Audit Report: Hyundai Card 1Q2011

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Hyundai Card Audit Report 1Q 2011

Hyundai Card Audit Report 1Q 2011

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  • 1. HYUNDAI CARD CO., LTD. AND ITS SUBSIDIARIESCONSOLIDATED FINANCIAL STATEMENTS FOR THETHREE MONTHS ENDED MARCH 31, 2011 AND 2010AND INDEPENDENT ACCOUNTANTS’ REVIEW REPORT
  • 2. 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.
  • 3. 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)
  • 4. 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.
  • 5. 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)
  • 6. 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.
  • 7. 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.
  • 8. 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)
  • 9. 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.
  • 10. 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
  • 11. 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.
  • 12. -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
  • 13. -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
  • 14. -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
  • 15. -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
  • 16. -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
  • 17. -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.
  • 18. -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
  • 19. - 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
  • 20. - 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.
  • 21. - 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
  • 22. - 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.
  • 23. - 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)
  • 24. - 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
  • 25. - 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)
  • 26. - 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
  • 27. - 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
  • 28. - 19 - 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) Change in useful life of intangible assets 4) Explanation of material adjustments to the consolidated statement of cash flows According to K-IFRS, dividends received, interest received, interest paid and income tax paid which not presently separately under K-GAAP are now presented separately in the statement of cash flows. In addition, gains (losses) on foreign currency translation of cash and cash equivalents are presented separately in the consolidated statements of cash flows. Interest paid, interest received and dividends received were classified as operating cash flows in accordance with K- GAAP. But, in accordance with K-IFRS, interest paid are reclassified as financing cash flows, and interest received and dividends received are reclassified as investing cash flows. The effect of exchange rate changes on cash and cash equivalents held or due in a foreign currency is presented separately from cash flows from operating, investing and financing activities. Except for the aforementioned items, there are no significant differences between the consolidated statements of cash flow prepared according to K-IFRS and K-GAAP. 5) Adjustment for comparable interim period of previous fiscal year Under K-GAAP, the preparation of consolidated interim financial statements were not required and accordingly not prepared by the Company. Under K-IFRS, in such cases, the effects of transition for the comparative periods; in equity for March 31, 2010 and for comprehensive income the three months ended March 31, 2010 is not required to be presented. Accordingly, the Company has omitted such disclosures in the accompanying financial statements. 5. SUBSIDIARY: Details of the Company’s subsidiaries as of March 31, 2011 and December 31, 2010 are as follows. Place of Voting share(%) incorporation and Companies Major operation operation March 31, 2011 December 31, 2010Work & Joy 2007 SPC Asset securitization Korea 0.9 0.9PRIVIA 1st SPC Asset securitization Korea 0.9 0.9PRIVIA 2nd SPC Asset securitization Korea 0.9 -
  • 29. - 20 - 6. CASH AND DEPOSITS: (1) Details of cash and cash equivalents as of March 31, 2011 and December 31, 2010 are as follows (Unit: Won in millions): March 31, 2011 December 31, 2010 Annual Annual interest rate(%) Amount interest rate(%) Amount Cash on hand - ₩ 4 - ₩ 4 Current deposits - 1,241 - 44 Pass-book deposits - 66,230 - 142,500 Other cash equivalents 2.75~3.15 210,000 2.37~2.75 210,000 Time deposits 3.20~3.30 54,500 2.88~2.90 14,500 Restricted cash & deposits 2.00~3.93 580,031 2.24~2.63 453,131 ₩ 912,006 ₩ 820,179 (2) Restricted financial assets as of March 31, 2011 and December 31, 2010 are as follows (Unit: Won in millions): Type Entity March 31, 2011 December 31, 2010 RestrictionDue from financial Financial Shinhan Bank Guarantee deposits institutions instruments and others ₩ 31 ₩ 31 for overdraft Financial Secured deposits instruments KB and others 33,000 23,100Others Other dues Korea Asset Management Escrow account Corporation 21,738 21,738 ₩ 54,769 ₩ 44,869 7. FINANCIAL ASSETS AVAILABLE-FOR-SALE (AFS): AFS financial assets as of March 31, 2011 and December 31, 2010 are as follows (Unit: Won in millions): March 31, 2011 December 31, 2010 Equity securities Unlisted shares ₩ 1,767 ₩ 1,775 Investments 1 1 ₩ 1,768 ₩ 1,776
  • 30. - 21 - 8. CARD ASSETS Composition of card assets for the three months ended March 31, 2011 and 2010 is as follows (Unit: Won in millions): Three months ended March 31, 2011 Three months ended March 31, 2010 Households Business Total Households Business TotalCARD ASSETS : Card receivables, net of present value discounts ₩ 5,430,421 ₩ 522,197 ₩ 5,952,618 ₩ 5,592,380 ₩ 428,316 ₩ 6,020,696 Cash advances 1,181,744 - 1,181,744 1,158,832 - 1,158,832 Card loans, net of deferred loan origination fees 2,000,567 - 2,000,567 1,992,216 - 1,992,216 Total card assets 8,612,732 522,197 9,134,929 8,743,428 428,316 9,171,744LOANS Loans to corporate - 1,000 1,000 - 1,000 1,000 Total 8,612,732 523,197 9,135,929 8,743,428 429,316 9,172,744Allowance for doubtful accounts (175,615) (8,168) (183,783) (161,546) (4,437) (165,983)Book value ₩ 8,437,117 ₩ 515,029 ₩ 8,952,146 ₩ 8,581,882 ₩ 424,879 ₩ 9,006,761Composition 94.20% 5.80% 100.00% 95.30% 4.70% 100.00% 9. ALLOWANCE FOR DOUBTFUL ACCOUNTS: Changes in the allowance for doubtful accounts for the three months ended March 31, 2011 and 2010 are as follows (Unit: Won in millions): Three months ended March 31, 2011 Card Cash receivables advances Card loans Other assets Loans Total Balance at January 1, 2011 ₩ 59,315 ₩ 43,132 ₩ 63,527 ₩ 4,059 ₩ 8 ₩ 170,041 Bad debt expenses (1,157) (1,207) (784) - - (3,148) Bad debt recovered 74 102 26 - - 202 Disposition & repurchase (7,074) (5,685) (7,113) - - (19,872) Transfer to (Reversal) allowance doubtful accounts 17,148 11,491 11,932 (1,388) 48 39,231 Balance at March 31, 2011 ₩ 68,306 ₩ 47,833 ₩ 67,588 ₩ 2,671 ₩ 56 ₩ 186,454 Three months ended March 31, 2010 Card Cash receivables advances Card loans Other assets Loans Total Balance at January 1, 2010 ₩ 42,809 ₩ 24,582 ₩ 26,060 ₩ - ₩ 1,825 ₩ 95,276 Bad debt expenses (1,077) (1,091) (429) - - (2,597) Bad debt recovered 64 96 71 - - 231 Disposition & repurchase (2,507) (1,326) (1,720) - - (5,553) Transfer to (Reversal) allowance doubtful accounts 6,257 5,094 5,740 - 52 17,143 Balance at March 31, 2010 ₩ 45,546 ₩ 27,355 ₩ 29,722 ₩ - ₩ 1,877 ₩ 104,500
  • 31. - 22 - 10. PROPERTY AND EQUIPMENT: (1) Property and equipment as of March 31, 2011 and December 31, 2010 are as follows (Unit: Won in millions): March 31, 2011 December 31, 2010 Acquisition Accumulated Acquisition Accumulated cost depreciation Book value cost depreciation Book valueLand ₩ 82,267 ₩ - ₩ 82,267 ₩ 80,414 ₩ - ₩ 80,414Buildings 41,475 (2,423) 39,052 36,663 (2,169) 34,494Vehicles 691 (202) 489 458 (165) 293Fixtures and equipment 90,895 (54,639) 36,256 86,975 (50,357) 36,618Assets under construction 667 - 667 697 - 697 Total ₩ 215,995 ₩ (57,264) ₩ 158,731 ₩ 205,207 ₩ (52,691) ₩ 152,516 As of December 31, 2010, the appraised value of the land are ₩14,431 million for Yoido 2nd land, ₩4,569 million for Hannamdong site, ₩5,962 million for Youngdeungpo building site, ₩791 million for Ulsan building site and ₩1,420 million of Suwon building site. In addition, the appraised value of the buildings are ₩13,516 million for Yoido 2nd land, ₩2,323 million for Hannamdong site, ₩2,838 million for Ulsan building and ₩5,258 million of Suwon building. (2) The changes in book value of property and equipment for the three months ended March 31, 2011 and year ended December 31, 2010 are as follows (Unit: Won in millions): Three months ended March 31, 2011 Beginning Ending balance Acquisition Reclassification Disposal Depreciation balance Land ₩ 80,414 ₩ 1,853 ₩ - ₩ - ₩ - ₩ 82,267 Buildings 34,494 4,812 - - (254) 39,052 Vehicles 293 233 - - (37) 489 Fixtures and equipment 36,617 3,890 31 - (4,282) 36,256 Assets under construction 698 - (31) - - 667 Total ₩ 152,516 ₩ 10,788 ₩ - ₩ - ₩ (4,573) ₩ 158,731 Year ended December 31, 2010 Beginning Ending balance Acquisition Reclassification(*) Disposal Depreciation balance Land ₩ 67,819 ₩ 12,595 ₩ - ₩ - ₩ - ₩ 80,414 Buildings 32,054 3,323 - - (883) 34,494 Vehicles 300 93 - - (100) 293 Fixtures and equipment 34,334 15,590 1,405 (10) (14,701) 36,618 Assets under construction 912 779 (994) - - 697 Total ₩ 135,419 ₩ 32,380 ₩ 411 ₩ (10) ₩ (15,684) ₩ 152,516 (*) ₩411 million of fixtures and equipment is reclassified from construction in progress intangible assets (see Note 11).
