HYUNDAI CARD CO., LTD. AND ITS SUBSIDIARIESCONSOLIDATED FINANCIAL STATEMENTSAS OF DECEMBER 31, 2012 AND 2011AND FOR THE YEARS ENDEDDECEMBER 31, 2012 AND 2011AND INDEPENDENT AUDITOR’S REPORT
Independent Auditor’s ReportEnglish Translation of a Report Originally Issued in KoreanTo the Shareholders and Board of Directors ofHyundai Card Co., Ltd. :We have audited the accompanying consolidated statements of Hyundai Card Co., Ltd. and its subsidiaries (the“Company”). The financial statements consist of the consolidated statements of financial position as of December31, 2012 and 2011, respectively, and the related consolidated statements of comprehensive income, consolidatedstatements of changes in shareholders’ equity and consolidated statements of cash flows, all expressed in Koreanwon, for the years ended December 31, 2012 and 2011, respectively. The Company’s management is responsible forthe preparation and fair presentation of the consolidated financial statements and our responsibility is to express anopinion on these consolidated financial statements based on our audits.We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the financial positionof the Company as of December 31, 2012 and 2011, respectively, and the results of its operations and its cash flowsfor the years ended December 31, 2012 and 2011, respectively in conformity with Korean International FinancialReporting Standards (“K-IFRS”).Accounting principles and auditing standards and their application in practice vary among countries. Theaccompanying consolidated financial statements are not intended to present the financial position, results ofoperations and cash flows in accordance with accounting principles and practices generally accepted in countriesother than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to auditsuch financial statements may differ from those generally accepted and applied in other countries. Accordingly, thisreport and the accompanying consolidated financial statements are for use by those knowledgeable about Koreanaccounting procedures and auditing standards and their application in practice.March 12, 2013 Notice to ReadersThis report is effective as of March 12, 2013, the auditor’s report date. Certain subsequent events orcircumstances may have occurred between the auditor’s report date and the time the auditor’s report is read. Suchevents or circumstances could significantly affect the accompanying consolidated financial statements and mayresult in modifications to the auditor’s report.
HYUNDAI CARD CO., LTD. AND ITS SUBSIDIARIES(the “Company”)CONSOLIDATED FINANCIAL STATEMENTSAS OF DECEMBER 31, 2012 AND 2011AND FOR THE YEARS ENDEDDECEMBER 31, 2012 AND 2011The accompanying financial statements including all footnote disclosures were prepared by andare the responsibility of the Company.Chung, Tae YoungCEO
HYUNDAI CARD CO., LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS OF DECEMBER 31, 2012 AND 2011 (Unit: Korean Won) December 31, 2012 December 31, 2011 ASSETS: CASH AND BANK DEPOSITS (Notes 5, 32, 33 and 34): Cash and cash equivalents ￦ 791,547,295,193 ￦ 830,022,903,023 Bank deposits 33,029,000,000 33,031,500,000 Total cash and bank deposits 824,576,295,193 863,054,403,023 INVESTMENT FINANCIAL ASSETS (Notes 6 and 34): Financial assets available-for-sale (AFS) 1,766,969,764 1,766,969,764 Total investment financial assets 1,766,969,764 1,766,969,764 CARD ASSETS (Notes 7, 8, 30, 33 and 34): Card receivables, net of present value discounts, deferred origination fees and allowance for doubtful accounts 6,530,709,506,111 6,432,351,415,041 Cash advances, net of allowance for doubtful accounts 906,232,767,098 978,117,626,263 Card loans, net of present value discounts, deferred loan origination fees and allowance for doubtful accounts 2,270,095,402,706 1,963,797,640,687 Total card assets 9,707,037,675,915 9,374,266,681,991 LOANS (Notes 7, 8, 33 and 34) Other loans, net of allowance for doubtful accounts - 469,647,440 PROPERTY AND EQUIPMENT (Notes 9, 11, 14 and 30): Land 122,011,816,788 83,994,796,609 Buildings, net of accumulated depreciation 60,330,598,734 42,186,583,765 Vehicles, net of accumulated depreciation 163,464,977 270,015,754 Fixtures and equipment, net of accumulated depreciation 56,690,437,564 57,974,548,577 Finance lease assets 1,389,170,627 2,500,507,128 Construction in progress 23,797,602,168 471,628,080 Total property and equipment 264,383,090,858 187,398,079,913 OTHER FINANCIAL ASSETS (Notes 5, 8, 19, 30, 33 and 34): Other accounts receivable, net of allowance for doubtful accounts 85,387,050,368 44,939,903,548 Accrued revenue, net of allowance for doubtful accounts 43,654,761,801 43,753,371,236 Guarantee deposits 52,348,673,218 71,368,896,821 Derivative assets 901,423,501 2,555,101,143 Total other financial assets 182,291,908,888 162,617,272,748 OTHER NON-FINANCIAL ASSETS (Notes 8, 10, 26 and 30): Advanced payments, net of allowance for doubtful accounts 11,254,701,307 25,223,575,660 Prepaid expenses 48,279,724,993 48,548,656,736 Intangible assets 74,664,032,134 72,976,002,526 Deferred income tax assets 135,666,642,303 112,403,093,896 Others 2,342,574,040 3,209,332,113 Total other non-financial assets 272,207,674,777 262,360,660,931 Total Assets ￦11,252,263,615,395 ￦10,851,933,715,810(Continued)
HYUNDAI CARD CO., LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (CONTINUED) AS OF DECEMBER 31, 2012 AND DECEMBER 31, 2011 (Unit: Korean Won) December 31, 2012 December 31, 2011LIABILITIES AND SHAREHOLDERS’EQUITY:BORROWINGS : Borrowings (Notes 12, 33 and 34) ( ￦ 487,500,000,000 ￦ 590,000,000,000 Bonds payable, net of discounts on bonds (Notes 13, 29, 33 and 34) 6,533,175,825,125 6,481,760,496,118 Total borrowings 7,020,675,825,125 7,071,760,496,118RETIREMENT BENEFIT (Note 15) Retirement benefit obligation 10,695,054,186 17,774,550,158 Total retirement benefit 10,695,054,186 17,774,550,158OTHER FINANCIAL LIABILITIES (Notes 14, 19, 30, 33 and 34): Accounts payable 1,186,714,518,145 1,066,705,610,154 Withholdings 123,824,521,370 64,312,342,703 Accrued expenses 139,353,829,793 140,922,092,976 Finance lease liabilities 1,452,239,137 2,548,330,830 Derivative liabilities 53,554,957,780 5,326,133,113 Guarantee deposits 12,776,716,986 11,684,414,000 Total other financial liabilities 1,517,676,783,211 1,291,498,923,776OTHER NON-FINANCIAL LIABILITIES : Withholdings 6,968,385,070 5,649,822,585 Unearned revenue(Note 17) 397,830,493,299 347,865,031,849 Provisions (Notes 18 and 28) 75,687,285,760 80,233,007,232 Current tax liability 30,439,361,053 40,468,853,188 Total other non-financial liabilities 510,925,525,182 474,216,714,854SHAREHOLDERS’ EQUITY : Share capital (Note 20) 802,326,430,000 802,326,430,000 Capital surplus (Note 21) 57,704,443,955 57,704,443,955 Retained earnings (Notes 22 and 24) 1,339,725,219,219 1,148,396,655,980 Reserves (Notes 23, 26 and 31) (7,485,485,483) (11,764,319,031) Non-controlling interest 19,820,000 19,820,000 Total shareholders’ equity 2,192,290,427,691 1,996,683,030,904 Total Liabilities and Shareholders’ Equity ￦ 11,252,263,615,395 ￦ 10,851,933,715,810 See accompanying notes to consolidated financial statements.
HYUNDAI CARD CO., LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 (Unit: Korean Won) For the year ended For the year ended December 31, 2012 December 31, 2011OPERATING REVENUE: Card income (Notes 30, 34 and 36) ￦ 2,388,278,853,242 ￦ 2,318,410,234,112 Interest income (Note 34 and 35) 22,593,511,595 26,005,809,597 Gain on disposal of financial assets AFS (Note 34) - 7,650,343,198 Reversal of impairment loss on financial assets AFS (Note 34) 461,757,518 805,860,595 Dividends income 477,523,977 591,173,105 Reversal of provision for unused credit limits (Note 18) 781,111,756 - Other operating revenue (Notes 2 and 37) 113,042,414,018 54,856,013,148 Total operating revenue 2,525,635,172,106 2,408,319,433,755OPERATING EXPENSES: Card expenses (Notes 30, 34 and 36) 1,043,710,631,004 923,941,904,342 Interest expenses (Notes 34 and 35) 343,398,755,949 357,374,378,109 General and administrative expenses (Notes 25 and 30) 609,986,735,363 538,383,719,988 Securitization expenses 367,539,337 336,492,018 Bad debt expense and loss on disposal of loans 202,956,968,418 200,062,143,140 Transfer to provision for unused credit limits (Note 18) - 1,094,594,223 Impairment loss on financial assets AFS (Note 34) - 8,324,157 Other operating expenses (Notes 2 and 37) 91,937,747,576 62,898,344,999 Total operating expenses 2,292,358,377,647 2,084,099,900,976OPERATING INCOME 233,276,794,459 324,219,532,779NON-OPERATING INCOME (Note 2): Gain from sale of property and equipment 9,133,500 5,897,268 Rental revenue 2,157,675,587 863,082,718 Miscellaneous gain 200,026,435 190,101,137 Total non-operating income 2,366,835,522 1,059,081,123NON-OPERATING EXPENSES (Note 2): Loss from sale of property and equipment 577,531,514 4,520,026 Impairment loss for intangible assets 512,947,720 - Donations 1,920,539,994 1,656,755,516 Miscellaneous loss 115,000,000 - Total non-operation expense 3,126,019,228 1,661,275,542INCOME BEFORE INCOME TAX 232,517,610,753 323,617,338,360INCOME TAX EXPENSE (Note 26) 41,189,047,514 84,969,756,377INCOME FOR THE PERIOD ￦ 191,328,563,239 ￦ 238,647,581,983(Continued)
HYUNDAI CARD CO., LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 (Unit: Korean Won) For the year ended For the year ended December 31, 2012 December 31, 2011OTHER COMPREHENSIVE INCOME (LOSS) FORTHE PERIOD (Note 31) Effective portion of changes in fair value of cash flow hedges 4,278,833,548 (8,613,983,761)TOTAL COMPREHENSIVE INCOME FOR THE PERIOD ￦ 195,607,396,787 ￦ 230,033,598,222Net income attributable to: Owners of the Company 191,328,563,239 238,647,581,983 Non-controlling interests - -Total comprehensive income attributable to: Owners of the Company 195,607,396,787 230,033,598,222 Non-controlling interests - -Earnings per share (In won per share) (Note 27) Basic earnings per share ￦ 1,192 ￦ 1,487 Diluted earnings per share ￦ 1,192 ￦ 1,487 See accompanying notes to consolidated financial statements.
HYUNDAI CARD CO., LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 Capital surplus Reserve Cash flow Attributable to Non- Share Share Other Retained hedging owners of the controlling capital premium capital earnings reserves Company Interests TotalBalance at January 1, 2011 ￦802,326,430,000 ￦ 45,399,364,539 ￦12,305,079,416 ￦ 909,749,073,997 ￦ (3,150,335,270) ￦ 1,766,629,612,682 ￦ 19,820,000 ￦ 1,766,649,432,682Comprehensive income Net income - - - 238,647,581,983 - 238,647,581,983 - 238,647,581,983 Other comprehensi ve loss - - - - (8,613,983,761) (8,613,983,761) - (8,613,983,761)Acquisition of subsidiaries - - - - - - 9,910,000 9,910,000Disposal of subsidiaries - - - - - - (9,910,000) (9,910,000)Balance at December 31, 2011 802,326,430,000 45,399,364,539 12,305,079,416 1,148,396,655,980 (11,764,319,031) 1,996,663,210,904 19,820,000 1,996,683,030,904Balance at January 1, 2012 802,326,430,000 45,399,364,539 12,305,079,416 1,148,396,655,980 (11,764,319,031) 1,996,663,210,904 19,820,000 1,996,683,030,904Comprehensive income Net income - - - 191,328,563,239 - 191,328,563,239 - 191,328,563,239 Other comprehensi ve income - - - - 4,278,833,548 4,278,833,548 - 4,278,833,548Acquisition of subsidiaries 9,910,000 9,910,000Disposal of subsidiaries - - - - - - (9,910,000) (9,910,000)Balance at December 31, 2012 ￦802,326,430,000 ￦ 45,399,364,539 ￦12,305,079,416 ￦ 1,339,725,219,219 ￦ (7,485,485,483) ￦ 2,192,270,607,691 ￦ 19,820,000 ￦ 2,192,290,427,691 See accompanying notes to consolidated financial statements.
