them recognized inloss immediately when it arises.3) Held-to-maturity investmentsNon-derivatives financial assets with fixed or determinable payments and fixed maturity dates that theCompany has the positive intent and ability to hold to maturity are classified as held-to-maturity investments.Held-to-maturity investments are measured at amortized cost using the effective interest rate method less anyimpairment, with revenue recognized on an effective interest rate method basis.4) Available-for-sale financial assets (ABS)Non-derivatives financial assets that are not classified as at held-to-maturity, held-for-trading, designated as atfair value through profit or loss, or loans and receivables are classified as at financial assets AFS. Financialassets AFS are initially recognized at fair value plus directly related transaction costs. They are subsequentlymeasured at fair value. Unquoted equity investments whose fair value cannot be measured reliably are carriedat cost. Gains and losses arising from changes in fair value are recognized and accumulated in othercomprehensive income, with the exception of impairment losses, interest calculated using the effective interestmethod, and foreign exchange gains and losses on monetary assets, which are recognized in profit or loss.Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previouslyaccumulated in the other comprehensive income is reclassified to profit or loss. Dividends on AFS equityinstruments are recognized in profit or loss when the Company’s right to receive the dividends is established.The fair value of AFS monetary assets denominated in a foreign currency is determined in that foreign currencyand translated at the spot rate at the end of the reporting period. The foreign exchange gains and losses that arerecognized in profit or loss are determined based on the amortized cost of the monetary asset. Other foreignexchange gains and losses are recognized in other comprehensive income.5) Loans and receivablesTrade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted inan active market are classified as ‘loans and receivables’. Loans and receivables are measured at amortized costusing the effective interest rate method, less any impairment. Interest income is recognized by applying theeffective interest rate, except for short-term receivables when the recognition of interest would be immaterial.6) Impairment of financial assetsFinancial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of eachreporting period. Financial assets are considered to be impaired when there is objective evidence that, as aresult of one or more events that occurred after the initial recognition of the financial asset, the estimated futurecash flows of the investment have been affected.For listed and unlisted equity investments classified as AFS, a significant or prolonged decline in the fair valueof the security below its cost is considered to be objective evidence of impairment.For all financial assets classified as AFS, objective evidence of impairment could include: • significant financial difficulty of the issuer or counterparty; or • default or delinquency in interest or principal payments; or • it becoming probable that the borrower will enter bankruptcy or financial re-organization.For certain categories of financial asset, such as card receivables, assets that are assessed not to be impairedindividually are, in addition, assessed for impairment on a collective basis. Objective evidence of impairmentfor a portfolio of receivables could include the Company’s past experience of collecting payments, an increase
-5-in the number of delayed payments in the portfolio exceeding the average credit period, as well as observablechanges in national or local economic conditions that correlate with default on receivables.For financial assets carried at amortized cost, the amount of the impairment loss recognized is the differencebetween the asset’s carrying amount and the present value of estimated future cash flows, discounted at thefinancial asset’s original effective interest rate.The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assetswith the exception of card receivables, where the carrying amount is reduced through the use of an allowanceaccount. When a card receivable is considered uncollectible, it is written off against the allowance account.Subsequent recoveries of amounts previously written off are credited against the allowance account. Changesin the carrying amount of the allowance account are recognized in profit or loss.When an AFS financial asset is considered to be impaired, cumulative gains or losses previously recognized inother comprehensive income are reclassified to profit or loss in the period.With the exception of AFS equity instruments, if, in a subsequent period, the amount of the impairment lossdecreases and the decrease can be related objectively to an event occurring after the impairment was recognized,the previously recognized impairment loss is reversed through profit or loss to the extent that the carryingamount of the investment at the date the impairment is reversed does not exceed what the amortized cost wouldhave been had the impairment not been recognized.In respect of AFS equity securities, impairment losses previously recognized in profit or loss are not reversedthrough profit or loss. Any increase in fair value subsequent to an impairment loss is recognized in othercomprehensive income.7) Derecognition of financial assetsThe Company derecognizes a financial asset only when the contractual rights to the cash flows from the assetexpire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of theasset to another entity. If the Company neither transfers nor retains substantially all the risks and rewards ofownership and continues to control the transferred asset, the Company recognizes its retained interest in theasset and an associated liability for amounts it may have to pay. If the Company retains substantially all therisks and rewards of ownership of a transferred financial asset, the Company continues to recognize thefinancial asset and also recognizes a collateralized borrowing for the proceeds received.(5) Property, Plant and EquipmentProperty, plant and equipment are stated at cost less subsequent accumulated depreciation and accumulatedimpairment losses. The cost of an item of property, plant and equipment is directly attributable to theirpurchase or construction, which includes any costs directly attributable to bringing the asset to the location andcondition necessary for it to be capable of operating in the manner intended by management. It also includesthe initial estimate of the costs of dismantling and removing the item and restoring the site on which it islocated.Subsequent costs are recognized in carrying amount of an asset or as a separate asset if it is probable that futureeconomic benefits associated with the assets will flow into the Company and the cost of an asset can bemeasured reliably. Routine maintenance and repairs are expensed as incurred.The Company does not depreciate land. Depreciation expense is computed using the straight-line method basedon the estimated useful lives of the assets as follows: Estimated useful lives Building 40 years Fixtures and equipment 4 years Vehicles 4 yearsEach part of property and equipment with a cost that is significant in relation to the total cost are depreciated