  • 32. - 23 -11. INTANGIBLE ASSETS: (1) Intangible assets as of March 31, 2011 and December 31, 2010 are as follows (Unit: Won in millions): March 31, 2011 Accumulated Acquisition cost amortization Book value Development cost ₩ 36,238 ₩ (7,531) ₩ 28,707 Industrial property rights 195 (50) 145 Others 12,066 (2,889) 9,177 Construction in progress 11,408 - 11,408 Total ₩ 59,907 ₩ (10,470) ₩ 49,437 December 31, 2010 Accumulated Acquisition cost amortization Book value Development cost ₩ 27,598 ₩ (5,797) ₩ 21,801 Industrial property rights 195 (40) 155 Others 11,987 (2,230) 9,757 Construction in progress 17,253 - 17,253 Total ₩ 57,033 ₩ (8,067) ₩ 48,966 (2) The changes in intangible assets for the three months ended March 31, 2011 and year ended December 31, 2010 are as follows (Unit: Won in millions): Three months ended March 31, 2011 Beginning Ending balance Acquisition Reclassification Disposal Amortization balance Development cost ₩ 21,081 ₩ 1,444 ₩ 7,196 ₩ - ₩ (1,734) ₩ 28,707 Industrial property rights 155 - - - (10) 145 Others 9,757 79 - - (659) 9,177 Construction in progress 17,253 1,351 (7,196) - - 11,408 Total ₩ 48,966 ₩ 29,874 ₩ - ₩ - ₩ (2,403) ₩ 49,437 Year ended December 31, 2010 Beginning Ending balance Acquisition Reclassification(*) Disposal Amortization balance Development cost ₩ 9,715 ₩ 8,791 ₩ 9,092 ₩ - ₩ (5,797) ₩ 21,801 Industrial property rights 195 - - - (40) 155 Others 7,577 4,329 81 - (2,230) 9,757 Construction in progress 9,980 16,857 (9,584) - - 17,253 Total ₩ 27,467 ₩ 29,977 ₩ (411) ₩ - ₩ (8,067) ₩ 48,966 (*) ₩411 million of construction in progress is reclassified to fixtures and equipment (see Note 10).12. ASSETS PLEDGED AS COLLATERAL: Land and buildings amounting to₩789 million are provided as collateral for leasehold deposit received as of March 31, 2011.
  • 33. - 24 - 13. BORROWINGS: Borrowings as of March 31, 2011 and December 31, 2010 are as follows (Unit: Won in millions): Annual interest Borrowed from rates (%) March 31, 2011 December 31, 2010 Commercial papers Shinhan Bank and others 2.93 ~ 3.68 ₩ 524,000 ₩ 850,000 Borrowings Hana Bank and others 4.21 ~ 5.31 180,000 620,000 Borrowings Mizuho in foreign currency Corporate Bank, Ltd. ¥Libor + 1.50 106,551 111,766 ₩ 810,551 ₩ 1,581,766 The Company has outstanding borrowings of ¥8,000,000,000 from Mizuho Corporate Bank, Ltd. 14. BONDS PAYABLE: (1) Bonds payable issued by the Company and outstanding as of March 31, 2011 and December 31, 2010 are as follows (Unit: Won in millions): Annual March 31, 2011 December 31, 2010 interest rates (%) Maturity Par value Issue price Par value Issue priceShort-term 2011.5.24 ~ debentures Debenture 3.17 ~ 4.55 2012.3.29 ₩ 370,000 ₩ 370,000 ₩ 350,000 ₩ 350,000Current portion of 1.5 ~ 8.56 2011.4.3 ~ debentures Debenture Libor + 0.43 2012.3.30 1,408,056 1,408,056 1,275,887 1,275,887Long-term 2012.4.7 ~ debentures Debenture 2.58 ~ 6.94 2018.3.29 4,623,776 4,623,776 3,972,640 3,972,640 Discounts on debentures (6,696) (4,121) ₩ 6,401,832 ₩ 6,395,136 ₩ 5,598,527 ₩ 5,594,406 The outstanding bonds payable are non-guaranteed corporate bonds, with their principals to be redeemed at maturity. Bond issuance costs are recorded as discounts on bonds payable and amortized using the effective interest rate method. (2) The redemption schedule for bonds payable is as follows (Unit: Won in millions): Amount to be redeemed Period as of March 31, 2011 2011.4.1 ~ 2012.3.31 ₩ 1,778,056 2012.4.1 ~ 2013.3.31 1,120,896 2013.4.1 ~ 2014.3.31 890,000 2014.4.1 ~ 2015.3.31 1,140,000 2015.4.1 ~ 1,472,880 ₩ 6,401,832 Amount to be redeemed Period as of December 31, 2010 2011.1.1 ~ 2011.12.31 ₩ 1,625,887 2012.1.1 ~ 2012.12.31 1,225,556 2013.1.1 ~ 2013.12.31 827,084 2014.1.1 ~ 2014.12.31 1,050,000 2015.1.1 ~ 870,000 ₩ 5,598,527
  • 34. - 25 -15. RETIREMENT BENEFIT PLAN: (1) Defined benefit plan The Company operates a defined benefit plan. Actuarial evaluation of plan assets and defined benefit obligation was performed by HMC Investment Securities Co., Ltd. as of March 31, 2011. Present value of the defined benefit obligation, current service cost and past service cost is calculated using the projected unit credit method. (2) Details of defined benefit plan are as follows (Unit: Won in millions): As of March 31, 2011 and December 31, 2010 the amounts recognized in the consolidation statements of financial position related to retirement benefit obligation are as follows (Unit: Won in millions): March 31, 2011 December 31, 2010 Present value of defined benefit obligation ₩ 29,975 ₩ 27,790 Fair value of plan assets (19,882) (18,143) Transferred to national pension fund (39) (39) Retirement benefit obligation ₩ 10,054 ₩ 9,608 (3) Changes in present values of defined benefit obligation for the years ended March 31, 2011 and 2010 are as follows (Unit: Won in millions): March 31, 2011 March 31, 2010 Beginning balance ₩ 27,790 ₩ 24,616 Current service cost 1,782 1,534 Interest cost 314 326 Benefits paid 236 346 Transfer of employees between the Company and the related companies (147) (571) Ending balance ₩ 29,975 ₩ 26,251 (4) Changes in fair values of plan assets for the three months ended March 31, 2011 and 2010 are as follows (Unit: Won in millions): March 31, 2011 March 31, 2010 Beginning balance ₩ 18,143 ₩ 19,259 Contributions from the employer 1,500 - Expected return on plan assets 174 228 Actuarial gains (losses) 16 (86) Transfer of employees between the Company and the related companies 200 (40) Benefits paid (151) (466) Ending balance ₩ 19,882 ₩ 18,895 (5) Details of pension expenses are as follows (Unit: Won in millions): March 31, 2011 March 31, 2010 Current service cost ₩ 1,782 ₩ 1,534 Interest cost 314 326 Expected return on plan assets (174) (228) Actuarial gains (*) (16) 86 ₩ 1,906 ₩ 1,718 Return on plan assets 190 142 (*) Actuarial gains are reflected in current profit or loss from January 1, 2011.