HYUNDAI CARD CO., LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 For the year ended December 31, 2012 2011 (Unit: Korean Won)CASH FLOWS FROM OPERATING ACTIVITIES: Income for the period ￦ 191,328,563,239 ￦ 238,647,581,983 Income tax expense 41,189,047,514 84,969,756,377 Interest income (22,593,511,595) (26,005,809,597) Interest expense 343,398,755,949 357,374,378,109 Dividend received (477,523,977) (591,173,105) Bad debt expense and loss on disposal of receivables 202,956,968,418 200,062,143,140 Retirement benefits 13,228,745,147 12,807,599,848 Depreciation 26,992,252,034 21,209,077,434 Amortization 14,180,876,300 11,354,527,198 Loss on foreign currency translation 38,093,094 16,397,494,270 Loss on valuation of trading derivatives 55,633,000,000 - (Decrease) increase in provision for unused credit limit (781,111,756) 1,094,594,223 (Decrease) increase in provision for others (3,764,609,716) 1,763,623,684 Loss from sale of property and equipment 577,531,514 4,520,026 Impairment loss of financial assets AFS - 8,324,157 Other operating losses 924,569,785 1,656,707,383 Impairment loss of intangible assets 512,947,720 - Reversal of impairment loss of financial assets AFS (461,757,518) (805,860,595) Gain on disposals of financial assets AFS - (7,650,343,198) Gain on foreign currency translation (55,663,248,513) (160,817,131) Gain on valuation of trading derivatives - (16,377,000,000) Amortization of present value discounts of card asset (40,906,150,359) (27,320,178,901) Amortization of deferred origination fees of card assets (18,129,500,265) (22,513,290,136) Gain from sale of property and equipment (9,133,500) (5,897,268)Changes in working capital: (Increase) in card assets (478,742,209,861) (521,184,666,885) Decrease in other receivables 500,000,000 500,000,000 (Increase) in other financial assets (41,853,625,282) (21,810,729,459) Decrease in other non-financial assets 8,425,805,126 54,853,752,837 Decrease in derivative assets 1,865,000,000 13,645,800,001 (Decrease) in retirement benefit obligations (6,571,624,714) (4,334,319,356) (Increase) in plan asset (13,726,405,314) (307,277,080) (Decrease) in derivative liabilities (1,972,000,000) (27,070,682,349) (Decrease) increase in capital lease liabilities (1,096,091,693) 2,548,330,830 Increase in other financial liabilities 168,017,357,285 278,289,966,782 Increase in other non-financial liabilities 49,965,461,450 60,424,613,138Cash generated from operating activities Interest received 24,109,712,867 23,576,136,047 Interest paid (324,680,224,065) (339,415,547,854) Dividend received 477,523,977 591,173,105 Income tax paid (75,846,752,199) (128,883,895,329)Net cash provided by operating activities 57,046,731,092 237,342,612,329(Continued)
HYUNDAI CARD CO., LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 For the year ended December 31, 2012 2011 (Unit: Korean Won)CASH FLOWS FROM INVESTING ACTIVITIES: Disposal of investment financial assets ￦ 461,757,518 ￦ - Disposal of property and equipment 30,217,356 110,930,258 Disposal of intangible assets 1,250,000,000 - Net increase in guarantee deposit 21,000,758,986 504,302,464 Net increase (decrease) in bank deposit 2,500,000 (9,900,500,000) Acquisition of property and equipment (99,177,344,840) (51,874,596,951) Acquisition of intangible assets (18,435,122,958) (18,207,275,153)Net cash used in investing activities (94,867,233,938) (79,367,139,382)CASH FLOWS FROM FINANCING ACTIVITIES: Increase in borrowings 7,680,000,000,000 5,734,000,000,000 Proceeds from issue of bonds payable 3,342,529,395,016 3,790,757,057,942 Repayment of borrowings (7,782,500,000,000) (6,725,766,400,000) Repayment of bonds payable (3,240,684,500,000) (2,923,991,000,000)Net cash used in financing activities (655,104,984) (125,000,342,058)NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (38,475,607,830) 32,975,130,889CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 830,022,903,023 797,047,772,134CASH AND CASH EQUIVALENTS, END OF THE PERIOD ￦ 791,547,295,193 ￦ 830,022,903,023 See accompanying notes to consolidated financial statements.
HYUNDAI CARD CO., LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 20111. 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, Korean government granted permission to the Parent to engage in the credit card business. As of December 31, 2012, the Parent has approximately 9.13 million card members, 1.98 million registered merchants, and 159 marketing centers, branches and posts. Its head office is located in Yoido, Seoul. As of December 31, 2012, the total common stock of the Parent is ￦802,326 million. The shareholders of the Parent and their respective ownerships as of December 31, 2012 and December 31, 2011 are as follows: December 31, 2012 December 31, 2011 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 the Republic of Korean won (“Won”) and prepares consolidated financial statements in conformity with Korean statutory requirements and Korean International Reporting Standards (“K-IFRS”), in Korean language (Hangul). Accordingly, these consolidated financial statements are intended for use by those who are informed about K-IFRS and Korean practices. Certain information included in the Korean language financial statements, but not required for a fair presentation of the Company’s financial position, operating results, changes in shareholders’ equity or cash flows, is not presented in the accompanying consolidated financial statements. (1) Basis of Preparation The Company has adopted K-IFRS for the annual period beginning on January 1, 2011. The Company’s significant accounting policies applied for the accompanying consolidated financial statements are the same as the policies applied for the preparation of the consolidated financial statements for the year ended December 31, 2011, except for the effects from the introduction of new and revised accounting standards or interpretations as described below. The consolidated financial statements have been prepared on the historical cost basis except for certain non- current assets and financial instruments that are measured at revalued amounts or fair values, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for assets.
- 2 -1) Accounting standards and interpretations that were newly applied for the year ended December 31, 2012, and changes in the Company’s accounting policies are as follows:K-IFRS 1107 Financial Instruments: Disclosures – Transfers of Financial Assets (Revised)The amendments to K-IFRS 1107 require the Company to disclose the nature of the transferred assets, thenature of the risks and rewards of ownership to which the Company is exposed, when the Company continuesto recognise all of the transferred assets, the carrying amounts of the transferred assets and the associatedliabilities at each reporting date for each class of transferred financial assets that are not derecognised in theirentirety. In addition, when the Company derecognizes transferred financial assets in their entirety but hascontinuing involvement in them, the Company disclosed, for each type of continuing involvement at eachreporting date, the carrying amount of the assets and liabilities that are recognised in the Company’sconsolidated statements of financial position and represent the Company’s continuing involvement in thederecognised financial assets, the amount that best represents the Company’s maximum exposure to loss fromits continuing involvement in the derecognised financial assets, and other risk exposure related information(See Note 29).Amendments to K-FIRS 1001, Presentation of Financial Statements – Disclosure of Operating Income(Revised)The amendment to K-IFRS 1001 require the Company to change the presentation of operating income bydeducting cost of sales and general and administration expenses from operating income line items. TheCompany applied these amendments retroactively for the comparative period and changes in operating incomefor the years ended December 31, 2012 and December 31, 2011 are as follows (Unit: Won in millions): For the years ended December 31, 2012 2011 Operating income before the application of the amendments ￦ 232,517,610,753 ￦ 323,617,338,360 Deduct: Non-operating income Gain on disposal of property and equipment 9,133,500 5,897,268 Rental revenue 2,157,675,587 863,082,718 Miscellaneous revenue 200,026,435 190,101,137 Sub-total 2,366,835,522 1,059,081,123 Add: Non-operating expenses Loss on disposal of property and equipment 577,531,514 4,520,026 Impairment loss of intangible Assets 512,947,720 - Donations 1,920,539,994 1,656,755,516 Miscellaneous expenses 115,000,000 - Sub-total 3,126,019,228 1,661,275,542 Operating income after the application of the amendments ￦ 233,276,794,459 ￦ 324,219,532,779Amendments to K-FIRS 1012 Deferred Tax – Recovery of Underlying Assets (Revised)The amendments to K-IFRS 1012 provide an exception to the general principles in K-IFRS 1012 that themeasurement of deferred tax assets and deferred tax liabilities should reflect the tax consequences that wouldfollow from the manner in which the Company expect to recover the carrying amount of an asset. Investmentproperty measured using the revaluation model under K-IFRS 1040 Investment Property or a non-depreciableasset measured using the revaluation model in K-IFRS 1016 Property, Plant, and Equipment, are presumed tobe recovered through sale for the purposes of measuring deferred taxes, unless the presumption is rebutted incertain circumstances. These amendments have no effect on the Company’s consolidated financial statementsand disclosures.
- 3 -2) Currently, enactments and amendments of the K-IFRSs are in progress, and the financial information presented in the consolidated financial statements may change accordingly in the future. The Company has not applied or adopted earlier the following new and revised K-IFRSs that have been issued but are not yet effective:Amendment to K-IFRS 1001 (as revised in 2012), Presentation of financial statements: Presentation of Itemsof Other Comprehensive IncomeThe amendments to K-IFRS 1001 require the Company to present items in the other comprehensive incomesection to be grouped into those that will not be reclassified subsequently to profit or loss; and will bereclassified subsequently to profit or loss when specific conditions are met. The amendments are effective forannual periods beginning on or after July 1, 2012. The Company does not anticipate that these amendmentsreferred above will have a significant effect on the Company’s consolidated financial statements anddisclosures.K-IFRS 1019 (as revised in 2011), Employee BenefitsThe amendments to K-IFRS 1019 require the recognition of changes in defined benefit obligations and in fairvalue of plan assets when they occur, and hence eliminate the ‘corridor approach’ permitted under the previousversion which allowed the Company defer the recognition of changes in net defined benefit liability and presentthe gains or losses on defined benefit liability and planned assets either in net income or in othercomprehensive income. The amendments to K-IFRS 1019 are effective for annual periods beginning on or afterJanuary 1, 2013 and require retrospective application with certain exceptions. The Company is reviewing onthe effect of these amendments on the Company’s consolidated financial statements and disclosures.K-IFRS 1032 (as revised in 2012), Financial Instruments: PresentationThe amendments to K-IFRS 1032 clarify existing application issue relating to the offset of financial assets andfinancial liabilities requirements. The Group’s right of set-off must not be contingent upon any future eventsbut enforceable anytime during the contract period in all of the circumstances; in the event of default,insolvency or bankruptcy of the entity or the counterparties as well as in the ordinary course of business.The amendments to K-IFRS 1032 are effective for annual periods beginning on or after January 1, 2014. TheCompany does not anticipate that these amendments referred above will have a significant effect on theCompany’s consolidated financial statements and disclosures.K-IFRS 1107 (as revised in 2012), Financial Instruments: Disclosures – Offsetting Financial Assets andFinancial LiabilitiesThe amendments to K-IFRS 1107 increase the disclosure requirements to include information about offsettingfinancial assets and financial liabilities. The amendments to K-IFRS 1107 are effective for annual periodsbeginning on or after January 1, 2013. The Company does not anticipate that these amendments referred abovewill have a significant effect on the Company’s consolidated financial statements and disclosures.K-IFRS 1110(as issued in 2011), Consolidated Financial StatementsK-IFRS 1110 establishes a single source of guidance in the application of definition of control. The standardstates that an investor controls an investee when it is exposed, or has rights, to variable returns from itsinvolvement with the investee and has the ability to affect those returns through its power over the investee.K-IFRS 1110 is effective for annual periods beginning on or after 1 January 2013. The Company does notanticipate that these enactments referred above will have a significant effect on the Company’s consolidatedfinancial statements and disclosures.K-IFRS 1111(as issued in 2011), Joint ArrangementsK-IFRS 1111 deals with how a joint arrangement of which two or more parties have joint control should bedetermined. Under K-IFRS 1111, joint arrangements are classified as joint operations or joint ventures,depending on the rights and obligations of the parties to the arrangements. A joint operation is a jointarrangement whereby the parties that have joint control of the arrangement (ie joint operators) have rights tothe assets, and obligations for the liabilities, relating to the arrangement. A joint venture is a joint arrangement
- 4 -whereby the parties that have joint control of the arrangement (ie joint venturers) have rights to the net assets ofthe arrangement. K-IFRS 1111 is effective for annual periods beginning on or after 1 January 2013. TheCompany does not anticipate that these enactments referred above will have a significant effect on theCompany’s consolidated financial statements and disclosures.K-IFRS 1112(as issued in 2011), Disclosures of Interests in Other EntitiesK-IFRS 1112 improves disclosures of reporting entities that have an interest in a subsidiary, a jointarrangement, an associate or unconsolidated structured entity. K-IFRS 1112 is effective for annual periodsbeginning on or after 1 January 2013. The Company is reviewing on the effect of these amendments on theCompany’s consolidated financial statements and disclosures at the end of reporting period.K-IFRS 1113(as issued in 2011) , Fair Value MeasurementsK-IFRS 1113 establishes a single source of guidance for fair value measurements and disclosures about fairvalue measurements. The standard defines fair value, establishes a framework for measuring fair value, andrequires disclosures about fair value measurements. K-IFRS 1113 is effective for annual periods beginning onor after January 1, 2013, with earlier application permitted. The Company is reviewing on the effect of theseamendments on the Company’s consolidated financial statements and disclosures at the end of reporting period.The accompanying consolidated financial statements of the Company were approved by the board of directorson February 28, 2013(2) Significant Accounting Policies1) Basis of ConsolidationThe consolidated financial statements incorporate the financial statements of the Parent and entities (includingspecial purpose entities) controlled by the Parent (or its subsidiaries). Control is achieved where the companyhas the power to govern the financial and operating policies of an entity so as to obtain benefits from itsactivities.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. Carrying amounts of the non-controlling interests in subsidiaries is adjusted by thechanges in the proportion of the equity held by non-controlling interests after initial acquisition of non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Companyand to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.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 without loss of control are accounted for asequity transactions. The carrying amounts of the Company’s interests and the non-controlling interests areadjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amountby which the non-controlling interests are adjusted and the fair value of the consideration paid or received isrecognized directly in equity and attributed to the owners of the Company.When the Parent 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 Parent 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 at
- 5 -the 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.2) 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 is measured atamortized cost using the effective interest rate method except for the financial assets classified as at fair valuethrough profit or loss (“FVTPL”).① Card ReceivablesThe Company records card receivables when its cardholders of the Company make purchases from domesticand foreign merchants, and when cardholders of MasterCard International, Visa International and Diners ClubInternational make purchases from domestic merchants. Commission from merchants for advanced payments;and commission from cardholders for installment payments and cash advances are recognized as revenue on anaccrual basis. Card receivables with non-interest bearing installment payment are initially recognized at fairvalue using a discounted cash flow. Since interest rate and other factors considering for calculating thediscounted cash flow of interest bearing installment payments are different than those for non-interest bearinginstallment payment, the Company independently determines the discount rates for non-interest bearinginstallment payments with objective and reasonable method.② Card LoansThe Company extends the card loans to its cardholders in accordance with the Specialized Credit FinancialBusiness Law. Commission incomes are accrued on a daily basis by calculating based on a constant rate percardholders’ credit rate until repayments of card loans.③ Cash AdvancesCash advance service allows cardholders to withdraw cash up to certain limits depending on card members’credit rating in accordance with the Specialized Credit Financial Business Law. Fees related to cash advancesare charged on the payment date with a specific percentage of service charges and interest income is accrued ona daily basis until repayment of cash advance.3) Financial assetsA financial asset is recognised when the Company becomes a party to the contract and at initial recognition. Afinancial assets excluding a financial asset at fair value through profit of loss (“FVTPL”) is measured at its fairvalue plus or minus, transaction costs that are directly attributable to the acquisition of the financial asset.Otherwise, the transaction cost that is directly attributable to the acquisition of the financial asset at fair valuethrough profit or loss is recognized in profit or loss immediately when it arises.A regular way purchase and sale of financial assets is recognised and derecognised at trade date. It is apurchase or sale of a financial asset under a contract whose terms require delivery of the asset within the timeframe established generally by regulation or convention in the marketplace concerned.Financial assets are classified into the following specified categories: financial assets at FVTPL, held-to-maturity (“HTM”), available-for-sale (“AFS”) and loans and receivables. The classification depends on thenature 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 used for calculating the amortized cost of a debt instrument and allocatinginterest income over the relevant period. The effective interest rate is the discounting rate used to estimate thenet carrying amount of future cash receipts (including all fees and points paid or received that form an integralpart of the effective interest rate, transaction costs and other premiums or discounts) throughout the expectedlife of the debt instrument, or, where appropriate, a shorter period,
- 6 -Interest income for debt instruments except for those financial assets classified as at FVTPL is recognizedusing an effective interest rate method.② Financial assets at FVTPLFinancial assets at FVTPL include financial assets held for trading or financial assets designated as at FVTPLupon initial recognition. A financial asset which is acquired or incurred principally for the purpose of selling orrepurchasing in the near term and all derivatives including embedded derivatives bifurcated from host contract(except for a derivative that is a designated and effective hedging instrument) are classified as held for trading.Financial assets at FVTPL are measured at fair value and the change in value is recognised in income (loss) forthe period.A financial asset is classified as held for trading if: • it has been acquired principally for the purpose of selling 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 designated as at FVTPL.Financial assets at FVTPL are stated at fair value, and any gains or losses arising on remeasurement arerecognized in income (loss) for the period.③ HTM investmentsNon-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Companyhas the positive intent and ability to hold to maturity are classified as HTM investments. HTM investments aremeasured at amortized cost using the effective interest rate method less any impairment, with revenuerecognized on an effective interest rate method basis.④ AFS financial assetsNon-derivative financial assets that are not classified as at HTM, held-for-trading, designated as at FVTPL, orloans and receivables are classified as at financial assets AFS.Financial assets AFS are subsequently measured at fair value. Gains and losses arising from changes in fairvalue are recognized and accumulated in other comprehensive income, with the exception of interest calculatedusing the effective interest rate method and foreign exchange gains and losses on monetary AFS financialassets, which are recognized in income (loss) for the period. Where the AFS financial assets are disposed of oris determined to be impaired, the cumulative gains or losses previously accumulated in the othercomprehensive income is recognized income (loss) for the period.Dividends from AFS equity instruments are recognized in income (loss) for the period when the Company’sright to receive payment of the dividends is established.