-6-separately.The Company reviews the depreciation method, the estimated useful lives and residual values of property, plantand equipment at the end of each annual reporting period. If expectations differ from previous estimates, thechanges are accounted for as a change in an accounting estimate.(6) Intangible assets1) Intangible assets acquired separatelyIntangible assets with finite useful lives that are acquired separately are carried at cost less accumulatedamortization and accumulated impairment losses. Amortization is recognized on a straight-line basis over theirestimated useful lives. The estimated useful life and amortization method are reviewed at the end of eachreporting 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 accumulatedimpairment losses.2) Internally-generated intangible assets - research and development expenditureExpenditure on research activities is recognized as an expense in the period in which it is incurred.An internally-generated intangible asset arising from development (or from the development phase of aninternal project) is recognized if, and only if, all of the following have been demonstrated: • the technical feasibility of completing the intangible asset so that it will be available for use or sale; • the intention to complete the intangible asset and use or sell it; • the ability to use or sell the intangible asset; • how the intangible asset will generate probable future economic benefits; • the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and • the ability to measure reliably the expenditure attributable to the intangible asset during its development.The amount initially recognized for internally-generated intangible assets is the sum of the expenditure incurredfrom the date when the intangible asset first meets the recognition criteria listed above. Where no internally-generated intangible asset can be recognized, development expenditure is recognized in profit or loss in theperiod in which it is incurred.Subsequent to initial recognition, internally-generated intangible assets are reported at cost less accumulatedamortization and accumulated impairment losses, on the same basis as intangible assets that are acquiredseparately.3) Intangible assets acquired in a business combinationIntangible assets that are acquired in a business combination are recognized separately from goodwill and areinitially 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 lessaccumulated amortization and accumulated impairment losses, on the same basis as intangible assets that areacquired separately.(7) Impairment of tangible and intangible assets other than goodwillAt the end of each reporting period, the Company reviews the carrying amounts of its tangible and intangibleassets to determine whether there is any indication that those assets have suffered an impairment loss. If anysuch indication exists, the recoverable amount of the asset is estimated in order to determine the extent of theimpairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, theCompany estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a
-7-reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individualcash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which areasonable and consistent allocation basis can be identified.Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested forimpairment 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. In assessing value in use, theestimated future cash flows are discounted to their present value using a pre-tax discount rate that reflectscurrent market assessments of the time value of money and the risks specific to the asset for which theestimates of future cash flows have not been adjusted.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. Animpairment loss is recognized immediately in profit or loss.(8) ProvisionsProvisions are recognized when the Company has a present obligation (legal or constructive) as a result of apast event, it is probable that the Company will be required to settle the obligation, and a reliable estimate canbe made of the amount of the obligation.The amount recognized as a provision is the best estimate of the consideration required to settle the presentobligation at the end of the reporting period, taking into account the risks and uncertainties surrounding theobligation. When a provision is measured using the cash flows estimated to settle the present obligation, itscarrying amount is the present value of those cash flows (where the effect of the time value of money ismaterial).When some or all of the economic benefits required to settle a provision are expected to be recovered from athird party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be receivedand 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 ifthe current best estimate is being recognized. If the existence of an obligation to transfer economic benefit is nolonger probable, the related provision is reversed during the period.(9) Financial liabilities and equity instruments issued by the Company1) Classification as debt or equityDebt and equity instruments are classified as either financial liabilities or as equity in accordance with thesubstance of the contractual arrangement.2) Equity instrumentsAn equity instrument is any contract that evidences a residual interest in the assets of an entity after deductingall of its liabilities. Equity instruments issued by the Company are recognized at the proceeds received, net ofdirect issue costs.3) Compound instrumentsThe component parts of compound instruments issued by the Company are classified separately as financialliabilities and equity in accordance with the substance of the contractual arrangement. At the date of issue, thefair value of the liability component is estimated using the prevailing market interest rate for a similar non-convertible instrument. This amount is recorded as a liability on an amortized cost basis using the effectiveinterest rate method until extinguished upon conversion or at the instrument’s maturity date. The equitycomponent is determined by deducting the amount of the liability component from the fair value of thecompound instrument as a whole. This is recognized and included in equity, net of income tax effects, and is