  • 35. - 26 - (6) Details of fair values of plan assets as of March 31, 2011 and December 31, 2010 are as follows (Unit: Won in millions): March 31, 2011 December 31, 2010 Amount Ratio Amount Ratio Deposits ₩ 19,882 100% ₩ 18,143 100% (7) Actuarial assumption as of March 31, 2011 and December 31, 2010 are as follows March 31, 2011 December 31, 2010 Discount rate (%) 4.90% 4.90% Expected return on plan assets (%) 4.20% 4.20% Expected rate of salary increase (%) 5.43% 5.43%16. EMPLOYEE BENEFITS: Details of employee benefits for the three months ended March 31, 2011 and 2010 are as follows (Unit: Won in millions): Three months ended March 31, 2011 2010 Short-term employee benefits ₩ 25,356 ₩ 19,298 Pension expenses 1,906 1,632 ₩ 27,262 ₩ 20,93017. PROVISION: (1) Provision for unused credit limits The Company recognizes other loss provision for expected future use of unused portions of credit limits. The changes in other loss provision are as follows (Unit: Won in millions): March 31, 2011 March 31, 2010 Beginning ₩ 46,073 ₩ 31,980 Increase 2,620 1,026 Ending ₩ 48,693 ₩ 33,006 (2) Provision for mileage points The Company records provisions for projected expenses considering the past rewards history and experience. The changes in provision for mileage points are as follows (Unit: Won in millions): March 31, 2011 March 31, 2010 Point Customer loyalty Point Customer loyalty Beginning ₩ 2,368 ₩ 12,069 ₩ 2,869 ₩ 13,080 Increase (decrease) (61) 397 (61) 127 Ending ₩ 2,307 ₩ 12,466 ₩ 2,808 ₩ 13,207 (3) Other provisions March 31, 2011 March 31, 2010 Beginning ₩ 20,916 ₩ 9,020 Increase - - Ending ₩ 20,916 ₩ 9,020
  • 36. - 27 - Escrow account deposits of ₩18,116 million and provision for pending litigations of ₩2,800 million are included in as the above amounts.18. DERIVATIVES AND HEDGE ACCOUNTING: (1) There are no derivative instruments held for trading as of March 31, 2011 and December 31, 2010. (2) Cash flow hedge 1) Fair value of cash flow hedge as of March 31, 2011 and December 31, 2010 are as follows (Won in millions): March 31, 2011 December 31, 2010 Contract Contract Amount Asset Liabilities Amount Asset LiabilitiesInterest rate swap ₩ 160,000 ₩ 583 - ₩ 560,000 ₩ 458 ₩ 974Cross currency swap 978,533 2,415 33,007 511,293 13,290 34,112 Total ₩ 1,138,553 ₩ 2,998 ₩ 33,007 ₩ 1,071,293 ₩ 13,748 ₩ 35,086 For transactions between local currencies and foreign currencies, the unsettled amount of transaction is presented using the basic foreign exchange rate on the contract amount in foreign currencies. For transaction between foreign currencies and other foreign currencies, the unsettled amount is presented using the basic foreign exchange rate on the contract amount in foreign currencies purchased. 2) Expected cash flow for cash flow hedge The maximum period, of which the Company is exposed to future cash flows fluctuations arising from currency swaps are as follows (Won in millions): March 31, 2011 December 31, 2010 Less than 1month ₩ (2,058) ₩ (2,443) 1-3 months (9,849) (7,278) 3-12 months (22,193) (35,820) 1-5 years (15,508) (11,262) More than 5 years - - ₩ (49,608) ₩ (56,803) The Company recorded the effective portion of the changes in fair value of cash flow hedges of ₩(5,123) million in other comprehensive income. Also, the Company recorded the ineffective portion of the changes in fair value of cash flow hedge of nil in current operation.
  • 37. - 28 -19. SHARE CAPITAL: (1) The Parent’s authorized shares are 600,000,000 (₩5,000 per shares), and 160,465,286 shares of common stocks (₩802,326 million per shares) are issued as of March 31, 2011. (2) There are no changes in shares of the Parent for the three months ended March 31, 2011 (3) 50,572,187 shares (₩252,861 million) of common stock issued by the Parent are owned by Hyundai Motors Company as of March 31, 201120. SHARE PREMIUM: Details of share premium as of March 31, 2011 and December 31, 2010 are as follows (Unit: Won in millions): March 31, 2011 December 31, 2010 Share premium ₩ 45,399 ₩ 45,399 Other capital surplus 12,305 12,305 ₩ 57,704 ₩ 57,70421. RETAINED EARNINGS: (1) Details of retained earnings as of March 31, 2011 and December 31, 2010 are as follows (Unit: Won in millions): March 31, 2011 December 31, 2010 Legal reserve (*) ₩ 20,143 ₩ 20,143 Retained earnings 934,117 860,067 ₩ 954,260 ₩ 880,210 (*) The Korean Commercial Code requires a company to appropriate at least 10 percent of dividends paid as legal reserve for each fiscal period, until the reserve equals 50 percent of paid-in capital. This reserve is not available for payment of cash dividends; however, it can be used to reduce deficit or be transferred to capital. (2) Changes in retained earnings for the three months ended March 31, 2011 and 2010 are as follows (Unit: Won in millions): Three months ended March 31, 2011 2010 Beginning ₩ 880,210 ₩ 734,778 Net income attributable to the owners of the Company 74,050 68,526 Total dividends - (104,302 ) Ending ₩ 954,260 ₩ 699,02222. RESERVES: Reserves as of March 31, 2011 and December 31, 2010 are as follows (Unit: Won in millions): March 31, 2011 December 31, 2010 Cash flow hedging reserve ₩ (3,585) ₩ (3,150)
  • 38. - 29 -23. RESERVE FOR BAD LOANS: (1) Reserve for bad loans reflected in retained earnings as of March 31, 2011 and December 31, 2010 are as follows (Unit: Won in millions): March 31, 2011 December 31, 2010 Accumulated reserve for bad loans ₩ - ₩ - Expected reserve for bad loans 220,992 - Reserve for bad loans ₩ 220,992 ₩ - (2) The transfer to reserve for bad loans and adjusted income with reserve for bad loans for the three months ended of March 31, 2011 and 2010 are as follows (Unit: Won in millions): Three months ended March 31, 2011 2010 Transfer to reserve for bad loans ₩ 220,992 ₩ - Adjusted income after reserve for bad loans (146,942) 68,594 EPS with reserve for bad loans ₩ (916) ₩ 42724. GENERAL AND ADMINISTRATIVE EXPENSES: Details of general and administrative expenses as of March 31, 2011 and 2010 are as follows (Unit: Won in millions): March 31, 2011 March 31, 2010 Salaries wages ₩ 20,699 ₩ 15,133 Pension expenses 1,906 1,632 Employee benefits 6,588 5,779 Travel expenses 422 257 Communication expenses 5,590 3,473 Post expense 3,057 2,612 Rental expenses 5,039 5,297 Taxes dues 4,868 3,657 Repair and maintenance expenses 181 101 Insurance premiums 7 9 Entertainment expenses 256 413 Advertising expenses 10,433 9,924 Supply expenses 386 336 Vehicle maintenance expenses 9 6 Periodicals expenses 27 24 Publication expenses 1,310 771 Training expenses 733 665 Electronic data processing expense 6,997 6,165 Expense for temporary staff 8,325 8,803 Professional expenses 21,688 12,772 Delivery commission 641 285 Commission expense 5,919 4,537 Business activities expense 778 800 Depreciation expense 4,573 3,692 Amortization expense 2,403 3,053 Event expense 157 92 Conference expense 103 93 Building administrative expense 598 325 ₩ 113,693 ₩ 90,706
  • 39. - 30 -25. TAXATION: (1) Income tax expense for the three months ended March 31, 2011 and 2010 are summarized as follows (Unit: Won in millions): Three months ended March 31, 2011 2010 Income tax currently payable ₩ 21,796 ₩ 18,958 Changes in deferred tax assets (liabilities) by temporary differences (*) (1,890) 10,127 Changes in deferred income tax reflected directly in shareholders’ equity 1,147 (2,814) Income tax expense ₩ 21,053 ₩ 26,271 (*) Net deferred tax assets due to temporary differences ₩ 126,953 ₩ 82,005 Net deferred tax liabilities due to temporary differences 125,063 92,132 Changes in net deferred tax assets (liabilities) due to temporary differences ₩ (1,890) ₩ 10,127 (2) A reconciliation between income before income tax and income tax expense for the three months ended March 31, 2011 and 2010 are as follows (Unit: Won in millions): Three months ended March 31, 2011 2010 Income before income tax ₩ 95,103 ₩ 94,864 Income tax payable by the statutory income tax rate of 24.2% 22,988 22,931 Tax reconciliations: Non-taxable income - (2) Non-deductible expenses 9 54 Consolidation effect (1,495) 2,923 Effect of change in tax rates and others (449) 365 Income tax expenses ₩ 21,053 ₩ 26,271 Effective income tax rate 22.14% 27.69% (3) Details of changes in accumulated temporary differences for the three months ended March 31, 2011 and for the year ended December 31, 2010 are as follows (Unit: Won in millions): Three months ended March 31, 2011 Beginning Ending Deferred Descriptions balance(*) Decrease Increase balance tax asset (liab.) Temporary differences to be deducted: Escrow deposit ₩ 18,083 ₩ - ₩ 33 ₩ 18,116 ₩ 3,986 Present value discount 8,644 8,644 - - - Allowance for doubtful accounts 59,652 10,959 - 48,693 10,713 Prepaid expenses (swap point) 54,312 - 3,275 57,587 12,999 Accrued expenses 94,442 29,718 - 64,724 15,663 Point allowance provisions 7,556 - 321,204 328,760 74,695 Debt-for-equity swap - - 7,450 7,450 1,803 Foreign currency translation losses 10,052 - 10,403 20,455 4,950 Loss on impairment of financial assets 24,059 7,864 - 16,195 3,566 available-for-sale Retirement benefit obligation (15,407) - 40,207 24,800 5,456 Loss on fair value of currency swaps - - 49,669 49,669 12,026 Loans to employees - - 5,443 5,443 1,198 Other loss provision - - 2,800 2,800 616 Others 280,591 278,820 - 1,771 948 541,984 336,005 440,484 646,463 148,619 Not recognized as asset - Recognized as asset 148,619