- 7 -The AFS investments in equity instruments that do not have a quoted price in an active market for an identicalinstrument and their fair value are not reliably measurable and derivative assets that are linked to thoseinvestments and must be settled by delivery of such an equity instrument are measured at cost, net of identifiedimpairment losses.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 effects of discount 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; • default or delinquency in interest or principal payments; • it becoming probable that the borrower will enter bankruptcy or financial re-organization; or • an active market for financial assets closes due to financial difficulties.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 increasein 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.For financial assets measured at amortized cost, the amount of the impairment is recognized as the differencebetween the carrying amount of the asset and current value of estimated future cash flows discounted by similarto the current market rate. The impairment is not reversed in subsequent periods.When an AFS financial asset is considered to be impaired, cumulative gains or losses previously recognized inother comprehensive income are recognized in income (loss) for the period.For financial assets measured at amortized cost, 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 income (loss) for the period to the extent that thecarrying amount of the investment at the date the impairment is reversed does not exceed what the amortizedcost would have been had the impairment not been recognized.In respect of AFS equity instruments, impairment losses previously recognized in income (loss) for the periodare not reversed. Any increase in fair value subsequent to an impairment loss is recognized in othercomprehensive income. In respect of AFS debt instruments, in a subsequent period, the amount of theimpairment loss increases and the increase can be related objectively to an event occurring after the impairmentwas recognized, the previously recognized impairment loss is reversed through income (loss) for the period.
- 8 -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 or retains substantially all the risks and rewards ofownership but 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.If the Company derecognizes the entire financial asset, the difference between total received amount plus thesum of cumulative income recognized in other comprehensive income and the book value of the asset isrecognized in income (loss) for the period.If the Company does not derecognize the entire financial asset, (for example, the Company holds either anoption to repurchase a certain portion of the asset or remaining equity, which does not allow the Company tohold the most of the risks and benefits from the financial asset or the Company controls assets) the Companydivides the book value of financial assets into a recognized part and a unrecognized part in accordance withrelative fair value of each portion. The difference between total received amount for derecognized portion ofthe asset plus the sum of cumulative income recognized in other comprehensive income and the book value ofthe asset is recognized in income (loss) for the period. Cumulative income recognized in other comprehensiveincome is divided into a recognized part and a unrecognized part in accordance with relative fair value of eachportion.4) Property and EquipmentProperty, plant and equipment are stated at cost less subsequent accumulated depreciation and accumulatedimpairment losses. The cost of an item of property and equipment is directly attributable to their purchase orconstruction, which includes any costs directly attributable to bringing the asset to the location and conditionnecessary for it to be capable of operating in the manner intended by management. It also includes the initialestimate of the costs of dismantling and removing the item and restoring the site on which it is located.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 bemeasurable. 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 depreciatedseparately.The Company assesses the depreciation method, the estimated useful lives and residual values of property andequipment at the end of each reporting period. If expectations differ from previous estimates, the changes areaccounted for as a change in an accounting estimate.When future economic benefits aren’t expected through the use or disposition of property and equipment, theCompany removes the book value of the assets from the consolidated statements of financial position. Thedifference between the amounts received from the disposal and the book values of assets are recognized asincome (loss) of the period when the assets are removed.5) LeaseA lease is classified as a finance lease whenever the terms of the lease transfer substantially all the risks andrewards of ownership to the lessee. All other leases are classified as operating leases.
- 9 -The Company recognizes the lesser of the current value of minimum lease payment and the fair value of leaseassets as capital lease assets and capital lease liabilities.Lease payments are apportioned to each period between interest expense and the reduction of lease liabilities toproduce a constant periodic rate of interest on the remaining balance of lease liability. Financial cost except forcertain qualifying assets, in accordance with the Company’s accounting policies, is recognized immediately asan expense in the period. Any adjustments to lease payment are recognized as cost when it occurred.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 lives 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 income (loss) for theperiod when 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 deemed 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.④ Disposal of intangible assetsIf future economic benefits are not expected through the use or disposition of the intangible assets, theCompany removes the book value of the assets from the consolidated financial statements. The differencebetween the amounts received from the disposal of intangible assets and the book values of the assets arerecognized as income (loss) of the period when the assets are removed..
- 10 -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 areasonable and consistent basis of allocation can be identified, assets which recoverable amounts are notindividually estimated are also allocated to individual cash-generating units, or otherwise they are allocated tothe smallest group of cash-generating units for which a reasonable and consistent allocation basis can beidentified.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 assets may be impaired.Recoverable amounts are the higher of fair value less costs to sell and value in use. In assessing value in use,the estimated 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 income (loss) for the period.If impairment recognized in prior periods is reversed, the book value of the individual assets (or cash-generating unit) is the smaller of the carrying amount of the recoverable amount and the book value that theimpairment would not have recognized in prior periods and the reversal of impairment loss is recognizedimmediately in income (loss) for the period at the time.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 the amount of theobligation is reliably estimated.The amounts 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 instruments① Classification as debt or equityDebt and equity instruments are classified as either financial liabilities or equity in accordance with thesubstance of the contractual arrangement and the definition of financial liabilities and equity instruments.
- 11 -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.Treasury shares transactions are deducted directly from equity. Profit or loss arising from purchases and sales,issuances, and incinerations of treasury shares are not recognized in income (loss) for the period.③ Compound instrumentsThe component parts of compound instruments issued by the Company are allocated into financial liabilitiesand equity in accordance with the definition of the financial asset and liability. Convertible option which can besettled by exchanging financial asset such as fixed amount of cash for the fixed number of treasury shares isequity instruments.At the date of issue, the fair value of the liability component is estimated using the prevailing market interestrate for a similar non-convertible instrument. This amount is recorded as a liability with an amortized cost basisusing the effective interest rate method until extinguished upon conversion or at the instrument’s maturity date.The equity component is determined by deducting the amounts of the liability component from the fair value ofthe compound instrument as a whole. This is recognized and included in equity, net of income tax effects, andis not subsequently remeasured.④ Financial liabilitiesA financial liability is recognised when the Company becomes a party to the contract and at initial recognition.A financial liability other than financial liability at FVTPL is measured at its fair value plus or minustransaction costs that are directly attributable to the issue of the financial liability. Otherwise, the transactioncost that is directly attributable to the issue of the financial liability at FVTPL is recognized in income (loss) forthe period immediately when it arises.Financial liabilities are classified as either financial liabilities at FVTPL or other financial liabilities.⑤ Other financial liabilitiesOther 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 used for calculating the amortized cost of a financial liability and ofallocating interest expense over the relevant period. The effective interest rate is discounting rate used toestimate the net carrying value of future cash payment including commission and points to be paid or received,transaction cost and other premium or discounts throughout the expected life of financial liability, or, whereappropriate, a shorter period.⑥ Derecognition of financial liabilitiesThe Company derecognizes financial liabilities when, and only when, the Company’s obligations aredischarged, cancelled or they expire. On derecognition of a financial liability in its entirety, the differencebetween the carrying amount and the consideration received is recognised in income (loss) for the period.10) Derivative instrumentsThe Company enters into a variety of derivative contract, including interest rate swaps and currency swaps, tomanage its exposure to interest rate and foreign exchange rate risk.
- 12 -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. Gain or loss from the change infair value is recognized in income (loss) for the period immediately unless the derivative is designated andeffective as a hedging instrument, in such case the timing of the recognition in profit or loss depends on thenature of the hedge relationship.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 derivativesWhen economic characteristics and risks of an embedded derivative are not closely related to the host contractand a separate instrument with the same terms as the embedded derivative would meet the definition of aderivative; and the changes in fair value of hybrid contract is not recognised in income (loss) for the period, theCompany accounts for the embedded derivative separately from the host contract.② Hedge accountingThe Company designates certain derivative instruments as cash flow hedges.At the inception of the hedge relationship, the Company 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 income (loss) for the period, and is included in the other operating revenue orexpenses line item.Amounts previously recognized in other comprehensive income and accumulated in equity are reclassified toincome (loss) for the period when the hedged item is recognized in income (loss) for the period.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 forecasted transaction isultimately recognized in profit or loss. When a forecasted 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. Stock issuance costs are incremental costs directly attributable to the issue ofequity instruments and are deducted on the initial recognition of the equity instruments.Where the Parent or its subsidiary purchases any shares of the Parent or its subsidiary, the consideration paid isdeducted from shareholders’ equity as treasury shares until they are cancelled. Where such shares aresubsequently sold or reissued, 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 the
- 13 -terms 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 FVTPL, the relevant fee is recognized as revenue when the instrument is 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-IFRS 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.④ Unearned revenue from point programs (Customer loyalty program)The Company operates customer loyalty program to provide customers with incentives to buy their goods orservices. If a customer buys goods or services, the Company grants the customer awards credits (oftendescribed as ‘points’). The customer can redeem the award credits for awards such as free or discounted goodsor services. The awards credits are accounted separately as identifiable component of the sales transaction(s) inwhich they are granted (the ‘initial sales’). The fair value of the consideration received or receivable in respectof the initial sale shall be allocated between the award credits and the other components of the sale.If the Company supplies the awards itself, it shall recognize the consideration allocated to award credits asrevenue when award credits are redeemed and it fulfills its obligation to supply awards. The amount of revenuerecognized shall be based on the number of award credits that have been redeemed in exchange for awards,related to the total number expected to be redeemed.If the third party supplies the awards, the Company shall assess whether it is collecting the considerationallocated to the award credits on its own account (as the principal in the transaction ) or on behalf of the thirdparty (as agent for the third party). The amount of revenue recognized shall be net amount retained on its ownaccount.13) Interest income and expense Using the effective interest rate method, the Company recognizes interest income and expense in the consolidated statements of comprehensive income. Effective interest rate method calculates the amortized cost of financial assets or liabilities and allocates interest income or expense over the relevant period. The effective interest rate discounts the expected future cash in and out through the expected life of financial instruments or, if appropriate, through shorter period, to net carrying amount of financial assets or liabilities. When calculating the effective interest rate, the Company estimates future cash flows considering all contractual financial instruments except the loss on future credit risk. Also, effective interest rate calculation includes redemption costs, points (part of the effective interest rate) that are paid or earned between contracting parties, transaction costs, and other premiums or discounts. It is assumed that the cash flows and the expected existing period of aggregation of homogeneous financial instruments are reliably estimable. However, in the exception that cash flow of financial instruments (or aggregation of homogeneous financial instruments) or the estimated maturity is not reliably estimable, the effective interest rate is calculated using the contractual terms of cash flows for the entire contract period. If financial instruments or aggregation of homogeneous financial instruments are impaired, the subsequent interest income is recognized based on the discount rate used in discounting future cash flows for the purpose of the measurement of impairments.14) Dividend revenueDividend income from investments is recognized when the shareholder’s right to receive the payment ofdividends has been established (provided that it is probable that the economic benefits will flow to theCompany and the amount of income can be measured reliably).