-8-not subsequently remeasured.4) Financial guarantee contract liabilitiesFinancial guarantee contract liabilities are initially measured at their fair values and, if not designated as atFVTPL, are subsequently measured at the higher of: • the amount of the obligation under the contract, as determined in accordance with K-IFRS 1037 Provisions, Contingent Liabilities and Contingent Assets; and • the amount initially recognized less, cumulative amortization recognized in accordance with the K-IFRS 1018 Revenue Recognition.5) Financial liabilitiesFinancial liabilities are classified as either financial liabilities at FVTPL or other financial liabilities.6) Financial liabilities at FVTPLFinancial liabilities are classified as at FVTPL when the financial liability is either held for trading or it isdesignated as at FVTPL.A financial liability is classified as held for trading if: • it has been acquired principally for the purpose of repurchasing it in the near term; or • on initial recognition it is part of a portfolio of identified financial instruments that the Company manages together and has a recent actual pattern of short-term profit-taking; or • it is a derivative that is not designated and effective as a hedging instrument.A financial liability other than a financial liability held for trading may be designated as at FVTPL upon initialrecognition if: • such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or • the financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Companys documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or • it forms part of a contract containing one or more embedded derivatives, and K-IFRS 1039 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on remeasurementrecognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any interest paid onthe financial liability and is included in the ‘other operating revenue or expenses’ line item in the consolidatedstatement of comprehensive income.7) Other financial liabilitiesOther financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs.Other financial liabilities are subsequently measured at amortized cost using the effective interest rate method,with interest expense recognized on an effective interest rate method.The effective interest rate method is a method of calculating the amortized cost of a financial liability and ofallocating interest expense over the relevant period. The effective interest rate is the rate that exactly discountsestimated future cash payments through the expected life of the financial liability, or (where appropriate) ashorter period, to the net carrying amount on initial recognition.
-9-8) Derecognition of financial liabilitiesThe Company derecognizes financial liabilities when, and only when, the Company’s obligations aredischarged, cancelled or they expire.(10) Derivative instrumentsThe Company enters into a variety of derivative financial instruments to manage its exposure to interest rateand foreign exchange rate risk, including interest rate swaps and cross currency swaps.Derivatives are initially recognized at fair value at the date the derivative contract is entered into and aresubsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss isrecognized in profit or loss immediately unless the derivative is designated and effective as a hedginginstrument, in such case the timing of the recognition in profit or loss depends on the nature of the hedgerelationship.A derivative with a positive fair value is recognized as a financial asset; a derivative with a negative fair valueis recognized as a financial liability.1) Embedded derivativesDerivatives embedded in other financial instruments or other host contracts are treated as separate derivativeswhen their risks and characteristics are not closely related to those of the host contracts and the host contractsare not measured at FVTPL.2) Hedge accountingThe Company designates certain derivative instruments as cash flow hedges.At the inception of the hedge relationship, the entity documents the relationship between the hedginginstrument and the hedged item, along with its risk management objectives and its strategy for undertakingvarious hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Companydocuments whether the hedging instrument is highly effective in offsetting changes in cash flows of the hedgeditem.3) Cash flow hedgesThe effective portion of changes in the fair value of derivatives that are designated and qualify as cash flowhedges is recognized in other comprehensive income. The gain or loss relating to the ineffective portion isrecognized immediately in profit or loss, and is included in the ‘other operating revenue or expenses’ line item.Amounts previously recognized in other comprehensive income and accumulated in equity are reclassified toprofit or loss in the periods when the hedged item is recognized in profit or loss, in the same line of theconsolidated statement of comprehensive income as the recognized hedged item.Hedge accounting is discontinued when the Company revokes the hedging relationship, when the hedginginstrument expires or is sold, terminated, or exercised, or it no longer qualifies for hedge accounting. Any gainor loss accumulated in equity at that time remains in equity and is recognized when the forecast transaction isultimately recognized in profit or loss. When a forecast transaction is no longer expected to occur, the gain orloss accumulated in equity is recognized immediately in profit or loss.(11) Share capitalIncremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction,net of tax, from the proceeds.Where the Parent or its subsidiary purchases the Parent’s share capital, the consideration paid is deducted from