  • 40. - 31 - Three months ended March 31, 2011 Beginning Ending Deferred Descriptions balance(*) Decrease Increase balance tax asset (liab.)Temporary differences to be added: Retirement insurance premium ₩ 17,764 ₩ - ₩ (37,366) ₩ (19,602) ₩ (4,312) Allowance for doubtful accounts (8,978) (2,431) - (6,547) (1,585) Accrued receivable income (975) (684) - (291) (70) Foreign currency translation gains - - (17,918) (17,918) (4,336) Gain on fair value of interest rate swaps - - (583) (583) (132) Gain on fair value of currency swaps (8,959) - (37,436) (46,395) (11,231) (1,148) (3,115) (93,303) (91,336) (21,666)Not recognized as liability -Recognized as liability (21,666) Deferred income tax assets ₩ 126,953(*) Differences between the amount disclosed in prior year’s audit report and the actual tax return amount of ₩(7,156 ) million is reflected in the beginning balances. Year ended December 31, 2010 Beginning Ending Deferred Descriptions balance Decrease Increase balance tax asset (liab.)Temporary differences to be deducted: Escrow deposit ₩ 12,336 ₩ - ₩ 5,748 ₩ 18,084 ₩ 3,978 Present value discount 13,136 4,492 - 8,644 2,058 Provision for unused credit limits 34,657 - 24,995 59,652 13,203 Prepaid expenses(swap point) 59,396 5,084 - 54,312 12,221 Accrued expenses 84,593 - 9,849 94,442 22,855 Provision for mileage points 15,383 7,827 - 7,556 1,826 Loss on impairment of financial assets (43,507) - 67,566 24,059 5,557 available-for-sale Foreign currency translation losses 98,575 88,523 - 10,052 2,433 Retirement insurance premium (17,082) - 34,846 17,764 3,908 Others 245,326 - 35,265 280,591 65,086 502,813 105,926 178,269 575,156 133,125Not recognized as asset -Recognized as asset 133,125Temporary differences to be added: Allowance for doubtful accounts (19,633) (10,655) - (8,978) (2,173) Construction in progress (45) (45) - - - Accrued receivable income (520) - (455) (975) (236) Gain on fair value of currency swaps (98,056) (89,097) - (8,959) (2,264) Retirement benefit obligation 17,230 - (32,637) (15,407) (3,389) (101,024) (99,797) (33,092) (34,319) (8,062)Not recognized as liability -Recognized as liability (8,062) Deferred income tax assets ₩ 125,063
  • 41. - 32 -26. EARNINGS PER SHARE: (1) Earnings per share for the three months ended March 31, 2011and 2010 is as follows. Three months ended March 31, 2011 2010 Net income ₩ 74,049,884,990 ₩ 68,593,548,945 Weighted average number of shares 160,465,286 160,465,286 Net income per share ₩ 461 ₩ 427 (2) Diluted earnings per share As the Company has not issued any diluted securities, diluted earnings per share is the same as basic earnings per share for the year ended March 31, 2011.27. CONTINGENCIES AND COMMITMENTS: (1) Credit line agreement a. The following are credit line agreement as of March 31, 2011 and December 31, 2010 (Unit: Won in millions): Type Financial instruments March 31, 2011 December 31, 2010 Overdraft limit SC First Bank and others ₩ 50,100 ₩ 50,100 Intraday overdraft limit Shinhan Bank 250,000 250,000 General credit limit KB 160,000 60,000 b. Credit Facility Agreement The Company entered into a Credit Facility Agreement with GE Capital Corporation (“GECC”) on August 4, 2010. The limit of Credit Facility is Euro worth of USD200 million. The Company will pay 28bp of commitment fee for amount and the maturity is renewable every 364 days, up to 3 years. With regard to the Credit Facility Agreement, the Company, GECC, Hyundai Motor Company and Kia Motors Corp. entered into a Support Agreement and the contract date of Support Agreement is the same as that of Credit Facility Agreement. In accordance with the Support Agreement, GECC has the right of debt- for-equity swap for the unredeemed amount in case that the Company is not able to repay after a year from the first withdrawal of Credit Facility. Additionally, GECC has a put option to sell 41% of convertible stock to Hyundai Motor Company and 15% of convertible stock to Kia Motors Corp. at the time of debt-for-equity swap. Hyundai Motor Company and Kia Motors Corp. have call options to buy stocks from GECC on the same condition of put option in case that GECC does not exercise a put option. The Company is will pay 15bp of commitment fee on the amount equivalent to 41% and 15% of settled amount of Credit Facility to Hyundai Motor Company and Kia Motors Corp., respectively. c. Revolving Credit Facility The Company has a revolving credit facility agreement with many financial institutions for credit line for the period ended March 31, 2011 as follows (Unit: Won in millions): Financial instruments Credit line Term Kookmin Bank ₩ 100,000 2011-01-28 ~ 2012-01-28 Nong Hyup 100,000 2011-03-29 ~ 2012-03-29 Citibank, Seoul 50,000 2010-12-24 ~ 2011-12-24 Woori Bank 200000 2010-06-30 ~ 2011-06-30 Shinhan Bank 50,000 2010-04-16 ~ 2011-04-16 (2) Alliance The Company has separate agency agreements regarding credit card business with SC First Bank, Shinhan
  • 42. - 33 - Bank, Woori Bank, Korea Exchange Bank, Citibank, Hana Bank, Gwangju Bank, Jeonbuk Bank, Cheju Bank, Postal Office, Korea Computer Co., Ltd. and others.(3) License Agreement and Franchise Agreement The Company entered into Member Issuance and Franchise Agreements with Master Card International, Visa International and Diners Club International for credit card issuance, and pays each a fee based on a fixed rate for each credit card issued.(4) Overseas Travel Insurance Agreement The Company has a travel insurance agreement with Hyundai Marine & Fire Insurance Co., Ltd. to cover the risks and damages that may occur during credit cardholders’ travel. As of December 31, 2010, the maximum amount of insurance claim is ₩1.2 billion per cardholder.(5) Directors and Officers Liability Insurance The Company has insurance for its directors and officers covering indemnity with the limit of ₩20 billion and financial accident liability with the limit of ₩1 billion.(6) Pending Lawsuits As of March 31, 2011, the following are the pending lawsuits, whose outcomes cannot be ascertained as of the report date (Unit: Won in millions): Type Plaintiff Defendant Amount Status Claim for loss Hankook Cardnet and The Company and 16 compensation 238 others defendants ₩ 11,550 Ongoing Claim for loss Settlement compensation Yoo, Ki Sook The Company 38 recommendation Claim for loss Shin, Gwang Sik The Company and 16 compensation and 5 others defendants 1,801 Ongoing Claim for loss Hankook Card System The Company and 16 compensation and 18 others defendants 1,700 Ongoing Card merchant San Kyoung commission Corporation The Company 20 Ongoing Unfair profits Jung, So Yeon and 26 The Company and 5 others defendants 21 Ongoing Claim for loss Jang, Won Sik and 124 The Company and 11 compensation others defendants 700 Ongoing Claim for loss Ko, Sung Bong and The Company and 16 compensation 108 others defendants 109 Ongoing Claim for loss Yoon, Yong Seob and The Company and 16 compensation 30 others defendants 310 Ongoing Claim for loss Lee, Kyoung Hee and The Company and 16 compensation 3 others defendants 80 Ongoing Claim for loss Kang, Kyoung Hee The Company and 16 compensation and 53 others defendants 108 Ongoing Claim for loss The Company and 16 compensation Shin, Dong Wook defendants 2 Ongoing Claim for loss Yoo, Jae Won and 5 The Company and 16 compensation others defendants 108 Ongoing Cancellation of tax Yeongdeungpo District charge The Company Tax Office 56 Ongoing Cancellation of tax Yeongdeungpo District charge The Company Tax Office 69 Ongoing ₩ 16,672
  • 43. - 34 - (7) Deposit for Loss Contingency As of March 31, 2011, the Company has deposits of ₩9,020 million and ₩9,097 million to cover probable losses from the sales of Daewoo Construction’s shares and Daewoo International Corporation’ shares, respectively, in an escrow account and records the amounts as loss provision. (8) Reserve for Loss Reimbursement The Company has the obligation to reimburse customers for fraudulent credit card activities; the Company records the expected losses as an accrued expense. (9) Security on the Receivables Sold Relating to Asset-Backed Securitization The Company continuously transfers receivables to maintain a certain level of its equity in the 2nd series beneficiary certificates relating to the asset-backed securitization. (10) Guarantee The Company is provided with a performance guarantee from the Seoul Guarantee Insurance Co., Ltd. amounting to ₩5,134 million in connection with airline ticket payments and others. (11) Early Redemption Rule Associated with Asset-Backed Securitization According to the agreement on the Company’s Asset-Backed Securitization, in order to enhance credits of the asset-backed securities, several provisions are in place as trigger clauses to be used for early redemption calls, thereby limiting the risk that the investors are exposed to resulting from a change in quality of the assets in the future. In the event the asset-backed securitization of the Company is in violation of the applicable trigger clause, the Company is obliged to make early redemption for the asset-backed securities. (12) Contract of Sale of Receivables The Company entered into a contract with Hyundai Capital Services, Inc. relating to its sale of receivables on January 24, 2006. In accordance with the contract, the Company sells the receivables that are 60 days or more past due or written-off to Hyundai Capital Services, Inc. Such sale occurs three times a month on designated cutoff dates at the amount calculated using a predetermined sales ratio pursuant to the contract.28. ASSETS-BACKED BORROWINGS (ABS): (1) Asset-backed borrowing and underlying assets The Company transferred its card assets to a special purpose corporation (SPC) and issued ABS with them. As the Company did not meet the requirements of a financial asset transfer, in accordance with K-IFRS 1039, the Company recognized this transaction as a borrowing and not as selling assets. As such, card assets transferred to SPC are included as part as the Company’s other card assets. The details of asset-backed borrowing and underlying assets as of March 31, 2011 and December 31, 2010 are as follows (Unit: Won in millions): . March 31, 2011 December 31, 2010 Senior Underlying Senior Underlying Maturity tranche asset tranche asset PRIVIA 1st SPC 2011-10-18 ₩ 312,696 ₩ 642,168 ₩ 492,720 ₩ 843,818 nd PRIVIA 2 SPC 2014-04-23 442,880 904,740 - - Discounts on debentures (2,937) - (390) - Net book value ₩ 752,639 ₩ 1,546,908 ₩ 492,330 ₩ 843,818