- 14 -15) Foreign currency translationThe individual financial statements of the consolidated entities are presented in the currency of the primaryeconomic environment in which the Company operates (its functional currency). For the purpose of theconsolidated financial statements, the results and financial position of each entity are expressed in Korean Won,which is the functional currency of the Company and the presentation currency for the consolidated financialstatements.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 income (loss) for 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.16) Retirement benefit costsContributions to defined contribution plans are recognized as an expense when employees have renderedservice entitling them to the contributions.For defined benefit plans, the cost of providing benefits is determined using the projected unit credit method,with actuarial valuations being carried out at the end of each reporting period. The present value of definedbenefit obligations are determined by the discount rate that reflects the current rate of return on a high qualitycorporate bond (or, in countries where there is no deep market in such bonds, government bonds) of equivalentterm and currency to the plan liabilities.Actuarial gains and losses are changes in the present value of the defined benefit obligation resulting fromexperience adjustments (the effects of differences between the previous actuarial assumptions and what hasactually occurred); and the effects of changes in actuarial assumptions. Past service cost is recognizedimmediately to the extent that the benefits are already vested and otherwise is amortized on a straight-line basisover 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 availableeconomic benefits of refunds and reductions in future contributions to the plan.17) TaxationIncome tax consists of current tax and deferred tax.① Current taxThe tax currently payable is based on taxable income for the period. Taxable income differs from income (loss)before tax expenses as reported in the consolidated statement of comprehensive income because of items ofincome or expense that are taxable or deductible in other periods. The Company’s liability for current tax iscalculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.② 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 taxableincome. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred incometax assets are generally recognized for all deductible temporary differences to the extent that it is probable thattaxable income will be available against which those deductible temporary differences can be utilized. Suchdeferred tax assets and liabilities are not recognized if the taxable or deductible temporary difference arises
- 15 -from goodwill or from the initial recognition (other than in a business combination) of other assets andliabilities in a transaction that affects neither the taxable income (taxable deficit) nor the accounting income.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 taxableincome against which to utilize the benefits of the temporary differences and they are expected to reverse in theforeseeable future.The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to theextent that it is no longer probable that sufficient taxable income will be available to allow all or part of theasset to be recovered.Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in whichthe liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted orsubstantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assetsreflects the tax consequences that would follow from the manner in which the Company expects, at the end ofthe reporting period, to recover or settle the carrying amount of its assets and liabilities.The Company shall offset deferred tax assets and deferred tax liabilities if, and only if; the Company has alegally enforceable right to set off current tax assets against current tax liabilities; and the deferred tax assetsand the deferred tax liabilities relate to income taxes levied by the same taxation authority on either; the sametaxable entity; or different taxable entities which intend either to settle current tax liabilities and assets on a netbasis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significantamounts of deferred tax liabilities or assets are expected to be settled or recovered.If a deferred tax liability or asset arises from investment property that is measured using the fair value model inK-IFRS 1040 Investment Property, there is a rebuttable presumption that the carrying amount of the investmentproperty will be recovered through sale. Accordingly, unless the presumption is rebutted, the measurement ofthe deferred tax liability or deferred tax asset shall reflect the tax consequences of recovering the carryingamount of the investment property entirely through sale. This presumption is rebutted if the investmentproperty is depreciable and is held within a business model whose objective is to consume substantially all ofthe economic benefits embodied in the investment property over time, rather than through sale.③ Current and deferred tax for the yearCurrent and deferred tax are recognized in income (loss) for the period except when they relate to items that arerecognized in other comprehensive income or directly in equity, in which case, the current and deferred tax arealso recognized in other comprehensive income or directly in equity respectively. Where current tax or deferredtax arises from the initial accounting for a business combination, the tax effect is included in the accounting forthe business combination.18) Earnings per shareBasic earnings per share is calculated by dividing net profit from the period available to common shareholdersby the weighted-average number of common shares outstanding during the year. Diluted earnings per shareare calculated using the weighted-average number of common shares outstanding adjusted to include thepotentially dilutive effect of common equivalent shares outstanding.
- 16 -3. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY In the application of the Company’s 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. Critical accounting judgement and key sources of estimation uncertainty at the end of reporting period having significant risk factors which can incur the material changes in the book value of assets and liabilities of the Company for the following fiscal year are as follows: 1) Allowance for Doubtful Accounts The Company determines and recognizes allowances for losses through impairment testing on credit card assets and other assets, such as other accounts receivable, advance payments and accrued income. The Company also recognizes provisions for losses on unused commitments. The accuracy of provisions for credit losses is determined by the risk assessment methodology and assumptions used for estimating expected cash flows of the borrower for allowances on individual loans and collectively assessing allowances for groups of loans and provisions for unused commitments. 2) Unearned revenue from point programs The Company provides its customers with incentives to buy goods or services by providing awards (called “customer loyalty programs”) and allocates the fair value of the consideration received or receivable between the award credits granted (“points”) and the other components of the revenue transaction. The Company supplies the awards such as discounted payments or free gifts. The consideration allocated to the award credits is measured by reference to their fair value, i.e. the amount for which the award credits could be sold separately. The fair value of the consideration allocated to the award credits is estimated by taking into account expected redemption rates, etc. and recognized as deferred revenue until the Company fulfills its obligations to deliver awards to customers. The amount of revenue recognized is to be based on the number of award credits that have been redeemed in exchange for awards, relative to the total number expected to be redeemed. 3) Post-Employment Benefits: Defined Benefit Plans The Company operates a defined benefit pension plan (“Plan”). The amount recognized as a defined benefit liability is the present value of the defined benefit obligation less the fair value of plan assets at the end of the reporting period. The present value of defined benefit obligation is calculated annually by using actuarial assumptions such as future increases in salaries, expected returns on plan assets, discount rate and others. The Plan has the uncertainty due to the nature of long-term plan. The defined benefit obligation as of December 31, 2012 and December 31, 2011 are ￦10,695 million and ￦17,775 million, respectively (See Note 15). 4) Fair Value Measurement of Financial Instruments As disclosed in Note 34, the fair value of financial instruments classified as certain level are measured using valuation techniques where significant inputs are not based on observable market data. The Company believes that valuation methods and assumptions used for measuring the fair value of financial instruments are reasonable and that the fair value recognized in the consolidated statements of financial position is appropriate.
- 17 - 4. SUBSIDIARY: (1) Details of the Company’s subsidiaries as of December 31, 2012 and December 31, 2011 are as follows: Voting share (%) Place of End of incorporation and reporting Companies Major operation operation December 31, 2012 December 31, 2011 period PRIVIA 1st SPC Asset securitization Korea - 0.9 December PRIVIA 2nd SPC Asset securitization Korea 0.9 0.9 " PRIVIA 3rd SPC Asset securitization Korea 0.9 - " The Company is considered to have substantial control over the entities by relationship with special purpose entities. (2) Summary of financial information for subsidiaries as of December 31, 2012 and December 31, 2011 are as follows (Unit: Won in millions) December 31, 2012 Total assets Total liabilities Sales Net income Comprehensive incomePRIVIA 2nd SPC 448,139 453,646 50,584 - -PRIVIA 3rd SPC 450,569 449,321 33,483 - - December 31, 2011 Total assets Total liabilities Sales Net income Comprehensive incomePRIVIA 1st SPC 10 - 17,854 391 391PRIVIA 2nd SPC 448,139 463,317 29,895 - - (3) The changes in subsidiaries for the year ended December 31, 2012 are as follows (Unit: Won in millions): Year ended December 31, 2012 PRIVIA 1st SPC Liquidation from asset-backed securities (“ABS”) maturity PRIVIA 3rd SPC Establishment from newly issuing ABS
- 18 -5. CASH AND DEPOSITS: (1) Details of cash and cash equivalents as of December 31, 2012 and December 31, 2011 are as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Annual Annual interest rate (%) Amount interest rate (%) Amount Cash on hand - ￦ - - ￦ 4 Current deposits - 90 - 8,749 Pass-book deposits - 89,957 - 72,770 Other cash equivalents 2.70~2.90 170,000 3.20~3.60 300,000 Time deposits 2.00 11,500 2.90~3.70 25,500 Other deposits 2.80~3.00 520,000 3.00~4.25 423,000 ￦ 791,547 ￦ 830,023 (2) Restricted deposits and others as of December 31, 2012 and December 31, 2011 are as follows (Unit: Won in millions): Type Entity December 31, 2012 December 31, 2011 Restriction Deposits Guarantee deposits KB and others ￦ 16 ￦ 18 for overdraft Shinhan Bank and others 33,000 33,000 Secured deposits Mirae Asset Social enterprise Securities 13 13 fund Other Korea Asset financial Management assets Corporation 9,246 18,610 Escrow account ￦ 42,275 ￦ 51,6416. INVESTMENT FINANCIAL ASSETS: Investment financial assets as of December 31, 2012 and December 31, 2011 are as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Financial assets AFS Unlisted shares investments ￦ 1,767 ￦ 1,767
- 19 - 7. CARD ASSETS AND LOANS: Card assets and loans by customer as of December 31, 2012 and December 31, 2011 are as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Households Corporates Total Households Corporates TotalCARD ASSETS : Card receivables (*) ￦ 6,116,731 ￦ 479,630 ￦6,596,361 ￦ 6,039,571 ￦ 461,552 ￦ 6,501,123 Cash advances 940,019 - 940,019 1,016,028 - 1,016,028 Card loans (*) 2,351,470 - 2,351,470 2,030,869 - 2,030,869 Sub total 9,408,220 479,630 9,887,850 9,086,468 461,552 9,548,020LOANS Loans to corporate - - - - 500 500 Total 9,408,220 479,630 9,887,850 9,086,468 462,052 9,548,520Allowance for doubtful accounts (176,050) (4,762) (180,812) (165,480) (8,304) (173,784)Book value ￦ 9,232,170 ￦ 474,868 ￦9,707,038 ￦ 8,920,988 ￦ 453,748 ￦9,374,736Composition rate 95.11% 4.89% 100.00% 95.16% 4.84% 100.00% (*) Adjusted for deferred origination fees and present value discounts. 8. ALLOWANCE FOR DOUBTFUL ACCOUNTS: Changes in the allowance for doubtful accounts for the years ended December 31, 2012 and 2011 are as follows (Unit: Won in millions): Year ended December 31, 2012 Card Cash receivables advances Card loans Loans Other assets Total Balance at January 1, 2012 ￦ 68,773 ￦ 37,910 ￦ 67,071 ￦ 30 ￦ 2,306 ￦ 176,090 Bad debt expenses (1,599) (408) (307) - - (2,314) Bad debt recovered 780 1,093 330 - - 2,203 Disposition & repurchase (25,829) (16,792) (18,324) - - (60,945) Provision of (Reversal of) allowance for doubtful accounts 23,527 11,983 32,604 (30) (39) 68,045 Balance at December 31, 2012 ￦ 65,652 ￦ 33,786 ￦ 81,374 ￦ - ￦ 2,267 ￦ 183,079 Year ended December 31, 2011 Card Cash receivables advances Card loans Loans Other assets Total Balance at January 1, 2011 ￦ 59,315 ￦ 43,132 ￦ 63,527 ￦ 8 ￦ 4,059 ￦ 170,041 Bad debt expenses (7,032) (6,836) (5,013) - - (18,881) Bad debt recovered 494 799 264 - - 1,557 Disposition & repurchase (22,465) (16,458) (22,948) - - (61,871) Provision of (Reversal of) allowance for doubtful accounts 38,461 17,273 31,241 22 (1,753) 85,244 Balance at December 31, 2011 ￦ 68,773 ￦ 37,910 ￦ 67,071 ￦ 30 ￦ 2,306 ￦ 176,090
- 20 -9. PROPERTY AND EQUIPMENT: (1) Property and equipment as of December 31, 2012 and December 31, 2011 are as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Acquisition Accumulated Acquisition Accumulated cost depreciation Book value cost depreciation Book valueLand ￦ 122,012 ￦ - ￦ 122,012 ￦ 83,995 ￦ - ￦ 83,995Buildings 64,818 (4,487) 60,331 45,436 (3,249) 42,187Vehicles 503 (340) 163 502 (232) 270Fixtures and equipment 146,839 (90,149) 56,690 127,465 (69,491) 57,974Finance leaseassets 3,334 (1,945) 1,389 3,334 (834) 2,500Construction in progress 23,798 - 23,798 472 - 472 Total ￦ 361,304 ￦ (96,921) ￦ 264,383 ￦ 261,204 ￦ (73,806) ￦ 187,398 (2) The changes in book value of property and equipment for the years ended December 31, 2012 and 2011 are as follows (Unit: Won in millions): Year ended December 31, 2012 Beginning Ending balance Acquisition Reclassification(*) Disposal Depreciation balance Land ￦ 83,995 ￦ 34,166 ￦ 3,851 ￦ - ￦ - ￦ 122,012 Buildings 42,187 23,162 (3,505) - (1,513) 60,331 Vehicles 270 76 - (40) (143) 163 Fixtures and equipment 57,974 23,374 125 (558) (24,225) 56,690 Finance lease assets 2,500 - - - (1,111) 1,389 Construction in progress 472 18,399 4,927 - - 23,798 Total ￦ 187,398 ￦ 99,177 ￦ 5,398 ￦ (598) ￦ (26,992) ￦ 264,383 (*)￦5,398 million of construction in progress is reclassified from advanced payments. Year ended December 31, 2011 Beginning Ending balance Acquisition Reclassification(*) Disposal Depreciation balance Land ￦ 80,414 ￦ 3,581 ￦ - ￦ - ￦ - ￦ 83,995 Buildings 34,494 8,773 - - (1,080) 42,187 Vehicles 293 233 - (110) (146) 270 Fixtures and equipment 36,617 35,803 4,703 - (19,149) 57,974 Finance lease assets - 3,334 - - (834) 2,500 Construction in progress 698 151 (377) - - 472 Total ￦ 152,516 ￦ 51,875 ￦ 4,326 ￦ (110) ￦ (21,209) ￦ 187,398 (*) ￦4,326 million of fixtures and equipment is reclassified from construction in progress of intangible assets.
- 21 - 10. INTANGIBLE ASSETS: (1) Intangible assets as of December 31, 2012, and December 31, 2011 are as follows (Unit: Won in millions): December 31, 2012 Accumulated Accumulated Acquisition cost amortization Impairment Book value Development cost ￦ 59,191 ￦ (24,444) ￦ - ￦ 34,747 Industrial property rights 195 (119) - 76 Others 16,868 (9,039) - 7,829 Construction in progress 11,041 - - 11,041 Membership 21,484 - (513) 20,971 Total ￦ 108,779 ￦ (33,602) ￦ (513) ￦ 74,664 December 31, 2011 Accumulated Accumulated Acquisition cost amortization Impairment Book value Development cost ￦ 50,499 ￦ (13,843) ￦ - ￦ 36,656 Industrial property rights 195 (79) - 116 Others 16,869 (5,500) - 11,369 Construction in progress 2,101 - - 2,101 Membership 22,734 - - 22,734 Total ￦ 92,398 ￦ (19,422) ￦ - ￦ 72,976 (2) The changes in intangible assets for the years ended December 31, 2012 and 2011 are as follows (Unit: Won in millions): Year ended December 31, 2012 Beginning Reclassification Ending balance Acquisition (*) Disposal Amortization Impairment balanceDevelopment cost ￦ 36,656 ￦ 7,543 ￦ 1,149 ￦ - ￦ (10,601) ￦ - ￦ 34,747Industrial property rights 116 - - - (40) - 76Others 11,369 - - - (3,540) - 7,829Construction in progress 2,101 10,892 (1,952) - - - 11,041Membership 22,734 - - (1,250) - (513) 20,971 Total ￦ 72,976 ￦ 18,435 ￦ (803) ￦ (1,250) ￦ (14,181) ￦ (513) 74,664 (*) ￦803 million of construction in progress is reclassified to advanced payments. Year ended December 31, 2011 Beginning Reclassification Ending balance Acquisition (*) Disposal Amortization Impairment balanceDevelopment cost ￦ 21,801 ￦ 7,561 ￦ 15,340 ￦ - ￦ (8,046) ￦ - ￦ 36,656Industrial property rights 155 - - - (39) - 116Others 9,757 4,807 75 - (3,270) - 11,369Construction in progress 17,253 4,589 (19,741) - - - 2,101Membership 21,484 1,250 - - - - 22,734 Total ￦ 70,450 ￦ 18,207 ￦ (4,326) ￦ - ￦ (11,355) ￦ - 72,976 (*) ￦4,326 million of construction in progress is reclassified to fixtures and equipment.