- 10 -shareholders’ equity as treasury shares until they are cancelled. Where such shares are subsequently sold orreissued, any consideration received is included in shareholders’ equity.(12) Commission revenue1) Fees that are a part of the financial instruments’ effective interest rateFees that are a part of the effective interest rate of a financial instrument are treated as an adjustment to theeffective interest rate. Such fees include compensation for activities such as evaluating the borrowers financialcondition, evaluating and recording guarantees, collateral, and other security arrangements, negotiating theterms of the instrument, preparing and processing documents and closing the transaction as well as originationfees received on issuing financial liabilities measured at amortized cost. These fees are deferred and recognizedas an adjustment to the effective interest rate. However, in case the financial instrument is classified as afinancial asset at fair value through profit or loss, the relevant fee is recognized as revenue when the instrumentis initially recognized.2) Commission from rendering of servicesCommission revenue from rendering of services is recognized as the services are provided. When it is notprobable that specific loan agreement is contracted and agreed commission is not applied to K-GAAP 1039,relating those services will be recognized on a straight-line basis as the work performs.3) Commission from significant act performedThe recognition of revenue is postponed until the significant act is executed.(13) Interest income and expenseUsing the effective interest rate method, the Company recognizes interest income and expense in consolidatedstatements of comprehensive income. Effective interest rate method calculates the amortized cost of financialassets or liabilities and allocates interest income or expense over the relevant period. The effective interest ratediscounts the expected future cash in and out through the expected life of financial instruments or, ifappropriate, through shorter period, to net carrying amount of financial assets or liabilities. When calculatingthe effective interest rate, the Company estimates future cash flows considering all contractual financialinstruments except the loss on future credit risk. Also, effective interest rate calculation include redemptioncosts, points (part of the effective interest rate) that are paid or earned between contracting parties, transactioncosts, and other premiums and discounts.(14) Net trading profit or lossNet trading profit or loss is comprised of held for trading assets (liabilities) related to gain and loss, andincludes changes of realized (unrealized) fair value, interest, dividend, gain or loss on foreign currencytranslation.(15) Dividend revenueDividend income from investments is recognized when the shareholder’s right to receive payment has beenestablished (provided that it is probable that the economic benefits will flow to the Company and the amount ofincome can be measured reliably).(16) Foreign currenciesThe individual financial statements of the Company are presented in the currency of the primary economicenvironment in which the entity operates (its functional currency). For the purpose of the consolidated financialstatements, the results and financial position of each entity are expressed in Korean Won, which is the
- 11 -functional currency of the Company and the presentation currency for the consolidated financial statements.In preparing the financial statements of the individual entities, transactions in currencies other than the entity’sfunctional currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of thetransactions. At the end of each reporting period, monetary items denominated in foreign currencies areretranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated inforeign 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 exchangedifferences on transactions entered into in order to hedge certain foreign currency risks. See Note 2 (10) abovefor hedging accounting policies.(17) Retirement benefit costsFor defined retirement benefit plans, the cost of providing benefits is determined using the Projected UnitCredit Method, with actuarial valuations being carried out at the end of each reporting period The present valueof the Company’s defined benefit obligation and the fair value of plan assets as at the end of each reportingperiod are amortized over the expected average remaining working lives of the participating employees. Pastservice cost is recognized immediately to the extent that the benefits are already vested, and otherwise isamortized on a straight-line basis over the average period until the benefits become vested.The retirement benefit obligation recognized in the consolidated statements of financial position represents thepresent value of the defined benefit obligation as adjusted for unrecognized actuarial gains and losses andunrecognized past service cost, and as reduced by the fair value of plan assets. Any asset resulting from thiscalculation is limited to unrecognized actuarial losses and past service cost, plus the present value of availablerefunds and reductions in future contributions to the plan.(18) TaxationIncome tax consists of current tax and deferred tax.1) Current taxThe tax currently payable is based on taxable profit for the period. Taxable profit differs from profit as reportedin the consolidated statement of comprehensive income because of items of income or expense that are taxableor deductible in other periods. The Company’s liability for current tax is calculated using tax rates that havebeen enacted or substantively enacted by the end of the reporting period2) Deferred taxDeferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities inthe consolidated 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 aregenerally recognized for all deductible temporary differences to the extent that it is probable that taxable profitswill be available against which those deductible temporary differences can be utilized. Such deferred tax assetsand 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 thetaxable profit nor the accounting profit.Deferred tax liabilities are recognized for taxable temporary differences associated with investments insubsidiaries and associates, and interests in joint ventures, except where the Company is able to control thereversal of the temporary difference and it is probable that the temporary difference will not reverse in theforeseeable future. Deferred tax assets arising from deductible temporary differences associated with suchinvestments and interests are only recognized to the extent that it is probable that there will be sufficient taxableprofits against which to utilize the benefits of the temporary differences and they are expected to reverse in theforeseeable future.