  • 44. - 35 - (2) Details of contractual maturity of the Company’s asset-backed borrowing as of March 31, 2011 and December 31, 2010 are as follows (Unit: Won in millions): March 31, 2011 December 31, 2010 Less than 1 year ₩ 312,696 ₩ 492,720 1-2 years - - 2-3 years 396,067 - 3-4 years 73,813 - 4-5 years - - More than 5 years - - Prior liability 755,576 492,720 Discounts on debentures (2,937) (390) Senior tranche ₩ 752,639 ₩ 492,330 29. TRANSACTION WITH RELATED PARTIES (1) Transaction with related companies for the three months ended March 31, 2011 and 2010 are as follows (Unit: Won in millions): Three months ended March 31, 2011 Three months ended March 31, 2010 Company Company with with Controlling significant Controlling significant company influence Total company influence TotalRevenues Card revenue ₩ 25,803 ₩ 14,227 ₩ 40,030 ₩ 22,293 ₩ 11,277 ₩ 33,570 Rental revenue - 46 46 - 46 46 Miscellaneous revenue - 9,366 9,366 - 6,053 6,053 25,803 23,639 49,442 22,293 17,376 39,669Expense Card expense 36 285 321 55 95 150 General and 156 8,143 8,299 36 7,360 7,396 administrative expense Miscellaneous expense - 9,563 9,563 - 5,910 5,910 192 17,991 18,183 91 13,365 13,456Others Payment of advanced payment - 1,005 1,005 - 695 695 Purchase of property, plant and equipment - - - - 306 306 Purchase of intangible assets - - - - 885 885Total ₩ - ₩ 1,005 ₩ 1,005 ₩ - ₩ 1,886 ₩ 1,886
  • 45. - 36 - (2) Outstanding receivables, payables and guarantee from transactions with related parties as of March 31, 2011 and December 31, 2010 are as follows (Unit: Won in millions): March 31, 2011 December 31, 2010 Company Company with with Controlling significant Controlling significant company influence Total company influence TotalReceivables Card asset ₩ 47,183 ₩ 180,042 ₩ 227,225 ₩ 52,340 ₩ 153,009 ₩ 205,349 Account receivable 379 789 1,168 311 747 1,058 Other - - - - 32 32 Allowance for bed debt (708) (2,701) (3,409) (785) (2,295) (3,080) Total 46,854 178,130 224,984 51,866 151,493 203,359Payables Card expense 32,581 34,995 67,576 45,967 37,717 83,684 Account payable - (19,876) (19,876) - - - Total ₩ 32,581 ₩ 15,119 ₩ 47,700 ₩ 45,967 ₩ 37,717 ₩ 83,684 (3) Compensation for key executives 1) Compensation cost for key executives for the three months ended March 31, 2011 and 2010 consist of short-term employee benefit and retirement benefit. 2) Compensation for key management for the three months ended March 31, 2011 consists of the following (Unit: Won in millions): Three months ended Type March 31, 2011 Remuneration ₩ 4,979 Retirement allowance 378 ₩ 5,357 3) Key management includes directors (including non-executive directors) and members of the audit committee with significant authority and responsibility over the Company’s plan, direction and control. 30. OTHER COMPREHENSIVE INCOME Comprehensive income for the three months ended March 31, 2011consists of the following (Unit: Won in millions): Three months ended March 31, 2011 Beginning Increase Income tax Ending balance (decrease) Disposal effect balance Comprehensive income Effective portion of changes in fair value of cash flow hedges ₩ (4,260) ₩ 2,566 ₩ (744) ₩ (1,147) ₩ (3,585)
  • 46. - 37 -31. CONSOLIDATED STATEMENTS OF CASH FLOWS (1) The Company’s consolidated statements of financial position’s cash and cash equivalents consist of cash on hand, current deposits, and others. Details of cash and cash equivalents as of March 31, 2011 and 2010 are as follows (Unit: Won in millions): March 31, 2011 March 31, 2010 Cash on hand ₩ 4 ₩ 4 Current deposits 1,241 259 Pass-book deposits 66,230 66,472 Other cash equivalents (*) 210,000 130,000 Time deposits 54,500 20,000 Restricted cash & deposits 547,000 400,054 Total ₩ 878,975 ₩ 616,789 (*) Other cash equivalents consist of MMF, MMDA, CMA and Others. (2) Non-cash investing activities and non-cash financing activities which are not reflected in the consolidated statement of cash flow as of March 31, 2011 and 2010 are as follows (Unit: Won in millions): March 31, 2011 March 31, 2010 Replacement of office equipment ₩ 31 ₩ 625 Gain on valuation of available-for- sale financial assets - 6,516 Loss on valuation of derivatives 369 3,403 Total ₩ 400 ₩ 10,54432. FINANCIAL RISK MANAGEMENT: (1) Introduction 1) General The Company is exposed to various financial risks such as credit risk, liquidity risk and market risk associated with financial instruments. The level of exposure to such risks, objectives of the Company and its risk management policy and procedures are outlined below. 2) Risk management framework The board of directors sets and oversees risk management framework. Responsibility for implementing and monitoring the Company’s risk management strategies and policies resides with Asset-Liability Management Committee (ALCO) set by the board of directors. Each committee has a permanent and non- permanent member and reports its activities to the board of directors on a regular basis. The Company’ risk management policy is to ensure that the Company identify and analyze the potential risks to financial performance, determine the degree of risk and control acceptable to the Company and monitor whether the Company confirms with the risk and its associated degree of acceptance. The risk management policy and system are regularly reviewed to reflect changes in market conditions and products and services the Company provides. The Company operates education and training program and procedures and management standards so all employees understand their roles and duties with the goal to build organizational control environment. The audit committee is responsible for monitoring whether the Company continues to comply with the risk management policies and procedures and also the current risk management system is appropriate for the risks that the Company is exposed to, with the assistance of internal auditors, which review regular
  • 47. - 38 - and irregular risk management procedures and report the results to the audit committee.(2) Credit risk 1) General Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises primarily from the Company’s loan, card assets and securities. The Company considers all the elements of individual borrower’s credit risk exposure such as default and breach. 2) Risk management framework The Company’s exposure and credit ratings of its counterparties is primarily reviewed and managed for accuracy by credit risk management department. Secondly, aggregate risks are allocated to total portfolio and controlled by counterparty limits that are reviewed and approved by the risk management department. To ensure that resolution and approval of the board of directors with respect to risk management, the Company sets and operates the risk management committee, which is a permanent organization and holds a regular meeting once a month as a rule and frequently if necessary. The risk management committee is assisted by independent risk management department (risk management team) which oversees the effectiveness of the operational credit controls and processes. - Manages aggregate risks on the acceptable level of loss through portfolio limits management. These limits of credit risk are established based on portfolio management standards and reflected into business plan. Risk management committee receives a report of whether level of credit risk and limits of the acceptable level of credit risk are in compliance with the standards. - Acceptable limits on overdue over 1 month, normal credit card payment rate and etc are considered into business plan, and credit risks are managed within the limits. - Credit limit on a new customer (the applicant) is determined based on monthly estimated income and liabilities computed using qualification standards. Final limit is granted with consideration of application ratings and external ratings agencies’ ratings. Credit limit on an existing customer is downgraded or upgraded as a result of changes in combination of factors, including behavior ratings, personal information such as employment, position, amount used, days in arrears and etc. - Target level on key factors, including expected loss, economic capital, portfolio quality index (overdue rate, 30+@3MOB), etc is set and actively monitored, of which results are reported to risk management committee. - Measurement of expected loss using long-term probability of default and recording of allowance for possible losses enables the Company to minimize the expected loss due to economy downturn. - Through implementation and management of contingency plan, the Company announces the appropriate contingency level according to the level of the deteriorating economy and quickly takes a corresponding action. This enables the Company to proactively respond to rapidly changing credit risks. Each credit management department holds right to approve credit and is required to perform credit policies and procedures and report important credit related issues to management and risk management committee. Responsibility for portfolio performance and soundness resides with each credit management department, which monitors and controls all credit risks arising from the portfolio.