- 22 -11. ASSETS PLEDGED AS COLLATERAL: Land and buildings amounting to￦1,123 million are provided as collateral for leasehold deposit received as of December 31, 2012.12. BORROWINGS: Borrowings as of December 31, 2012 and December 31, 2011 are as follows (Unit: Won in millions): Annual interest Borrowed from rates (%) Maturity December 31, 2012 December 31, 2011 Commercial Shinhan bank 2013.1.4 ~ papers and 4 others 2.90 ~ 2.98 2013.2.25 ￦ 350,000 ￦ 490,000 Hana bank 2013.2.23 ~ Borrowings 4.12 ~ 5.55 and 4 others 2014.7.19 137,500 100,000 ￦ 487,500 ￦ 590,00013. BONDS PAYABLE: (1) Bonds payable issued by the Company and outstanding as of December 31, 2012 and December 31, 2011 are as follows (Unit: Won in millions): Annual December 31, 2012 December 31, 2011 interest rates (%) Maturity Par value Issue price Par value Issue priceShort-term 2013.2.8 ~ 2.91 ~ 3.65 debentures 2013.11.6 ￦ 170,000 ￦ 170,000 ￦ 130,000 ￦ 130,000Current portion of 3.36~6.35, 2013.1.14 ~ long-term 1M USD Libor+0.724 2013.12.29 debentures 1,707,580 1,707,580 1,333,797 1,333,797Long-term 2.91 ~ 6.75, 2014.1.8 ~ debentures 1M USD Libor+0.724 2019.7.31 1M USD Libor+1.5 4,665,067 4,665,067 5,027,320 5,027,320Discounts on bonds (9,471) (9,357) Bonds payable, net ￦6,533,176 ￦6,481,760 The outstanding bonds payable are non-guaranteed corporate bonds, with their principals to be redeemed by installment or at maturity. Bond issuance costs are recorded as discounts on bonds payable and amortized using the effective interest rate method.
- 23 - (2) The redemption schedule for the bonds payable is as follows (Unit: Won in millions): Amount to be redeemed Period as of December 31, 2012 2013.1.1~2013.12.31 ￦ 1,877,580 2014.1.1~2014.12.31 1,705,627 2015.1.1~2015.12.31 1,821,440 2016.1.1~2016.12.31 720,000 2017.1.1 ~ 418,000 ￦ 6,542,647 Amount to be redeemed Period as of December 31, 2011 2012.1.1~2012.12.31 ￦ 1,463,797 2013.1.1~2013.12.31 1,537,300 2014.1.1~2014.12.31 1,791,320 2015.1.1~2015.12.31 870,000 2016.1.1 ~ 828,700 ￦ 6,491,11714. FINANCE LEASE LIABILITIES: (1) Lease contract The Company has a 3 year finance lease for electronic equipment. The Company has a bargain purchase option at expiration date of lease contract. The lessor has the legal ownership of the finance lease, whose book value amounts to ￦1,389 million and ￦2,500 million as of December 31, 2012 and 2011 and which are set as collateral for finance lease obligation. (2) Finance lease liabilities of December 31, 2012 and December 31, 2011 are as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Minimum lease Present value of Minimum lease Present value of payments minimum lease payments payments minimum lease payments Less than 1 year ￦ 1,202 ￦ 1,154 ￦ 1,202 ￦ 1,096 1-5 years 301 298 1,503 1,452 Present value discounts (51) (157) Present value ￦ 1,452 ￦ 2,548
- 24 -15. RETIREMENT BENEFIT PLAN: (1) Defined Contribution Plan The Company operates a defined contribution plan for participating employees. The Company pays fixed contributions into a separate fund, and the plan assets are managed by a trustee separately from the Company’s assets. Plan forfeitures occur when a participant terminated employment (voluntarily or involuntarily) prior to satisfying the required service years to become fully vested in his/her account, which will reduce the Company’s contribution to pay. The Company is required to contribute a specified percentage of employee’s earnings to the plan fund. The only obligation that the Company has with respect to the plan is to make the specified contributions in the future. The expense related to post-employment benefit plans under defined contribution plans during the years ended December 31, 2012 and 2011 are ￦10 million and ￦1 million, respectively, which represents contribution payable to these plans based on the rate as of December 31, 2012 and December 31, 2011. ￦4 million and ￦1 million are recorded as payables as of December 31, 2012 and December 31, 2011, respectively. The amount is subject to be transferred to other account operated for the defined contribution plan participants. The expense recognized in the consolidation statements of comprehensive income related to post-employment benefit plan under the defined contribution plan for the three month period ended December 31, 2012 and 2011 are as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Defined contribution plan ￦ 10 ￦ 1 (2) 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 December 31, 2012. Present value of the defined benefit obligation, current service cost and past service cost is calculated using the projected unit credit method. 1) Details of defined benefit plan are as follows (Unit: Won in millions): As of December 31, 2012 and December 31, 2011, the amounts recognized in the consolidated statements of financial position related to retirement benefit obligation are as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Present value of defined benefit obligation ￦ 44,474 ￦ 37,007 Fair value of plan assets (33,745) (19,195) Transferred to national pension fund (34) (37) Retirement benefit obligation ￦ 10,695 ￦ 17,775 2) Changes in present values of defined benefit obligation for the years ended December 31, 2012 and 2011 are as follows (Unit: Won in millions): Years ended December 31, 2012 2011 Beginning balance ￦ 37,007 ￦ 27,790 Current service cost 8,543 7,466 Interest cost 1,500 1,334 Transfer of employees between the Company and the related companies (1,822) 1,740 Actuarial gains 4,006 4,751 Benefits paid (4,760) (6,074) Ending balance ￦ 44,474 ￦ 37,007
- 25 - 3) Changes in fair values of plan assets for the years ended December 31, 2012 and 2011 are as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Beginning balance ￦ 19,195 ￦ 18,143 Contributions from the employer 16,900 1,500 Expected return on plan assets 733 703 Actuarial gains 87 40 Transfer of employees between the Company and the related companies (1,191) 609 Benefits paid (1,979) (1,800) Ending balance ￦ 33,745 ￦ 19,195 4) Details of retirement benefits are as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Current service cost ￦ 8,543 ￦ 7,466 Interest cost 1,500 1,334 Expected return on plan assets (733) (703) Actuarial gains 3,919 4,711 Total ￦ 13,229 ￦ 12,808 Return on plan assets ￦ 820 ￦ 743 5) Details of fair values of plan assets as of December 31, 2012 and December 31, 2011 are as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Amount Ratio Amount Ratio Deposits ￦ 33,745 100% ￦ 19,195 100% 6) Actuarial assumption as of December 31, 2012 and December 31, 2011 are as follows: December 31, 2012 December 31, 2011 Discount rate (%) 3.39 4.23 Expected return on plan assets (%) 2.78 4.08 Expected rate of salary increase (Employer) (%) 5.00 5.00 Expected rate of salary increase (Employee) (%) 5.58 5.6016. EMPLOYEE BENEFITS: Details of employee benefits for the years ended December 31, 2012 and 2011 are as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Short-term employee benefits ￦ 135,728 ￦ 133,436 Pension expenses 13,239 12,809 ￦ 148,967 ￦ 146,245
- 26 -17. UNEARNED REVENUE: Details of unearned revenue as of December 31, 2012 and 2011 are as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Customer loyalty program ￦ 320,328 ￦ 284,001 Membership fee 77,450 63,864 Others 52 - ￦ 397,830 ￦ 347,86518. PROVISION: (1) Details of provision as of December 31, 2012 and December 31, 2011 are as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Provision for unused credit limits ￦ 46,386 ￦ 47,167 Provision for mileage points 15,509 11,240 Other provisions 13,792 21,826 ￦ 75,687 ￦ 80,233 (2) Provision for unused credit limits The Company recognizes loss provision for expected future use of unused portions of credit limits. The changes in loss provision are as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Beginning ￦ 47,167 ￦ 46,073 Increase (Decrease) (781) 1,094 Ending ￦ 46,386 ￦ 47,167 (3) 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): December 31, 2012 December 31, 2011 Point Customer loyalty Point Customer loyalty Beginning ￦ 3,685 ￦ 7,555 ￦ 2,368 ￦ 12,069 Increase (decrease) (191) 4,460 1,317 (4,514) Ending ￦ 3,494 ￦ 12,015 ￦ 3,685 ￦ 7,555 (4) Other provisions December 31, 2012 December 31, 2011 Beginning ￦ 21,826 ￦ 20,916 Increase(Decrease) (8,034) 910 Ending ￦ 13,792 ￦ 21,826 The above amounts as of December 31, 2012 include provision for deposits in escrow account of ￦4,944 million, provision for charging additional tax related to VISA of ￦3,212 million and provision for pending litigations of ￦5,636 million, in which provision includes deposits in escrow account of ￦4,467 million (See Note 28(5)).
- 27 -19. DERIVATIVES AND HEDGE ACCOUNTING: (1) There are no derivative instruments held for trading as of December 31, 2012 and December 31, 2011. (2) Cash flow hedge A cash flow hedge is a hedge of the exposure to variability in expected future cash flows of an asset or a liability or a forecasted transaction that is attributable to a particular risk and could affect current operations. The effective portion of changes in the fair value of derivatives that are designated and qualify as a cash flow hedge is recorded in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in income (loss) for the period, and is included in the other operating revenue and expenses’ line item. The effective portion of gain or loss recorded as other comprehensive income (loss) is reclassified to current earnings when the hedged transaction affects earnings. If the hedged transaction results in the acquisition of an asset or the incurrence of a liability, the gain or loss in other comprehensive income (loss) is added to or deducted from the asset or the liability. Cash flow hedge accounting is discontinued prospectively in the following circumstances: - The hedged transaction is no longer probable of occurring or the hedging relationship no longer meets the effectiveness tests. - The derivative expires or is sold, terminated or exercised. - The Company removes the designation of the hedge. When a forecasted transaction is no longer expected to occur, the gain or loss accumulated in equity is recognized immediately in income (loss) for the period. The Company removes the volatility risk of future cash flow of a hedged item, such as borrowing or bond, caused by changes in market interest rates or in foreign currency rates using the derivatives instruments such as an interest swap or currency swap. 1) Fair value of cash flow hedge as of December 31, 2012 and December 31, 2011 are as follows (Won in millions): December 31, 2012 December 31, 2011 Contract Contract Amount Asset Liabilities Amount Asset LiabilitiesInterest rate swap ￦ 778,000 ￦ 901 3,925 ￦ 280,000 ￦ 643 ￦ 931Cross currency swap 873,092 - 49,630 582,573 1,912 4,395 Total ￦ 1,651,092 ￦ 901 ￦ 53,555 ￦ 862,573 ￦ 2,555 ￦ 5,326 For transactions between local currency and foreign currencies, the unsettled contract amount of transaction is translated applying the basic foreign exchange rate at the end of reporting period to the contract amount in foreign currencies. For transaction between foreign currencies and other foreign currencies, the unsettled contract amount is the amounts translated applying the basic foreign exchange rate at the end of reporting period to the contract amount in foreign currencies purchased.
- 28 - 2) Expected cash flow for cash flow hedge Maximum potential amounts of future payments for cash flow hedges by the period when the cash flows are expected to occur and when they are expected to affect income (loss) for the period are as follows (Won in millions): December 31, 2012 December 31, 2011 Less than 1 month ￦ (2,079) ￦ (1,228) 1-3 months (3,881) (347) 3-12 months (25,813) (10,651) 1-5 years (47,039) 864 ￦ (78,812) ￦ (11,361)20. SHARE CAPITAL: (1) The Company’s authorized shares are 600,000,000 (￦5,000 per shares), and 160,465,286 shares of common stocks (￦802,326 million) are issued as of December 31, 2012. (2) There are no changes in shares of the Company for the year ended December 31, 2012. (3) 50,572,187 shares (￦252,861 million) of common stock issued by the Company are owned by Hyundai Motors Company as of December 31, 2012.21. CAPITAL SURPLUS: Details of capital surplus as of December 31, 2012 and December 31, 2011 are as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Share premium ￦ 45,399 ￦ 45,399 Other capital surplus 12,305 12,305 ￦ 57,704 ￦ 57,70422. RETAINED EARNINGS: (1) Details of retained earnings as of December 31, 2012 and December 31, 2011 are as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Legal reserve (*) ￦ 20,143 ￦ 20,143 Reserve for bad loans 439,031 192,810 Unappropriated retained earnings 880,551 935,444 ￦ 1,339,725 ￦ 1,148,397 (*) 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.