- 12 - 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. 3) Current and deferred tax for the year Current and deferred tax 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 tax 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. (19) Earnings per share Basic earnings per share is calculated by dividing net profit from the period available to common shareholders by the weighted-average number of common shares outstanding during the year. Diluted earnings per share is calculated using the weighted-average number of common shares outstanding adjusted to include the potentially dilutive effect of common equivalent shares outstanding. The weighted-average number of shares in current year includes convertible bond and stock option.3. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY In the application of the Company accounting policies, which are described in Note 2, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.4. TRANSITION TO K-IFRSs Transition adjustments from previous GAAP, Korean GAAP (K-GAAP), to K-IFRSs that affected the Company’s financial position, comprehensive income and cash flows are as follows. (1) Explanation of transition to K-IFRSs Significant differences between the accounting policies chosen by the Company under K-IFRS and under K- GAAP are as follows: 1) Impairment of financial assets (allowance for doubtful accounts) Under K-GAAP, the Company provided an allowance for doubtful accounts for card assets. The amount of allowance was the higher of allowance calculated based on the expected loss or calculated in accordance to the guidelines provided in the Regulation on Supervision of Credit-Specialized Financial Business. According to K-IFRS, card assets that are assessed for impairment individually and also assessed on a collective basis by grouping assets with similar characteristics. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment
- 13 -2) Provision for unused credit limitsUnder K-GAAP, the provision estimated the unused commitment based on the asset quality classificationsoffered to card accounts and applied a credit conversion ratio as dictated by the Supervision of BankingBusiness Regulation, additionally, loss provision for more than minimum required reserve rate in Regulation ofSpecialized Credit Financial Business was recognized. However under K-IFRS, the Company recognizes lossprovision for expected future use of unused portions in accordance with K-IFRS 1037 Provision, ContingentLiabilities and Asset.3) Expansion of the scope for accrued income adjustmentUnder K-GAAP, the Company adjusted for accrued income only for card assets not past due. However, underK-IFRS, the Company adjusts for accrued income card assets that are past due and even those that are notimpaired. The Company also provides an allowance for accrued income under K-IFRS.4) Financial instruments carried at amortized costFinancial instruments including loan and receivable were accounted for at the nominal amount under K-GAAP.According to K-IFRS, it is measured at fair value at initial recognition and subsequent at amortized cost.5) Deferred annual membership incomeAnnual membership income was recognized when it was acquired at one time under K-GAAP. Howeveraccording to K-IFRS, It is deferred and recognized during the membership period.6) Unearned revenue from points programUnder K-GAAP, the Company recognized a provision for granted points amounting to the expected expense inthe future. However, according to K-IFRS, the Company defers the revenue amounting to the fair value of thepoints when the points related to the revenue are granted, and then recognizes the revenue when the points areused. However, the Company reserves a provision for the granted points unrelated to the revenue, for theexpected expense in the future.7) Review of useful lives of intangible assetsUnder K-GAAP, intangible assets were amortized during 4~5 years of its estimated useful life. However, underK-IFRS, the Company reviews the useful life of intangible assets at the end of each reporting period andreflects appropriately changes accordingly.8) Retirement benefit obligation (Accrued severance liability)According to K-GAAP, at the end of a reporting period a retirement benefit obligation is calculated andrecognized, based on an assumption that all employees who have worked over a year were to retire as of thereporting period end. However, according to K-IFRS, retirement benefit obligation is estimated by actuarialassessment using the projected unit credit method.9) Tax effectThe tax effects which related to the aforementioned K-IFRS transition adjustments have are also reflected.