  • 48. - 39 - 3) Level of exposure to credit risk The Company’s level of exposure to credit risk as of March 31, 2011 and December 31, 2010 is summarized as follows (Unit: Won in millions): March 31, 2011 December 31, 2010 Deposit ₩ 912,002 ₩ 820,175 Card asset (*1) 9,134,929 9,171,743 Loan 1,000 1,000 Other asset (*1,2) 79,544 198,692 Unused commitment 30,460,354 28,113,052 Total ₩ 40,587,829 ₩ 38,304,662 (*1) Card asset is stated at book value before allowance for possible losses. (*2) Other asset consists of account payable, unearned income and prepaid amount. 4) Analysis of credit soundness of financial assets ① Credit soundness of card assets neither past due nor impaired as of March 31, 2011 and December 31, 2010 is summarized as follows (Unit: Won in millions):A. Retail March 31, 2011 December 31, 2010 Book value Book value before before Grade(*) allowance for Allowance allowance for Allowance doubtful for doubtful doubtful for doubtful accounts accounts Book value accounts accounts Book value Card receivables and cash advances 1 ₩ 628,493 ₩ 340 ₩ 628,153 ₩ 690,042 ₩ 371 ₩ 689,671 2 531,222 366 530,856 588,025 408 587,617 3 672,348 619 671,729 697,028 638 696,390 4 510,664 602 510,062 534,241 634 533,607 5 494,108 877 493,231 528,814 953 527,861 6 503,642 1,384 502,258 525,120 1,448 523,672 7 473,901 2,443 471,458 489,321 2,521 486,800 8 504,467 4,714 499,753 522,392 4,861 517,531 9 554,971 8,980 545,991 553,190 8,890 544,300 10 480,136 11,941 468,195 474,873 11,666 463,207 11 380,883 12,925 367,958 364,825 12,233 352,592 12 466,709 24,559 442,150 429,980 22,539 407,441 13 156,968 9,460 147,508 136,401 8,167 128,234 14 118,047 14,065 103,982 95,141 11,419 83,722 15 12,461 1,573 10,888 14,913 1,650 13,263 6,489,020 94,848 6,394,172 6,644,306 88,398 6,555,908 Card loan 1 7,839 20 7,819 8,774 23 8,751 2 40,925 177 40,748 45,864 203 45,661 3 125,667 590 125,077 134,001 634 133,367 4 136,156 1,190 134,966 140,295 1,234 139,061 5 542,635 7,755 534,880 541,545 7,796 533,749 6 461,592 10,547 451,045 450,669 10,343 440,326 7 258,798 8,639 250,159 256,291 8,575 247,716 8 163,160 7,497 155,663 163,724 7,518 156,206 9 99,593 6,431 93,162 97,980 6,289 91,691 10 29,283 2,367 26,916 30,821 2,499 28,322 11 62,640 7,542 55,098 62,390 7,509 54,881 1,928,288 52,755 1,875,533 1,932,354 52,623 1,879,731 Total ₩ 8,417,308 ₩ 147,603 ₩ 8,269,705 ₩ 8,576,660 ₩ 141,021 ₩ 8,435,639
  • 49. - 40 - (*) Grades are internal credit ratings evaluated by the Company.B. Corporate March 31, 2011 December 31, 2010 Book value Book value before before Grade(*) allowance for Allowance allowance for Allowance doubtful for doubtful doubtful for doubtful accounts accounts Book value accounts accounts Book value 1 ₩ 281,056 ₩ 148 ₩ 280,908 ₩ 173,953 ₩ 140 ₩ 173,813 2 115,158 183 114,975 128,813 1,510 127,303 3 49,630 123 49,507 47,470 563 46,907 4 46,848 188 46,660 35,884 221 35,663 5 5,603 109 5,494 4,290 93 4,197 6 3,201 115 3,086 2,859 116 2,743 7 2,996 287 2,709 2,247 187 2,060 8 5,391 563 4,828 473 70 403 N (**) 1,128 8 1,120 1,356 9 1,347 Total ₩ 511,011 ₩ 1,724 ₩ 509,287 ₩ 397,345 ₩ 2,909 ₩ 394,436 (*) Grades are internal credit ratings evaluated by the Company (**) N represents card assets consisting of sound government-related assets such as central and local governments, public authorities. ② Credit soundness of credit cards past due but not impaired as of March 31, 2011 and December 31, 2010 are summarized as follows (Unit: Won in millions): March 31, 2011 Less than More than 1 month 1-2 months 2-3 months 3 months Total Retail ₩ 144,383 ₩ 24,221 ₩ - ₩ - ₩ 168,604 Corporate 20,376 3,978 - 16 24,370 164,759 28,199 - 16 192,974 Card assets Card receivables 98,143 15,405 - 16 113,564 Cash advances 20,895 4,599 - - 25,494 Card loans 45,721 8,195 - - 53,916 164,759 28,199 - 16 192,974 Allowance for doubtful accounts (5,954) (2,195) - (16) (8,165) Book value ₩ 158,805 ₩ 26,004 ₩ - ₩ - ₩ 184,809 December 31, 2010 Less than More than 1 month 1-2 months 2-3 months 3 months Total Retail ₩ 126,309 ₩ 21,605 ₩ - ₩ - ₩ 147,914 Corporate 29,833 646 - 3 30,482 156,142 22,251 - 3 178,396 Card assets Card receivables 97,645 10,475 - 3 108,123 Cash advances 19,009 4,418 - - 23,427 Card loans 39,488 7,358 - - 46,846 156,142 22,251 - 3 178,396 Allowance for doubtful accounts (5,087) (1,990) - (3) (7,080) Book value ₩ 151,055 ₩ 20,261 ₩ - ₩ - ₩ 171,316
  • 50. - 41 - 5) Concentrations of credit risk ① Concentration of credit risk by term structures as of March 31, 2011 and December 31, 2010 are summarized as follows (Unit: Won in millions): March 31, 2011 Allowance for doubtful Retail Corporate Total Ratio accounts Book valueLess than 3 months ₩ 2,635,735 ₩ 481,336 ₩ 3,117,071 34.12% ₩ (39,597) ₩3,077,4743-6 months 1,327,557 1,171 1,328,728 14.54% (26,049) 1,302,6796-12 months 1,962,294 40,691 2,002,985 21.92% (38,151) 1,964,8341-2 years 1,820,436 - 1,820,436 19.93% (52,028) 1,768,4082-3 years 782,596 - 782,596 8.57% (19,659) 762,9373-4 years 69,139 - 69,139 0.76% (1,240) 67,8994-5 years 2,164 - 2,164 0.02% (368) 1,796More than 5 years 12,810 - 12,810 0.14% (6,691) 6,119 Total ₩ 8,612,731 ₩ 523,198 ₩ 9,135,929 100.00% ₩ (183,783) ₩ 8,952,146 December 31, 2010 Allowance for doubtful Retail Corporate Total Ratio accounts Book valueLess than 3 months ₩ 3,029,549 ₩ 374,477 ₩ 3,404,026 37.11% ₩ (38,355) ₩ 3,365,6713-6 months 918,460 53,191 971,651 10.60% (15,437) 956,2146-12 months 1,860,225 1,147 1,861,372 20.29% (35,552) 1,825,8201-2 years 2,022,449 500 2,022,949 22.05% (50,597) 1,972,3522-3 years 809,427 - 809,427 8.83% (19,220) 790,2073-4 years 91,046 - 91,046 0.99% (1,474) 89,5724-5 years 2,075 - 2,075 0.02% (291) 1,784More than 5 years 10,197 - 10,197 0.11% (5,056) 5,141 Total ₩ 8,743,428 ₩ 429,315 ₩ 9,172,743 100.00% ₩ (165,982) ₩ 9,006,761 ② Concentrations of credit risk by industry of corporate loans as of March 31, 2011 and December 31, 2010 are summarized as follows (Unit: Won in millions): March 31, 2011 December 31, 2010 Book value Book value before Allowanc before Allowanc allowance e for allowance e for for doubtful doubtful Book for doubtful doubtful Book accounts Ratio accounts value accounts Ratio accounts valueBanking ₩ 157,357 30.08% ₩ (134) ₩ 157,223 ₩ 121,221 28.23% ₩ (161) ₩ 121,060Manufacturing 110,721 21.16% (3,005) 107,716 127,973 29.81% (601) 127,372Service 157,900 30.18% (2,981) 154,919 150,854 35.14% (1,947) 148,907Public 488 0.09% - 488 459 0.11% - 459Others 96,732 18.49% (2,048) 94,684 28,808 6.71% (1,723) 27,085 Total ₩ 523,198 100.00% ₩ (8,168) ₩ 515,030 ₩ 429,315 100.00% ₩ (4,432) ₩ 424,883
  • 51. - 42 - 6) Card assets by the allowance for doubtful accounts’ assessment methods as of March 31, 2011 and December 31, 2010 are summarized as follows (Unit: Won in millions): March 31, 2011 Individual assessment Collective assessment Total Book value Book value Book value before before before allowance Allowance allowance Allowance allowance Allowance for for for for for for doubtful doubtful Allowance doubtful doubtful Allowance doubtful doubtful Allowance accounts accounts rate accounts accounts rate accounts accounts rate Card assets Card receivables ₩ 1,661 ₩ - ₩ - ₩ 6,327,458 ₩ (86,739) 1.37% ₩ 6,329,119 ₩ (86,739) 1.37% Cash advances - - - 804,805 (29,400) 3.65% 804,805 (29,400) 3.65% Card loans - - - 2,001,005 (67,588) 3.38% 2,001,005 (67,588) 3.38% Loans to corporate - - - 1,000 (56) 5.61% 1,000 (56) 5.61% Total ₩ 1,661 ₩ - ₩ - ₩ 9,134,268 ₩(183,783) 2.01% ₩9,135,929 ₩(183,783) 2.01% December 31, 2010 Individual assessment Collective assessment Total Book value Book value Book value before before before allowance allowance Allowance allowance Allowance for Allowance for for for for doubtful for doubtful Allowance doubtful doubtful Allowance doubtful doubtful Allowance accounts accounts rate accounts accounts rate accounts accounts rateCard assets Card receivables ₩ 1,665 - - ₩6,382,026 ₩ (75,319) 1.18% ₩6,383,691 ₩(75,319) 1.18% Cash advances - - - 795,241 (27,129) 3.41% 795,241 (27,129) 3.41% Card loans - - - 1,992,811 (63,527) 3.19% 1,992,811 (63,527) 