- 29 - (2) Changes in retained earnings for the years ended December 31, 2012 and 2011 are as follows (Unit: Won in millions): Years ended December 31, 2012 2011 Beginning ￦ 1,148,397 ￦ 909,749 Net income attributable to the Parent 191,328 238,648 Ending ￦ 1,339,725 ￦ 1,148,39723. RESERVES: (1) Reserves as of December 31, 2012 and December 31, 2011 are as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Cash flow hedging reserve ￦ (7,485) ￦ (11,764) (2) Cash flow hedging reserve Details of cash flow hedging reserve for the years ended December 31, 2012 and 2011 are as follows (Unit: Won in millions): Years ended December 31, 2012 2011 Beginning ￦ (11,764) ￦ (3,150) Cash flow hedging gains (losses) Interest rate swap (2,736) 229 Currency swap 8,380 (11,073) Tax effect related to other comprehensive income (1,365) 2,621 Amount reclassified to net income Currency swap - (391) Tax effect related to reclassified amounts to net income - - Ending ￦ (7,485) ￦ (11,764) Cash flow hedging reserve represents the cumulative gains or losses of hedging instruments considered effective portion in hedge accounting. The cumulative deferred gains or losses of hedging instruments is reclassified to income (loss) for the period only when gains or losses of the hedged item is reflected in income (loss) for the period, or is reflected to the initial book value of non-financial hedged item in accordance with relevant accounting policy.24. RESERVE FOR BAD LOANS: Reserve for bad loans is calculated and disclosed according to Article 11, Supervisory Regulation of Specialized Credit Financial Business. (1) Reserve for bad loans reflected in retained earnings as of December 31, 2012 and December 31, 2011 are as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Accumulated reserve for bad loans ￦ 439,031 ￦ 192,810 Expected reserve for bad loans 172,591 246,221 Reserve for bad loans ￦ 611,622 ￦ 439,031
- 30 - (2) The provision of reserve for bad loans and adjusted income after reserve for bad loans for the years ended of December 31, 2012 and 2011 are as follows (Unit: Won in millions): Years ended December 31, 2012 2011 Provision ￦ 172,591 ￦ 246,221 Adjusted income after reserve for bad loans 18,738 (7,573) Adjusted EPS after reserve for bad loans 117 (47)25. GENERAL AND ADMINISTRATIVE EXPENSES: Details of general and administrative expenses for the years ended December 31, 2012 and 2011 are as follows (Unit: Won in millions): Years ended December 31, 2012 2011 PAYROLL Salaries wages ￦ 115,320 ￦ 115,653 Pension expenses 13,239 12,809 Employee benefits 28,128 24,909 156,687 153,371 OTHER EXPENSES Travel expenses ￦ 2,533 ￦ 2,243 Communication expenses 23,414 21,224 Posts expense 12,840 11,840 Rental expenses 27,372 21,630 Taxes dues 15,424 19,187 Repair and maintenance expenses 622 759 Insurance premiums 207 228 Entertainment expenses 814 825 Advertising expenses 39,431 60,729 Supply expenses 2,597 2,126 Vehicle maintenance expenses 26 17 Periodicals expenses 1,076 95 Publication expenses 9,327 12,295 Training expenses 4,066 4,287 Electronic data processing expense 38,433 28,419 Expense for temporary staff 35,394 32,981 Professional expenses 157,287 100,136 Delivery commission 3,736 2,828 Commission expense 23,965 22,068 Business activities expense 4,382 4,358 Depreciation expense 26,992 21,209 Amortization expense 14,181 11,355 Event expense 4,961 1,204 Conference expense 515 418 Building administrative expense 3,705 2,551 ￦ 453,300 ￦ 385,012
- 31 -26. INCOME TAX FROM CONTINUED OPERATION (1) Income tax expense for the years ended December 31, 2012 and 2011 are summarized as follows (Unit: Won in millions): Years ended December 31, 2012 2011 Income tax currently payable ￦ 65,818 ￦ 82,490 Changes in deferred tax assets (liabilities) by temporary differences (*) (23,264) (141) Total 42,554 82,349 Changes in income tax expense reflected directly in shareholders’ equity (1,365) 2,621 Income tax expense ￦ 41,189 ￦ 84,970 (*) Ending net deferred tax assets due to temporary differences ￦ 135,667 ￦ 112,403 Beginning net deferred tax assets due to temporary differences 112,403 112,262 Changes in net deferred tax assets due to temporary differences ￦ (23,264) ￦ (141) (2) Income tax expenses reflected directly in shareholders’ equity for the year ended December 31, 2012 are as follows (Unit: Won in millions): January 1, 2012 Decrease December 31, 2012 Tax effect related to the cash ￦ 3,732 ￦ (1,365) ￦ 2,367 flow hedging reserve gains and losses (3) A reconciliation between income before income tax and income tax expense for the years ended December 31, 2012 and 2011 are as follows (Unit: Won in millions): Years ended December 31, 2012 2011 Income before income tax ￦ 232,518 ￦ 323,617 Income tax payable by the statutory income tax rates (*) 55,807 78,289 Tax reconciliations: Non-deductible expenses 33 178 Deferred tax expense relating to changes in tax rates - 552 The amount of deductible temporary differences for which no deferred tax asset is recognized (11,384) - True-up adjustment (3,463) (6,941) Others 196 12,892 Income tax from continued operation ￦ 41,189 ￦ 84,970 (*) Income tax rate is 11% below 0.2 billion won, 22% from 0.2 billion won to 20 billion won and 24.2% above 20 billion won for the years ended December 31, 2012 and 2011.
- 32 - (4) Details of changes in accumulated temporary differences for the years ended December 31, 2012 and 2011 are as follows (Unit: Won in millions): Year ended December 31, 2012 Beginning Ending Deferred Descriptions Balance (*) Decrease Increase balance tax asset (liab)Temporary differences to be deducted: Escrow deposit ￦ 14,058 ￦ 9,097 ￦ - ￦ 4,961 ￦ 1,192 Present value discount 9,178 9,178 5,318 5,318 1,278 Provision for unused commitments 47,167 47,167 46,386 46,386 11,144 Accrued expenses 62,771 62,771 58,253 58,253 13,995 Point provisions 295,241 295,241 335,837 335,837 80,684 Unearned revenue 63,864 63,864 77,450 77,450 18,607 Debt-for-equity swap 7,459 - - 7,459 1,792 Loss on impairment of financial assets available-for-sale 8,247 134 - 8,113 1,949 Allowance for doubtful accounts - - - - - Retirement benefit obligation 28,056 (1,979) (16,238) 13,797 3,315 Loss on valuation of currency swaps 19,062 17,958 6,829 7,933 1,906 Provision for litigation 7,768 7,768 8,832 8,832 2,122 Loss on valuation of interest rate swaps 931 931 3,925 3,925 943 563,802 512,130 526,592 578,264 138,927Temporary differences to be added: Retirement insurance premium (19,195) 1,979 9,915 (11,259) (2,705) Accrued income (243) (243) (126) (126) (30) Foreign currency translation gains (3,652) (2,548) - (1,104) (265) Gain on valuation of currency swaps (202) (202) - - - Gains on valuation of interest rate swaps (643) (643) (901) (901) (217) Amortization of intangible assets (531) (352) - - (179) (43) - (24,466) (2,009) 8,888 (13,569) (3,260) Deferred income tax assets ￦ 135,667(*) Differences between the amount disclosed in prior year’s audit report and the actual tax return are reflected in the beginning balances.
- 33 - Year ended December 31, 2011 Beginning Ending Deferred Descriptions Balance (*) Decrease Increase balance tax asset (liab.) Temporary differences to be deducted: Escrow deposit ￦ 18,116 ￦ 18,116 ￦ 14,058 ￦ 14,058 ￦ 3,385 Present value discount 804 8,644 17,551 9,711 2,339 Provision for unused commitments 215,032 46,073 47,167 216,126 52,047 Accrued expenses 57,894 59,541 64,418 62,771 15,116 Point provisions 233,069 14,437 79,006 297,638 71,676 Debt-for-equity swap 7,450 - - 7,450 1,794 Loss on impairment of financial assets available-for-sale 16,262 8,015 8 8,255 1,988 Foreign currency translation losses 20,419 20,419 - - - Retirement benefit obligation 21,278 - - 21,278 5,124 Loss on fair value of currency swaps 42,597 - 13,646 56,243 13,544 Gains or losses on fair value of currency swaps 1,203 1,203 - - - Gain on fair value of interest rate swaps (169) - 15,665 15,496 3,732 633,955 176,448 251,519 709,026 170,745 Temporary differences to be added: Retirement insurance premium (20,998) - - (20,998) (5,056) Allowance for doubtful accounts 12,754 12,754 - - - Prepaid expenses - 533 (2,397) (2,930) (705) Accrued income (291) (291) - - - Foreign currency translation gains (10,373) - 6,721 (3,652) (879) Other loss provision (litigation) - 2,800 (158,391) (161,191) (38,818) Gain on fair value of currency swaps (52,590) - - (52,590) (12,665) Gains or losses on valuation of investment in securities (67) - 67 - - Amortization of intangible assets - - (909) (909) (219) Others (Transition to K-IFRS) (107,893) (107,893) - - - - - - (179,468) (92,097) (154,909) (242,270) (58,342) Deferred income tax assets ￦ 112,403 (*) Differences between the amount disclosed in prior year’s audit report and the actual tax return is reflected in the beginning balances.27. EARNINGS PER SHARE: (1) Earnings per share for the years ended December 31, 2012 and 2011 is as follows. December 31, 2012 December 31, 2011 Net income ￦ 191,328,563,239 ￦ 238,647,581,983 Weighted average number of shares 160,465,286 160,465,286 Net income per share ￦ 1,192 ￦ 1,487 (2) Diluted earnings per share As the Company has not issued any diluted shares, diluted earnings per share is the same as basic earnings per share for the year ended December 31, 2012.
- 34 -28. CONTINGENCIES AND COMMITMENTS: (1) Credit line agreement a. The followings are credit line agreement as of December 31, 2012 and December 31, 2011 (Unit: Won in millions): Type Financial instruments December 31, 2012 December 31, 2011 Overdraft limit Standard Chartered Bank ￦ 50,000 ￦ 50,000 Shinhan Bank and Intraday overdraft limit 4 others 280,000 250,000 b. Credit Facility Agreement The Company entered into a Credit Facility Agreement with GE Capital Corporation (“GECC”) on September 24, 2012. The credit facility limit that can be used by the Company is Euro equivalent of USD200 million. In terms of duration, the Agreement is renewable for one year on January 2013 and 2014 until January 9, 2015, the maturity of the Credit Facility Agreement. With regard to the Credit Facility Agreement, the Company, GECC, Hyundai Motor Company (“HMC”) and Kia Motors Corp. (“KMC”) entered into a Support Agreement with same contract period as of the Credit Facility Agreement. Under the Support Agreement, in case that the Company uses the credit facility line, each of HMC and KMC shall bear an amount equal to 41 percent and 15 percent of losses, respectively, which are any amount of obligations have not been paid to GECC by the Company or otherwise received or collected by GECC from the Company. c. Revolving Credit Facility The Company has a revolving credit facility agreement with many financial institutions for credit line for the period ended December 31, 2012 as follows (Unit: Won in millions): Financial instruments Credit line Term Kookmin Bank ￦ 100,000 2012-01-30 ~ 2013-01-28 Kookmin Bank 30,000 2012-05-28 ~ 2013-05-29 Kookmin Bank 30,000 2012-11-07 ~ 2013-10-22 NH Bank 100,000 2012-03-29 ~ 2013-03-29 Citibank, Seoul 50,000 2012-12-24 ~ 2013-12-23 Woori Bank 200,000 2012-06-29 ~ 2013-06-28 Shinhan Bank 50,000 2012-04-16 ~ 2013-04-15 Shinhan Bank 50,000 2012-05-31 ~ 2013-05-31 (2) Alliance The Company has separate agency agreements regarding its credit card business with SC First Bank, Woori Bank, Korea Exchange Bank, Shinhan Bank, Citibank Korea, Hana Bank, Gwangju Bank, Jeonbuk Bank, Cheju Bank, Postal Office, Korea Computer Inc.. 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 fees based on a fixed rate for each credit card issued.
- 35 -(4) Pending Lawsuits As of December 31, 2012, 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 Jeong, Seong Hwa and 70 The Company and 16 compensation others defendants ￦ 2,343 Ongoing Claim for loss Hankook Cardnet and 6 The Company and 16 compensation others defendants 2,742 Ongoing Claim for loss The Company and 16 Lee, Bok Ki and 113 others compensation defendants 153 Ongoing Claim for loss Ko, Sung Bong and 108 The Company and 16 compensation others defendants 109 Ongoing Claim for loss Shin, Gwang Sik and 5 The Company and 16 compensation others defendants 638 Ongoing Claim for loss HanKook Card System and The Company and 16 compensation 18 others defendants 1,700 Ongoing Claim for loss Jang, Won Sik and 124 The Company and 11 compensation others defendants 700 Ongoing Claim for loss Kang, Kyoung Hee and 53 The Company and 16 compensation others defendants 108 Ongoing Claim for loss Yoon, Yong Seob and 30 The Company and 16 compensation others defendants 1,243 Ongoing Claim for loss Lee, Kyoung Hee and 3 The Company and 16 compensation others defendants 80 Ongoing Claim for loss The Company and 16 compensation Yoo, Jae Won and 5 others defendants 100 Ongoing Claim for loss The Company and 16 compensation SPECOM Co. Ltd. defendants 185 Ongoing Claim for loss Lim, Byeong Gwi and 30 The Company and 16 compensation others defendants 2,481 Ongoing Claim for loss ZIO TECHNET and 32 The Company and 16 compensation others defendants 903 Ongoing Claim for loss The Company and 16 compensation Jung, Hyun Oh and others defendants 85 Ongoing Claim for loss The Company and 16 compensation Guryun Soft and 6 others defendants 572 Ongoing Claim for loss Kim, Jun Hyeong and 4 The Company and 16 compensation others defendants 36 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 Unfair profits Jung, So Yeon and 26 The Company and 5 others defendants 29 Ongoing Claim for loss Kumho Industrial Co.,Ltd KAMCO, the Company compensation and 5 others and 5 defendants 104,272 Ongoing Unfair profits refund Lee, Yeon Jae The Company and 3 defendants 23 Ongoing Total ￦ 118,627(5) Deposit for Loss Reimbursement As of December 31, 2012, the Company has deposits of ￦4,944 million and ￦4,302 million of proceeds and interests from the sale of Daewoo International Corporation’ shares, respectively, in an escrow account and records ￦4,944 million of provision for proceeds and ￦4,467 million of provision for litigation relating to the sale of Daewoo International Corporation’ shares (See Note 18(4)).