- 14 - (2) Reconciliation in equity due to transition to K-IFRS 1) Reconciliation of equity as of January 1, 2010, K-IFRS transition date, is as follows (Unit: Won in millions): January 1, 2010 K-GAAP Conversion Effect K-IFRSASSETSCASH AND BANK DEPOSITS : Cash and cash equivalents (Note 1) ￦ 479,500 ￦ 8,015 ￦ 487,515 Bank deposits (Note 1) 51 3 54 Total cash and bank deposits 479,551 8,018 487,569INVESTMENT FINANCIAL ASSETS : Financial assets available-for-sale (Note 1) 82,877 (300) 82,577 Financial assets held for trading 27 - 27 Total investment financial assets 82,904 (300) 82,604CARD ASSETS : Card receivables, net of present value discounts and allowance for doubtful accounts (Notes 1,2 and 3) 4,061,085 1,179,079 5,240,164 Cash advances, net of allowance for doubtful accounts (Notes 1 and 2) 535,785 205,031 740,816 Card loans, net of deferred loan origination fees and allowance for doubtful accounts (Notes 1,2 and 3) 814,509 219,884 1,034,393 Assets in trust, net of allowance for doubtful accounts (Note 1) 837,372 (837,372) - Total card assets 6,248,751 766,621 7,015,372PROPERTY AND EQUIPMENT : Land 67,819 - 67,819 Buildings, net of accumulated depreciation 32,055 - 32,055 Fixtures and equipment, net of accumulated depreciation 34,333 - 34,333 Vehicles, net of accumulated depreciation 300 - 300 Assets under construction 365,066 - 365,066 Total property and equipment 135,419 - 135,419OTHER ASSETS: Other accounts receivable, net of allowance for doubtful accounts (Notes 1 and 2) 9,808 (1,327) 8,481 Accrued revenue, net of allowance for doubtful accounts (Note 4) 41,621 (12,968) 28,653 Advanced payments, net of allowance for doubtful accounts (Note 1) 27,189 (6,622) 20,567 Prepaid expenses (Note 1) 4,121 5,189 9,310 Guarantee deposits (Note 3) 36,017 (1,519) 34,498 Intangible assets 27,466 - 27,466 Deferred income tax assets (Note 5) 55,551 36,581 92,132 Derivative assets (Note 1) 103,225 1,117 104,342 Memberships 22,933 - 22,933 Others 16,683 - 16,683 Total other assets 344,615 20,451 365,066 Total Assets ￦ 7,291,241 ￦ 794,789 ￦ 8,086,030 (Continued)
- 15 - January 1, 2010 K-GAAP Conversion Effect K-IFRSLIABILITIES AND SHAREHOLDERS’ EQUITYBORROWINGS : Borrowings (Note 1) ￦ 671,006 ￦ 400,000 ￦ 1,071,006 Bonds payable, net (Note 1) 3,853,140 333,871 4,187,011 Total borrowings 4,524,146 733,871 5,258,017OTHER LIABILITIES: Accounts payable (Note 6) 628,103 1,514 629,617 Withholdings (Note 1) 67,332 (10,269) 57,063 Accrued expenses (Note 1) 175,115 1,955 177,070 Unearned revenue (Note 6) 4,664 241,537 246,201 Retirement benefit obligation (Note 7) 5,164 148 5,312 Provisions (Note 8) 387,819 (330,871) 56,948 Derivatives liabilities (Note 1) 6,363 8,034 14,397 Other liabilities (Note 3) 9,287 (235) 9,052 Total Liabilities 5,807,992 645,685 6,453,677SHAREHOLDERS’ EQUITY: Share capital 802,326 - 802,326 Share premium 57,704 - 57,704 Retained earnings (Note 9) 576,332 158,446 734,778 Reserves (Note 1) 46,886 (9,363) 37,523 Non-controlling interest (Note 1) - 20 20 Total shareholders’ equity 1,483,249 149,103 1,632,352 Total Liabilities and Shareholders’ Equity ￦ 7,291,241 ￦ 794,789 ￦ 8,086,030 1) Effect from the changes in the scope of consolidation as a result of the adoption of K-IFRS 2) Effect of the allowance of doubtful accounts on an incurred loss model 3) Fair value effect due to the effective interest rate method 4) Effect from change in scope for accrued income adjustment 5) Temporary differences, arising from changes in capital of subsidiaries and resulting in changes of deferred tax assets (liabilities), and offsetting of deferred tax assets and liabilities 6) Effect from change in points program accounting treatment 