3.19% Loans to corporate - - - 1,000 (7) 0.77% 1,000 (7) 0.77%Total ₩ 1,665 ₩ - ₩ - ₩9,171,078 ₩(165,982) 1.81% ₩9,172,743 ₩(165,982) 1.81% (3) Liquidity risk 1) Liquidity risk ① General Liquidity risk is the risk that the Company is unable to meet its payment obligations arising from financial liabilities as they fall due. The Company classifies and discloses contractual maturity of all financial assets, liabilities and offshore accounts in relation to liquidity risk into four categories as immediately payable, less than 1 year, 1~5 years and more than 5 years. The cash flows disclosed in the maturity analysis is undiscounted contractual amount, including principal and future interest payments, which results in disagreement with the discounted cash flows included in the consolidated statement of financial position. Calculated cash flows are allocated into four categories, which draw contractual maturity analysis of each financial asset and liability. ② Liquidity risk management process and guidance General principles and the overall framework for managing liquidity risk across the Company are defined in the Liquidity Risk Policy approved by the ALCO. All transactions that affect in and out flows of Korean/foreign currency funds across the Company are subject to liquidity risk management. Liquidity risk is centrally managed and controlled by the Financial Planning Department, which reports into the ALCO on liquidity analysis and statistics, including liquidity gap, liquidity ratio, maturity mismatch ratio and liquidity risk situation. The financial strategies to achieve
  • 52. - 43 - the Company’s management goal including liquidity risk is set and overseen by the ALCO. 2) Residual contractual maturity analysis of financial assets and liabilities The Company’s financial assets and liabilities by residual contractual maturity as of March 31, 2011 and December 31, 2010 are classified as follows (Unit: Won in millions): March 31, 2011 Immediate Less than More than payment 1 year 1-5 years 5 years TotalFinancial assets Cash and due from financial institutions ₩ 913,210 ₩ 253 ₩ - ₩ - ₩ 843,463 Investment financial assets 1,768 - - - 1,768 Card assets - 8,194,415 1,882,266 626,002 10,702,683 Loans - 1,080 - - 1,080 Other assets - 94,495 9,547 23,578 127,620 Total ₩ 844,978 ₩ 8,290,243 ₩ 1,891,813 ₩ 649,580 ₩11,676,614Financial liabilities Borrowings ₩ - ₩ 724,291 ₩ 30,944 ₩ - ₩ 755,235 Debentures - 1,896,756 4,566,062 102,838 6,565,656 Derivatives liabilities - 34,100 15,508 - 49,608 Other liabilities 41,571 885,150 614 - 927,335 Total ₩ 41,571 ₩ 3,540,297 ₩ 4,613,128 ₩ 102,838 ₩ 8,297,834 (*) These amounts include all cash inflows such as interests. December 31, 2010 Immediate Less than More than payment 1 year 1-5 years 5 years TotalFinancial assets Cash and due from financial institutions ₩ 820,901 ₩ 148 ₩ - ₩ - ₩ 801,049 Investment financial assets 1,775 - - - 1,775 Card assets - 9,008,393 771,337 20,112 9,799,842 Loans - 576 504 - 1,080 Derivatives assets - 7,564 - - 7,564 Other assets - 125,573 9,274 22,029 156,876 Total ₩ 822,676 ₩ 9,142,254 ₩ 781,115 ₩ 42,141 ₩10,768,186Financial liabilities Borrowings ₩ - ₩ 1,439,519 ₩ 91,295 ₩ - ₩ 1,530,814 Debentures - 1,820,293 4,392,090 41,030 6,253,413 Derivatives liabilities - 53,105 11,262 - 64,367 Other liabilities 52,143 914,507 16 - 966,666 Total ₩ 52,143 ₩ 4,227,424 ₩ 4,494,663 ₩ 41,030 ₩ 8,815,260 (*) These amounts include all cash inflows such as interests.(4) Market risk 1) Market risk Market risk is the risk to the Company’s earnings arising from changes in interest rates, stock price, currency exchange rates or commodity prices. Market risk is generated through both trading and non- trading position. The trading market risk that the Company is mainly exposed to is the interest rate risk arising from the change in the value of debt instruments and interest rate embedded securities due to
  • 53. - 44 - changes in market interest rate. The Company is additionally exposed to stock price and foreign exchange rate fluctuation risk arising from loans, receivables, deposits, securities or financial derivatives. Non trading market risk also exposes the Company to interest rate risk and liquidity risk. The trading position held for the Company’s short-term funding purpose does not fall into the category that expose the Company to interest rate risk as these are not sensitive to fluctuations in interest rate due to short-term strategic management. Only risks arising from non trading market risk are managed.2) Market risk management Incorporated market risk management policy is set by ALCO, which approves market risk limits, use of new derivative financial instruments and day to day operations related to market risks. Furthermore, ALCO determines VaR (Value at Risk) limits on bonds, stocks, foreign currency and financial derivatives instruments, position limits and stop loss limits, and additionally sets scenario loss limits and sensitivity limits on financial derivatives instruments. Determination of interest rate and commission rate, enactment and amendment of ALM risk management policy and interest rate and commission rate guidelines and analysis of monthly ALM risk lie with the Chief Financial Committee. Interest risk limits are determined based on asset liability position and expected interest rate fluctuation considering annual operational planning, and centrally measured and monitored by the Financial Planning Team. Responsibility for management of both interest rate risk condition, such as interest rate gap, duration gap, sensitivity, etc and compliance with interest rate risk limits policy resides with the Financial Planning Team, which reports the results into the ALCO on a monthly basis.3) Non trading market management The majority of the Company’s non trading market risk is the interest rate risk. This non-traded interest rate risk arises from two mismatch sources: mismatches between the maturity of interest bearing assets and liabilities and between interest rate changing periods. The Company internally assesses the interest rate risk arising from Koran and Foreign currency assets and liabilities including derivatives financial instruments. And, most assets generating interest income and liabilities generating interest expense are denominated in Korean won. The objective of interest rate risk management is to reduce a decline in the value of assets due to changes in market interest rates and to secure stable and optimal net interest income. The management of interest rate risk is supported by a comprehensive analysis of interest rate gap (between assets generating interest income and liabilities generating interest expense) and measurement of interest rate VaR and EaR (Earnings-at-Risk). The Company calculates risk index using the methodologies listed above, and discloses the interest rate risk calculated using duration.4) Interest rate VaR (Value-at-Risk) Interest rate VaR is a statistical estimate of the maximum potential decline in the value of net assets due to the unfavorable changes in interest rate, using the VaR methodology, a key measure of market risk, into interest rate risk assessment. The interest rate VaR disclosed below is calculated using the BIS (the Bank for International Settlements) standards framework. This methodology employs using revised duration proxy by maturity provided by BIS. The assumption used to calculate the VaR is that expected range of interest rate fluctuation affected by interest rate shock is 100bp parallel movement of benchmark rate curve. Although the VaR is a generally used key measure of market risk, certain limitations to this methodology exist. The VaR measures the potential loss in value of a risky asset or portfolio based on historical market movements over a defined period for a given confidence interval. However, it is not always possible in practice that the historical market movements reflect all future conditions and circumstances, which results in variance in actual loss timing and size due to the changes in assumptions used in calculation.