- 36 - (6) 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. (7) 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. (8) Guarantee The Company has a performance guarantee from the Seoul Guarantee Insurance Co., Ltd. amounting to ￦1,194 million in connection with airline ticket payments and others. (9) Early Redemption Rule Associated with Asset-Backed Securitization According to the agreement on the Company’s asset-backed securitization, in order to enhance credit level 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. (10) 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 five times a month on designated cutoff dates at the amount calculated using a predetermined price pursuant to the contract.29. TRANSFERS OF FINANCIAL ASSETS: Asset-backed securities and the underlying assets The Company transferred its card assets to special purpose companies (“SPCs”) for asset securitization and SPCs issued ABSs. The ABSs are collateralized by card assets as underlying assets. All of the transferred financial assets do not qualify for derecognition because the Company has retained substantially all the risks and rewards of ownership of the transferred asset. Therefore the Company continues to recognize the transferred financial assets. The details of asset-backed securities and underlying assets as of December 31, 2012 and December 31, 2011 are as follows (Unit: Won in millions): Carrying amount Fair value Underlying Senior Underlying Senior Net Maturity asset tranche asset tranche positionPRIVIA 2nd SPC 2014-04-24 ￦ 1,055,990 ￦ 428,440 ￦ 1,074,693 ￦ 428,160 ￦ 646,533PRIVIA 3rd SPC 2015-07-20 1,038,539 428,440 1,058,068 427,951 630,117Discounts on bonds - (3,589) - - - ￦ 2,094,529 ￦ 853,291 ￦ 2,132,761 ￦ 856,111 ￦ 1,276,650
- 37 -30. TRANSACTION WITH RELATED PARTIES (1) Status of related parties Related parties consist of entities related to the Company, post-employment benefits, a key management personnel and a close member of that person’s family, an entity controlled or jointly controlled and an entity influenced significantly. Details of related parties as of December 31, 2012 are as follows: Companies Parent company Hyundai Motor Company Other related parties GE Capital Intl Holdings, Green air, Kia motor company, Kia Tigers, Busan Finance Center AMC, Samwoo, Seoul Metro Line9, HL Green Power, WIA Magna Powertrain, Eukor Car Carriers, Innocean, Iljin Bearing, Jongro Academy, Chunbuk Hyundai motors FC, Jongro Eclass, Korea Credit Bureau, Hankook Economy News Haevichi Country Club, Haevichi Hotel&Resort, Hyundai construction, Hyundai construction human resource development center, Hyundai Glovis, Hyundai Dymos, Hyundai Life, Hyundai Rotem, Hyundai Materials, Hyundai Metia, Hyundai Movis, Hyundai BNG Steel, Hyundai farm land & development, Hyundai Steel Company, Hyundai C&I, Hyundai IHL, Hyundai energy, Hyundai engineering, Hyundai NGV, Hyundai MSEAT, Hyundai MnSoft, Hyundai AMCO, Hyundai Auto Ever Systems, Hyundai Wistco, Hyundai Wia, Hyundai Engineering & Steel Industries, Hyundai Architects & Engineers Associates, Hyundai Motors Electronic Industry, Hyundai Capital, Hyundai Commercial, Hyundai Kefico, Hyundai Powertech, Hyundai Fastech, Hyundai Hysco, HMC Investment Securities (2) Transaction with related companies for the years ended December 31, 2012 and 2011 are as follows (Unit: Won in millions): Year ended December 31, 2012 Year ended December 31, 2011 Parent Other related Parent Other related company parties Total company parties TotalRevenues Card revenue ￦ 112,140 ￦ 61,323 ￦ 173,463 ￦ 128,143 ￦ 55,050 ￦ 183,193 Rental revenue - 271 271 - 200 200 Others - 35,711 35,711 - 22,354 22,354 112,140 97,305 209,445 128,143 77,604 205,747Expense Card expense 15 263 278 130 1,977 2,107 General and administrative expense 391 42,991 43,382 459 35,370 35,829 Others 69 60,900 60,969 - 28,910 28,910 475 104,154 104,629 589 66,257 66,846Others Prepaid expense - - - - 228 228 Purchase of property and equipment 76 21,588 21,664 - 13,453 13,453 Purchase of intangible assets - 3,182 3,182 - 6,941 6,941 Disposal of assets - 359,956 359,956 - 324,687 324,687 Total ￦ 76 ￦384,726 ￦ 384,802 ￦ - ￦ 345,309 ￦ 345,309
- 38 - (3) Outstanding receivables, payables and guarantee from transactions with related parties as of December 31, 2012 and December 31, 2011 are as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Other Other Parent related Parent related company parties Total company parties Total Receivables Card asset ￦ 64,580 ￦ 147,800 ￦212,380 ￦ 60,555 ￦165,755 ￦226,310 Other accounts receivable - - - 59 68 127 Others 151 21,626 21,777 - 30,241 30,241 Allowance for doubtful accounts (710) (1,626) (2,336) (908) (2,464) (3,372) Total 64,021 167,800 231,821 59,706 193,600 253,306 Payables Accounts payable 87,354 58,060 145,414 35,013 54,520 89,533 Other 7 (5,489) (5,482) 3,955 1,165 5,120 Total ￦ 87,361 ￦ 52,571 ￦139,932 ￦ 38,968 ￦ 55,685 ￦ 94,653 The Company is being provided payment guarantees through credit facility agreement by HMC and KMC. The limit of payment guarantees as of December 31, 2012 and December 31, 2011 is Euro equivalent of USD200 million (See Note 28(1)). (4) Compensation for key executives 1) Compensation cost for key executives for the years ended December 31, 2012 and 2011 consist of short-term employee benefit and retirement benefit. 2) Compensation for key management for the years ended December 31, 2012 and 2011 consists of the following (Unit: Won in millions): For the year ended December 31 2012 2011 Short-term employee benefit 9,227 11,192 Retirement benefit 2,600 2,274 Total 11,827 13,466 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.31. OTHER COMPREHENSIVE INCOME Other comprehensive income for the year ended December 31, 2012 consists of the following (Unit: Won in millions): Year ended December 31, 2012 Beginning Income tax Ending Balance Decrease Disposal effect balance Other comprehensive income Effective portion of changes in fair value of cash flow hedges ￦ (11,764) ￦ 5,846 ￦ (202) ￦ (1,365) ￦ (7,485)
- 39 -32. CONSOLIDATED STATEMENTS OF CASH FLOWS: Non-cash activities which are not reflected in the consolidated statements of cash flow for the years ended December 31, 2012 and 2011 are as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Replacement of tangible assets(*) ￦ 4,323 ￦ 4,703 Current portion of long-term borrowings 25,000 90,000 Gain (Loss) on valuation of derivatives 5,644 (11,235) (*) These consist of land, building and fixtures and equipment.33. 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’s 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, so that 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 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 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. Credit risk arises primarily from the Company’s loan and card assets. The Company considers all the elements of individual borrower’s credit risk exposure such as default and breach.
- 40 -2) Risk management framework The Company’s exposure and credit ratings of its counterparties are primarily reviewed and managed for accuracy by credit risk management department. Secondly, aggregate risks are allocated to total portfolio and controlled by counterparty’s credit 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 are effectively implemented, 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 or more often if necessary. The risk management committee is assisted by independent risk management department (risk management team) which oversees all the risks for the Company’s operations comprehensively. - 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 one month overdue over, 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 determined with consideration of behavior ratings, external ratings by rating agencies and etc. 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, amounts 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 enable 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.3) Level of exposure to credit risk The Company’s maximum exposure to credit risk as of December 31, 2012 and December 31, 2011 are summarized as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Deposit ￦ 824,576 ￦ 863,054 Card assets (*1) 9,887,850 9,548,020 Loans (*1) - 500 Other financial assets (*1, 2) 184,554 164,918 Unused commitment 32,974,864 31,564,297 Total ￦ 43,871,844 ￦ 42,140,789 (*1) Card assets are stated at book value before allowance for doubtful accounts. (*2) Other financial assets consist of accounts payable and unearned income.
- 41 - 4) Analysis of credit soundness of financial assets ① Credit soundness of card assets neither past due nor impaired as of December 31, 2012 and December 31, 2011 are summarized as follows (Unit: Won in millions):A. Retail December 31, 2012 December 31, 2011 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 ￦ 651,870 ￦ 351 ￦ 651,519 ￦ 693,874 ￦ 370 ￦ 693,504 2 606,450 408 606,042 630,622 430 630,192 3 741,638 631 741,007 741,158 629 740,529 4 565,099 603 564,496 580,079 632 579,447 5 698,188 1,113 697,075 589,433 970 588,463 6 584,134 1,577 582,557 582,570 1,565 581,005 7 573,129 3,186 569,943 549,984 3,028 546,956 8 565,730 5,641 560,089 563,463 5,535 557,928 9 561,500 9,281 552,219 570,577 9,424 561,153 10 441,710 10,681 431,029 464,475 11,125 453,350 11 327,366 11,455 315,911 321,501 11,230 310,271 12 375,751 18,362 357,389 370,374 17,823 352,551 13 130,631 10,207 120,424 138,363 10,763 127,600 14 67,577 7,583 59,994 108,320 12,042 96,278 15 23,802 2,512 21,290 24,542 2,729 21,813 6,914,575 83,591 6,830,984 6,929,335 88,295 6,841,040 Card loan 1 28,455 83 28,372 19,480 55 19,425 2 71,879 280 71,599 59,451 227 59,224 3 99,548 634 98,914 84,113 546 83,567 4 136,699 972 135,727 113,442 801 112,641 5 210,982 2,007 208,975 176,958 1,656 175,302 6 253,457 2,962 250,495 210,234 2,371 207,863 7 248,570 3,422 245,148 201,924 2,673 199,251 8 272,313 4,436 267,877 224,432 3,441 220,991 9 225,331 4,452 220,879 183,896 3,459 180,437 10 174,391 4,043 170,348 146,402 3,155 143,247 11 130,631 3,613 127,018 110,753 2,867 107,886 12 96,619 3,003 93,616 86,085 2,458 83,627 13 79,475 2,912 76,563 84,203 2,835 81,368 14 41,259 2,087 39,172 48,392 2,345 46,047 15 168,413 19,904 148,509 202,228 25,797 176,431 2,238,022 54,810 2,183,212 1,951,993 54,686 1,897,307 Total ￦ 9,152,597 ￦ 138,401 ￦ 9,014,196 ￦ 8,881,328 ￦ 142,981 ￦ 8,738,347 (*) Grades are internal credit ratings evaluated by the Company.