7) Actuarial valuations of defined benefit liabilities and valuation of long-term employee benefits 8) Changes in estimation of provision for unused credit limits 9) Adjustment of retained earnings as follows; January 1, 2010 Adjustment in allowance for doubtful accounts ￦ 47,543 Adjustment in provision for unused credit limits 151,259 Adjustment in accrued income 532 Effective interest rate (EIR) (6,249) Deferred annual membership income (37,571) Unearned revenue from the points program (31,479) Adjustment of retirement benefit liabilities (148) Tax reconciliation 33,840 Consolidation effect 719 Total ￦ 158,446
- 16 - 2) Adjustments in equity as of December 31, 2010, the end of the final fiscal period described in annual consolidated financial statements in accordance with K-GAAP, are as follows (Unit: Won in millions): December 31, 2010 K-GAAP Conversion Effect K-IFRSASSETSCASH AND BANK DEPOSITS : Cash and cash equivalents (Note 1) ￦ 719,544 ￦ 77,504 ￦ 797,048 Bank deposits (Note 1) 23,128 3 23,131 Total cash and bank deposits 742,672 77,507 820,179INVESTMENT FINANCIAL ASSETS : Financial assets available-for-sale (Note 1) 2,143 (367) 1,776 Financial assets held for trading - - - Total investment financial assets 2,143 (367) 1,776CARD ASSETS : Card receivables, net of present value discounts and allowance for doubtful accounts (Notes 1,2 and 3) 4,859,801 1,101,579 5,961,380 Cash advances, net of allowance for doubtful accounts (Notes 1 and 2) 893,897 221,803 1,115,700 Card loans, net of deferred loan origination fees and allowance for doubtful accounts (Notes 1,2 and 3) 1,638,017 290,672 1,928,689 Assets in trust, net of allowance for doubtful accounts (Note 1) 1,081,585 (1,081,585) - Total card assets 8,473,299 532,469 9,005,768LOANS 985 7 992 Other loans, net of allowance for doubtful accounts 985 7 992PROPERTY AND EQUIPMENT : Land 80,414 - 80,414 Buildings, net of accumulated depreciation 34,494 - 34,494 Fixtures and equipment, net of accumulated depreciation 36,618 - 36,618 Vehicles, net of accumulated depreciation 458 - 458 Assets under construction 698 - 698 Total property and equipment 152,516 - 152,516OTHER ASSETS: Other accounts receivable, net of allowance for doubtful accounts (Notes 1 and 2) 15,859 (805) 15,054 Accrued revenue, net of allowance for doubtful accounts (Note 4) 60,034 (12,397) 47,637 Advanced payments, net of allowance for doubtful accounts (Note 1) 152,933 (76,614) 76,319 Prepaid expenses (Note 1) 7,821 3,813 11,634 Guarantee deposits (Note 3) 49,961 (1,832) 48,129 Intangible assets 47,859 1,107 48,966 Deferred income tax assets (Note 5) 147,146 (22,082) 125,064 Derivative assets (Note 1) 13,748 - 13,748 Memberships 21,484 - 21,484 Others 27,308 - 27,308 Total other assets 544,152 (108,809) 435,343 Total Assets ￦ 9,915,768 ￦ 500,806 ￦ 10,416,574(Continued)
- 17 - December 31, 2010 K-GAAP Conversion Effect K-IFRSLIABILITIES AND SHAREHOLDERS’ EQUITYBORROWINGS : Borrowings (Note 1) ￦ 1,391,766 ￦ 190,000 ￦ 1,581,766 Bonds payable, net (Note 1) 5,292,077 302,330 5,594,407 Total borrowings 6,683,843 492,329 7,176,172OTHER LIABILITIES: Accounts payable (Note 6) 792,925 2,796 795,721 Withholdings (Note 1) 85,105 (11,533) 73,572 Accrued expenses (Note 1) 207,816 2,160 209,976 Unearned revenue (Note 6) 5,237 282,203 287,440 Retirement benefit obligation (Note 7) 7,251 2,357 9,608 Provisions (Note 8) 466,218 (384,792) 81,426 Derivatives liabilities (Note 1) 4,789 30,297 35,086 Other liabilities (Note 3) 10,496 (33) 10,463 Total Liabilities 8,263,679 415,785 8,679,464SHAREHOLDERS’ EQUITY: Share capital 802,326 - 802,326 Share premium 57,704 - 57,704 Retained earnings (Note 9) 792,807 87,403 880,210 