  • 54. - 45 - The result of interest rate VaR calculated under normal distribution of interest rate is as follows (Unit: Won in millions): March 31, 2011 December 31, 2010 Interest rate VaR ₩ 31,590 ₩ 4,80033. FINANCIAL ASSETS AND FINANCIAL LIABILITIES: (1) Fair Value of Financial Assets and Liabilities The fair value of financial assets and financial liabilities as of March 31, 2011 and December 31, 2010 are summarized as follows (Unit: Won in millions): March 31, 2011 December 31, 2010 Book value Fair value Book value Fair value Assets Financial assets Cash and due from financial institutions ₩ 912,006 ₩ 912,006 ₩ 820,179 ₩ 820,179 Investment financial assets 1,768 1,768 1,776 1,776 Card assets 8,951,202 9,315,138 9,005,768 8,946,299 Loans 944 1,029 992 1,017 Derivatives assets 2,998 2,998 13,748 13,748 Other assets 165,855 166,126 192,157 192,598 Sub total 10,034,773 ₩ 10,399,065 10,034,620 ₩ 9,975,617 Non-financial assets 386,878 381,954 Assets total ₩ 10,421,651 ₩ 10,416,574 Liabilities Financial liabilities Borrowings ₩ 810,551 ₩ 644,168 ₩ 1,581,766 ₩ 1,572,060 Debentures 6,395,136 6,437,450 5,594,406 5,705,078 Derivatives liabilities 33,007 33,007 35,086 35,086 Other liabilities 900,623 900,614 998,090 998,104 Sub total 8,139,317 ₩ 8,015,239 8,209,348 ₩ 8,310,328 Non-financial liabilities 471,599 470,116 Liabilities total ₩ 8,610,916 ₩ 8,679,464 Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. The Company presents a comparative disclosure of fair value and book value by financial assets and financial liabilities type. The best evidence of fair value is a quoted price in an active market. The fair values of financial instruments where no active market exists or where quoted prices are not otherwise available are determined by using valuation techniques. Valuation techniques include using recent arm’s length market transactions between knowledgeable, willing parties, if available, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. If there is a valuation technique commonly used by market participants to price the instrument and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, the Company uses that technique. Although the Company believes that the valuation techniques it has used are appropriate and the fair values recorded in the consolidated statement of financial position are reasonably estimated, the application of
  • 55. - 46 - assumptions and estimates means that any selection of different assumptions and valuation techniques would cause the reported results to differ. Furthermore, as various valuation techniques and assumptions are used in estimating fair values, it might be difficult to compare the Company’s results with fair values determined by other financial institutions.(2) Fair Value hierarchy All financial instruments at fair value are categorized into one of the following three fair value hierarchy levels. Level 1: Fair value measurements are those derived from quoted prices (unadjusted) for identical assets or liabilities in an active market. Examples are publicly traded stocks, derivatives and treasury bonds. Level 2: Fair value measurements are those derived from valuation techniques of which for all significant inputs are market-observable, either directly or indirectly. Examples include bonds denominated in Korean won, bonds denominated in foreign currencies and general over-the-counter derivatives transactions, such as swaps, forward contracts and options. Level 3: Fair value measurements are those derived from valuation techniques which include significant inputs which are not based on observable market data. Examples are unlisted stocks, complex structured bonds and complex over-the-counter derivatives. The best estimate of fair value is quoted prices in an active market if the financial instrument is traded in the active market (Level 1). If there is a quoted price commonly used by market participants through stock exchange, seller, broker, industrial organization, ratings agencies or supervisory authorities, that price is considered regularly occurred in actual market transactions between knowledgeable, willing parties. The table below provides the Company’s financial assets and financial liabilities recorded at fair value in the consolidated statement of financial position as of March 31, 2011 and December 31, 2010 (Unit: Won in millions): March 31, 2011 Book value Fair value Level 1 Level 2 Level 3(*)Financial assetsFair value financial assets Financial assets ₩ 1,768 ₩ 1,768 ₩ - ₩ - ₩ 1,768 Derivatives assets 2,998 2,998 - 2,998 - ₩ 4,766 ₩ 4,766 ₩ - ₩ 2,998 ₩ 1,768Financial liabilitiesFair value financial liabilities Derivatives liabilities ₩ 33,007 ₩ 33,007 ₩ - ₩ 33,007 ₩ -(*) There was no change in the financial instruments classified as level 3 during the reporting period. December 31, 2010 Book value Fair value Level 1 Level 2 Level 3(*)Financial assetsFair value financial assets Financial assets ₩ 1,776 ₩ 1,776 ₩ - ₩ - ₩ 1,776 Derivatives assets 13,748 13,748 - 13,748 - ₩ 15,524 ₩ 15,524 ₩ - ₩ 13,748 ₩ 1,776Financial liabilitiesFair value financial liabilities Derivatives liabilities ₩ 35,086 ₩ 35,086 ₩ - ₩ 35,086 ₩ -(*) There was no change in the financial instruments classified as level 3 during the reporting period.
  • 56. - 47 - (3) Financial assets and financial liabilities recorded at fair value The table below provides the Company’s financial assets and financial liabilities recorded at fair value in the consolidated statements of financial position as of March 31, 2011 and December 31, 2010 (Unit: Won in millions): March 31, 2011 Financial asset at FVTPL Financial Available- Financial Trading assets for-sale assets financial designated at Loans and financial held to Hedging assets FVTPL receivables assets maturity derivative TotalFinancial assets Cash and bank deposit ₩ - ₩ - ₩ 912,006 ₩ - ₩ - ₩ - ₩ 912,006 Financial assets - - - 1,768 - - 1,768 Card assets - - 8,951,202 - - - 8,951,202 Loans - - 944 - - - 944 Derivative assets - - - - - 2,998 2,998 Other assets - - 165,855 - - - 165,855 Total ₩ - ₩ - ₩10,030,007 ₩ 1,768 ₩ - ₩ 2,998 ₩10,034,773 March 31, 2011 Financial liabilities at FVTPL Financial Trading liabilities Amortized financial designated at financial Hedging liabilities FVTPL liabilities derivatives Total Financial liabilities Borrowings ₩ - ₩ - ₩ 810,551 ₩ - ₩ 810,551 Bonds payable - - 6,395,136 - 6,395,136 Derivatives liabilities - - - 33,007 33,007 Other liabilities - - 900,623 - 900,623 Total ₩ - ₩ - ₩ 8,106,310 ₩ 33,007 ₩ 8,139,317 December 31, 2010 Financial asset at FVTPL Financial Available- Financial Trading assets for-sale assets financial designated at Loans and financial held to Hedging assets FVTPL receivables assets maturity derivatives TotalFinancial assets Cash and bank deposit ₩ - ₩ - ₩ 820,179 ₩ - ₩ - ₩ - ₩ 820,179 Financial assets - - - 1,776 - - 1,776 Card assets - - 9,005,768 - - - 9,005,768 Loans - - 992 - - - 992 Derivative assets - - - - - 13,748 13,748 Other assets - - 192,156 - - - 192,156 Total ₩ - ₩ - ₩10,019,096 ₩ 1,776 ₩ - ₩13,748 ₩10,034,620
  • 57. - 48 - December 31, 2010 Financial liabilities at FVTPL Financial Trading liabilities Amortized financial designated at financial Hedging liabilities FVTPL liabilities derivatives TotalFinancial liabilities Borrowings ₩ - ₩ - ₩ 1,581,766 ₩ - ₩ 1,581,766 Bonds payable - - 5,594,406 - 5,594,406 Derivatives liabilities - - - 35,086 35,086 Other liabilities - - 998,090 - 998,090 Total ₩ - ₩ - ₩ 8,174,262 ₩ 35,086 ₩ 8,209,34834. NET INTEREST INCOME: Net interest income for the three months ended March 31, 2011 and 2010 is as follows (Unit: Won in millions): Three months ended March 31, 2011 2010 Interest income Cash and due from financial institutions ₩ 4,538 ₩ 3,129 Others 346 429 Total 4,884 3,558 Interest expense Borrowings 11,484 11,918 Bonds payable 78,845 61,075 Others 32 50 Total 90,361 73,043 Net interest income ₩ (85,477) ₩ (69,485)35. NET COMMISSION INCOME: Net commission income for the three months ended March 31, 2011 and 2010 is as follows (Unit: Won in millions): Three months ended March 31 2011 2010 Commission income Card assets ₩ 359,425 ₩ 383,914 Total 359,425 383,914 Commission expense Service fee 123,858 100,343 Payment fee 3,245 2,813 A credit sale handling fee 24,518 20,381 Merchants co-payment fee 30 34 Overseas payment fee 7,808 6,940 Other 8,994 21,745 Total 168,453 152,256 Net commission income ₩ 190,972 ₩ 231,658
  • 58. - 49 - 36. NET INCOME OF FINANCIAL ASSETS: Net income of financial assets for the three months ended March 31, 2011 and 2010 is as follows (Unit: Won in millions): <March 31, 2011> Gains Reversal of on disposals Impairment loss impairment loss Net gainFinancial assets available-for-sale ₩ - ₩ 8₩ 67 ₩ 59 <December 31, 2010> Gains Reversal of on disposals Impairment loss impairment loss Net gainFinancial assets available-for-sale ₩ 3,174 ₩ - ₩ 67 ₩ 3,241