- 42 -B. Corporate December 31, 2012 December 31, 2011 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 ￦ 260,878 ￦ 71 ￦ 260,807 ￦ 236,273 ￦ 260 ￦ 236,013 2 76,501 159 76,342 90,155 409 89,746 3 41,571 151 41,420 61,467 221 61,246 4 43,949 437 43,512 34,550 292 34,258 5 9,854 304 9,550 6,938 215 6,723 6 3,024 177 2,847 3,012 166 2,846 7 3,369 384 2,985 2,785 298 2,487 8 1,040 145 895 1,402 74 1,328 N (**) 10,203 77 10,126 2,296 1 2,295 Total ￦ 450,389 ￦ 1,905 ￦ 448,484 ￦ 438,878 ￦ 1,936 ￦ 436,942 (*) Grades are internal credit ratings evaluated by the Company. (**) N represents card assets which are composed of sound government-related assets such as central and local governments and public authorities. ② Credit quality of credit cards past due but not impaired as of December 31, 2012 and December 31, 2011 are summarized as follows (Unit: Won in millions): December 31, 2012 Less than More than 1 month 1-2 months 2-3 months 3 months Total Retail ￦ 173,994 ￦ 29,994 ￦ - ￦ - ￦ 203,988 Corporate 13,485 2,653 - - 16,138 187,479 32,647 - - 220,126 Card assets Card receivables 110,097 16,497 - - 126,594 Cash advances 18,102 4,378 - - 22,480 Card loans 59,280 11,772 - - 71,052 187,479 32,647 - - 220,126 Allowance for doubtful accounts (7,051) (2,879) - - (9,930) Book value ￦ 180,428 ￦ 29,768 ￦ - ￦ - ￦ 210,196 December 31, 2011 Less than More than 1 month 1-2 months 2-3 months 3 months Total Retail ￦ 150,825 ￦ 26,686 ￦ - ￦ - ￦ 177,511 Corporate 12,131 4,637 - 3 16,771 162,956 31,323 - 3 194,282 Card assets Card receivables 99,144 18,194 - 3 117,341 Cash advances 17,265 4,349 - - 21,614 Card loans 46,547 8,781 - - 55,328 162,956 31,324 - 3 194,283 Allowance for doubtful accounts (7,317) (2,943) - (3) (10,263) Book value ￦ 155,639 ￦ 28,381 ￦ - ￦ - ￦ 184,020
- 43 - ③ Credit quality of credit cards past due and impaired as of December 31, 2012 and December 31, 2011 are summarized as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Card assets ￦ 64,738 ￦ 33,531 Allowance for doubtful (30,576) (18,573) accounts Total ￦ 34,162 ￦ 14,958 3) Concentrations of credit risk ① Concentration of credit risk by term structures as of December 31, 2012 and December 31, 2011 are summarized as follows (Unit: Won in millions): December 31, 2012 Allowance for doubtful Retail Corporate Total Ratio accounts Book value Within 3 months ￦ 3,913,271 ￦ 479,587 ￦ 4,392,858 44.44% (48,758) 4,344,100 3-6 months 1,145,140 43 1,145,183 11.58% (17,545) 1,127,638 6-12 months 1,718,014 - 1,718,014 17.38% (32,564) 1,685,450 1-2 years 1,756,477 - 1,756,477 17.76% (49,545) 1,706,932 2-3 years 775,687 - 775,687 7.84% (17,342) 758,345 3-4 years 64,680 - 64,680 0.65% (1,293) 63,387 4-5 years 2,016 - 2,016 0.02% (779) 1,237 After 5 years 32,935 - 32,935 0.33% (12,986) 19,949 Total ￦ 9,408,220 ￦ 479,630 ￦ 9,887,850 100.00% ￦ (180,812) ￦ 9,707,038 December 31, 2011 Allowance for doubtful Retail Corporate Total Ratio accounts Book value Within 3 months ￦ 2,780,370 ￦ 461,977 ￦ 3,242,347 33.96% (36,070) 3,206,277 3-6 months 2,019,680 75 2,019,755 21.15% (32,495) 1,987,260 6-12 months 1,925,037 - 1,925,037 20.16% (35,937) 1,889,100 1-2 years 1,609,716 - 1,609,716 16.86% (48,580) 1,561,136 2-3 years 694,083 - 694,083 7.27% (17,307) 676,776 3-4 years 41,371 - 41,371 0.43% (661) 40,710 4-5 years 1,636 - 1,636 0.02% (131) 1,505 After 5 years 14,575 - 14,575 0.15% (2,603) 11,972 Total ￦ 9,086,468 ￦ 462,052 ￦ 9,548,520 100.00% ￦ (173,784) ￦ 9,374,736 ② Concentrations of credit risk by industry of corporate loans as of December 31, 2012 and December 31, 2011 are summarized as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Book value Book value before Allowance before Allowance allowance for allowance for for doubtful doubtful Book for doubtful doubtful Book accounts Ratio accounts value accounts Ratio accounts valueFinancing ￦121,927 25.42% ￦ (219) ￦121,708 ￦ 136,413 29.52% ￦ (153) ￦ 136,260Manufacturing 161,781 33.73% (863) 160,918 153,518 33.23% (3,589) 149,929Service 149,343 31.14% (1,997) 147,346 131,772 28.52% (1,878) 129,894Public 145 0.03% - 145 254 0.05% (73) 181Others 46,434 9.68% (1,683) 44,751 40,095 8.68% (2,611) 37,484 Total ￦479,630 100.00% ￦ (4,762) ￦474,868 ￦ 462,052 100.00% ￦ (8,304) ￦ 453,748
- 44 - 4) Card assets by the assessment methods for impairments as of December 31, 2012 and December 31, 2011 are summarized as follows (Unit: Won in millions): December 31, 2012 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 rateCard assets Card receivabl es ￦ 11,574 ￦ (121) ￦ 1.05% ￦ 6,584,787 ￦ (65,531) 1.00% ￦ 6,596,361 ￦ (65,652) 1.00% Cash advances - - - 940,019 (33,786) 3.59% 940,019 (33,786) 3.59% Card loans - - - 2,351,470 (81,374) 3.46% 2,351,470 (81,374) 3.46% Loans to corporate - - - - - - - - - Total ￦ 11,574 ￦ (121) ￦ 1.05% ￦ 9,876,276 ￦(180,691) 1.83% ￦ 9,887,850 ￦ (180,812) 1.83% December 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 rateCard assets Card receivabl es ￦ 1,368 ￦ - ￦ - ￦ 6,499,755 ￦ (68,773) 1.06% ￦ 6,501,123 ￦ (68,773) 1.06% Cash advances - - - 1,016,028 (37,910) 3.73% 1,016,028 (37,910) 3.73% Card loans - - - 2,030,869 (67,071) 3.30% 2,030,869 (67,071) 3.30% Loans to corporate - - - 500 (30) 6.00% 500 (30) 6.00% Total ￦ 1,368 ￦ - ￦ - ￦ 9,547,152 ￦(173,784) 1.82% ￦ 9,548,520 ￦ (173,784) 1.82%
- 45 -(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 become 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, within 1 year, 1~5 years and after 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 statements 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 local/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 the Company’s management goal including liquidity risk is set and overseen by the ALCO. 2) Residual contractual maturity analysis of financial liabilities The Company’s financial liabilities by residual contractual maturity as of December 31, 2012 and December 31, 2011 are classified as follows (Unit: Won in millions): December 31, 2012 Immediate Less than More than payment 1 year 1-5 years 5 years TotalBorrowings ￦ - ￦ 429,738 ￦ 64,417 ￦ - ￦ 494,155Debentures - 2,108,561 4,801,662 230,914 7,141,137Derivatives liabilities - 32,147 47,682 - 79,829Other liabilities 42,139 1,421,832 192 - 1,464,163 Total ￦ 42,139 ￦ 3,992,278 ￦ 4,913,953 ￦ 230,914 ￦ 9,179,284 These amounts include all cash outflows such as interests without discount and other liabilities are composed of account payable, accrued expense, deposit received, finance lease liabilities and guarantee deposit received for import license. December 31, 2011 Immediate Less than More than payment 1 year 1-5 years 5 years TotalBorrowings ￦ - ￦ 544,343 ￦ 54,387 ￦ - ￦ 598,730Debentures - 1,728,091 5,310,411 195,212 7,233,714Derivatives liabilities - 14,013 (367) - 13,646Other liabilities 28,200 1,211,178 675 - 1,240,053 Total ￦ 28,200 ￦ 3,497,625 ￦ 5,365,106 ￦ 195,212 ￦ 9,086,143 These amounts include all cash outflows such as interests without discount and other liabilities are composed of account payable, accrued expense, deposit received, finance lease liabilities and guarantee deposit received import license.
- 46 -(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. 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 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. The market risk from the non-trading position 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 organization 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 asset liability management (“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 position The majority market risk from the Company’s non-trading position is the interest rate risk. This interest rate risk from non-trading position 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 lcoal 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 VaR 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.
- 47 - The interest rate VaR disclosed below is estimated at a 95% confidence level with 1% interest rate shock 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. The result of interest rate VaR calculated under normal distribution of interest rate risk is as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Interest rate VaR ￦ 1,197 ￦ 24,005(5) Capital management The Parent (specialized credit finance company) must maintain adjusted capital adequacy ratio in accordance with Specialized Credit financial business and sub-regulations, and the ratio for the credit card company must be more than 8 %. This ratio is calculated dividing adjusted capital by adjusted total assets and all factors are based on consolidated financial statement. The Parent maintains an adjusted capital adequacy ratio over 8%.
- 48 -34. FINANCIAL ASSETS AND FINANCIAL LIABILITIES: (1) Fair Value of Financial Assets and Liabilities The fair value of financial assets and financial liabilities as of December 31, 2012 and December 31, 2011 are summarized as follows (Unit: Won in millions): December 31, 2012 December 31, 2011 Book value Fair value Book value Fair value Assets Financial assets Cash and bank deposit ￦ 824,576 ￦ 824,576 ￦ 863,054 ￦ 863,054 Investment financial assets 1,767 1,767 1,767 1,767 Card assets 9,707,038 10,119,434 9,374,266 9,727,640 Loans - - 470 502 Other assets 182,292 182,697 162,617 162,827 Total ￦10,715,673 ￦11,128,474 ￦ 10,401,704 ￦ 10,754,023 Liabilities Financial liabilities Borrowings ￦ 487,500 ￦ 488,832 ￦ 590,000 ￦ 590,623 Bonds payable 6,533,176 6,740,956 6,481,760 6,628,755 Other liabilities 1,517,677 1,517,676 1,291,499 1,245,368 Total ￦ 8,538,353 ￦8,747,464 ￦ 8,363,259 ￦ 8,464,746 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 statements of financial position are reasonably estimated, the application of 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.
- 49 -(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 statements of financial position as of December 31, 2012 and December 31, 2011 (Unit: Won in millions): December 31, 2012 Book value Fair value Level 1 Level 2 Level 3Financial assetsFair value financial assets Derivatives assets ￦ 901 ￦ 901 ￦ - ￦ 901 ￦ -Financial liabilitiesFair value financial liabilities Derivatives liabilities ￦ 53,555 ￦ 53,555 ￦ - ￦ 53,555 ￦ - December 31, 2011 Book value Fair value Level 1 Level 2 Level 3Financial assetsFair value financial assets Derivatives assets ￦ 2,555 ￦ 2,555 ￦ - ￦ 2,555 ￦ -Financial liabilitiesFair value financial liabilities Derivatives liabilities ￦ 5,326 ￦ 5,326 ￦ - ￦ 5,326 ￦ - The table below provides the Company’s financial assets and financial liabilities that are carried at cost since the fair values of the financial instruments are not readily determinable in the consolidated statements of financial position as of December 31, 2012 and December 31, 2011 (Unit: Won in millions): Year ended December 31 2012 2011 Investment financial assets AFS financial assets(*) ￦ 1,767 ￦ 1,767 (*) AFS financial assets are unlisted equity securities and recorded as carried at cost since they do not have quoted prices in an active market and the fair values are not measured with reliability.
- 50 - (3) Book value of financial assets and financial liabilities The table below provides book value by category of financial assets and financial liabilities recorded at fair value in the consolidated statements of financial position as of December 31, 2012 and December 31, 2011 (Unit: Won in millions): December 31, 2012 Financial asset at FVTPL Designated AFS at Loans and financial Hedging Trading FVTPL receivables assets derivatives TotalFinancial assets Cash and bank deposit ￦ - ￦ - ￦ 824,576 ￦ - ￦ - ￦ 824,576 Investment financial assets - - - 1,767 - 1,767 Card assets - - 9,707,038 - - 9,707,038 Loans - - - - - - Other assets - - 181,391 - 901 182,292 Total ￦ - ￦ - ￦ 10,713,005 ￦ 1,767 ￦ 901 ￦10,715,673 December 31, 2012 Financial liabilities at FVTPL Designated at Amortized Hedging Trading FVTPL cost derivatives Total Financial liabilities Borrowings ￦ - ￦ - ￦ 487,500 ￦ - ￦ 487,500 Bonds payable - - 6,533,176 - 6,533,176 Other liabilities - - 1,464,122 53,555 1,517,677 Total ￦ - ￦ - ￦ 8,484,798 ￦ 53,555 ￦ 8,538,353
- 51 - December 31, 2011 Financial asset at FVTPL Designated AFS at Loans and financial Hedging Trading FVTPL receivables assets derivatives TotalFinancial assets Cash and bank deposit ￦ - ￦ - ￦ 863,054 ￦ - ￦ - ￦ 863,054 Investment financial assets - - - 1,767 - 1,767 Card assets - - 9,374,266 - - 9,374,266 Loans - - 470 - - 470 Other assets - - 160,062 - 2,555 162,617 Total ￦ - ￦ - ￦ 10,397,852 ￦ 1,767 ￦ 2,555 ￦10,402,174 December 31, 2011 Financial liabilities at FVTPL Designated at Amortized Hedging Trading FVTPL cost derivatives Total Financial liabilities Borrowings ￦ - ￦ - ￦ 590,000 ￦ - ￦ 590,000 Bonds payable - - 6,481,760 - 6,481,760 Other liabilities - - 1,286,173 5,326 1,291,499 Total ￦ - ￦ - ￦ 8,357,933 ￦ 5,326 ￦ 8,363,259
- 52 - (4) Net profit or loss of financial instruments by categories Net profit or loss of financial instruments by categories for the years ended December 31, 2012 and December 31, 2011 is as follows (Unit: Won in million): December 31, 2012 (Reversal Foreign of) currency Foreign Interest Interest Card Card impairment Valuation Disposal translation exchange income expense revenue expenses loss gain(loss) gain(loss) gain (loss) gain(loss)Financial assets Loans and receivables ￦ 22,593 ￦ - ￦ 2,388,279 ￦1,043,711 ￦ - ￦ - ￦ - ￦ (8) ￦ 7,744 AFS financial assets - - - - 462 - - - - Hedging derivatives - - - - - - - - -Financial liabilities Financial liabilities at amortized cost 343,399 - - - - - 55,633 799 Hedging derivatives - - - - - (55,633) (799) - - Total ￦22,593 ￦ 343,399 ￦ 2,388,279 ￦1,043,711 ￦ 462 ￦ (55,633) ￦ (799) ￦ 55,625 ￦ 8,543 December 31, 2011 (Reversal Foreign of) currency Foreign Interest Interest Card Card impairment Valuation Disposal translation exchange income expense revenue expenses loss gain(loss) gain(loss) gain (loss) gain(loss)Financialassets Loans and receivable s ￦ 26,006 ￦ - ￦ 2,318,410 ￦923,942 ￦ - ￦ - ￦ - ￦ 141 ￦ (1,505) AFS financial assets - - - - 798 - 7,650 - - Hedging derivatives - - - - - 16,377 7,630 - -Financial liabilities Financial liabilities at amortized cost 357,374 - - - - - (16,377) 5,878 Hedging derivatives - - - - - - (5,878) - - Total ￦26,006 ￦ 357,374 ￦ 2,318,410 ￦923,942 ￦ 798 ￦ 16,377 ￦ 9,402 ￦ (16,236,) ￦ 4,373
- 53 -35. NET INTEREST INCOME (EXPENSE): Net interest income (expense) for the years ended December 31, 2012 and 2011 is as follows (Unit: Won in millions): Years ended December 31, Interest income 2012 2011 Cash and bank deposit ￦ 19,915 ￦ 24,071 Others 2,678 1,935 Total 22,593 26,006 Interest expense Borrowings 25,304 32,635 Bonds payable 317,881 324,707 Others 214 32 Total 343,399 357,374 Net interest expense ￦ (320,806) ￦ (331,368)36. NET COMMISSION INCOME: Net commission income for the years ended December 31, 2012 and 2011 is as follows (Unit: Won in millions): Years ended December 31, Commission income 2012 2011 Card income ￦ 1,513,832 ￦ 1,434,743 Total 1,513,832 1,434,743 Commission expense Service fee 559,560 488,265 Financial payment fee 13,027 13,098 A new credit sale handling fee 132,072 108,046 Merchants co-payment fee 83 114 Overseas payment fee 39,967 31,552 Other 36,840 32,423 Total 781,549 673,498 Net commission income ￦ 732,283 ￦ 761,245 Commission income and commission expense are included in card income and card expenses, respectively.37. OTHER OPERATING INCOME AND OTHER OPERATING EXPENSES Other operating income and other operating expenses for the years ended December 31, 2012 and 2011 is as follows (Unit: Won in millions): Years ended December 31, Other operating revenue 2012 2011 Foreign exchange gain ￦ 10,126 ￦ 14,522 Foreign currency translation gain 55,663 161 Gain on derivative transactions - 7,630 Gain on valuation of derivatives - 16,377 Others 47,253 16,166 Total 113,042 54,856 Commission expense Foreign exchange loss 1,583 10,149 Foreign currency translation loss 38 16,397 Loss on derivative transactions 799 5,878 Loss on valuation of derivatives 55,633 - Others 33,885 30,474 Total 91,938 62,898
- 54 -38. SEGMENT INFORMATIONThough the Company conducts business activities related to credit cards, installment financing, leasing, etc., inaccordance with relevant laws such as Specialized Credit Finance Business Act, it does not report separate segmentinformation, as the management considers the Company to operate under one core business.