Reserves (Note 1) (749) (2,401) (3,150) Non-controlling interest (Note 1) - 20 20 Total shareholders’ equity 1,652,089 85,021 1,737,110 Total Liabilities and Shareholders’ Equity ￦ 9,915,768 ￦ 500,806 ￦ 10,416,574 1) Effect from the changes in the scope of consolidation as a result of the adoption of K-IFRS 2) Effect of the allowance of doubtful accounts on an incurred loss model 3) Fair value effect due to the effective interest rate method 4) Effect from change in scope for accrued income adjustment 5) Temporary differences, arising from changes in capital of subsidiaries and resulting in changes of deferred tax assets (liabilities), and offsetting of deferred tax assets and liabilities 6) Effect from change in points program accounting treatment 7) Actuarial valuations of defined benefit liabilities and valuation of long-term employee benefits 8) Changes in estimation of provision for unused credit limits 9) Adjustment of retained earnings as follows; December 31, 2010 Adjustment in allowance for doubtful accounts ￦ (25,849) Adjustment in provision for unused credit limits 17,701 Adjustment in accrued income 452 Effective interest rate (EIR) 2,222 Deferred annual membership income (10,123) Unearned revenue from the points program 6,159 Adjustment of retirement benefit liabilities 1,107 Tax reconciliation 855 Consolidation effect 94,879 Total ￦ 87,403
- 18 -3) Adjustments in consolidated comprehensive income for the year ended December 31, 2010 are as follows (Unit:Won in millions, except for per share amounts): Year ended December 31, 2010 K-GAAP Conversion Effect K-IFRS OPERATING REVENUE: Card income (Notes 4 and 6) ￦ 2,012,965 ￦ 101,843 ￦ 2,114,808 Interest income (Note 1) 13,364 2,448 15,812 Gain on asset securitization (Note 1) 90,704 (90,704) Gain on disposal of financial assets available-for-sale 101,145 - 101,145 Reversal of impairment loss on financial assets available-for- sale 2,616 - 2,616 Dividends income 724 - 724 Other operating revenue (Note 1) 54,223 27,118 81,341 Total operating revenue 2,275,742 40,705 2,316,447 OPERATING EXPENSES: Card expenses (Note 6) 891,441 (30,577) 860,864 Interest expenses (Note 1) 279,358 38,666 318,024 Bad debt expense and loss on disposal of loans (Notes 2 and 4) 158,861 25,849 184,710 General and administrative expenses (Notes 7 and 9) 481,588 (724) 480,864 Securitization expenses (Note 1) 901 901 Transfer to provision for unused credit limits (Note 8) 31,794 (17,701) 14,093 Other operating expenses 43,514 34,818 78,332 Total operating expenses 1,886,556 51,232 1,937,788 OPERATING INCOME 389,186 (10,527) 378,659 NON-OPERATING INCOME: Rental revenue 825 203 1,028 Miscellaneous gains (Note 3) 20,261 (885) 19,377 21,086 (682) 20,404 NON-OPERATING EXPENSES: Donations 1,969 - 1,969 Miscellaneous losses 19,219 - 19,219 21,188 - 21,188 INCOME BEFORE INCOME TAX 389,084 (11,209) 377,875 INCOME TAX EXPENSE (Note 5) 36,214 57,284 93,498 NET INCOME 352,870 (68,493) 284,377 OTHER COMPREHENSIVE INCOME (Note 1) : (47,635) 4,412 (43,223) Gain (loss) on fair value of financial assets available-for-sale (53,751) (50) (53,801) Effective portion of changes in fair value of cash flow hedges 6,116 7,012 13,128 Actuarial losses - (2,550) (2,550) TOTAL COMPREHENSIVE INCOME ￦ 305,235 ￦ (64,081) ￦ 241,154 1) Effect from the changes in the scope of consolidation as a result of the adoption of K-IFRS 2) Effect of the allowance of doubtful accounts on an incurred loss model 3) Fair value effect by effective interest rate method 4) Effect from change in scope for accrued income adjustment 5) Temporary differences, arising from changes in capital of subsidiaries and resulting in changes of deferred