Audit Report: Hyundai Commercial 2Q2011

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Hyundai Commercial Audit Report 2Q 2011

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Audit Report: Hyundai Commercial 2Q2011

  1. 1. Hyundai Commercial, Inc. andSubsidiariesInterim Consolidated Financial StatementsJune 30, 2011
  2. 2. Hyundai Commercial, Inc. and SubsidiariesIndexJune 30, 2011Report on Review of Interim Financial Statements ..........................................................................1-2Interim Consolidated Financial StatementsInterim Consolidated Statements of Financial Position .........................................................................3-5Interim Consolidated Statements of Comprehensive Income................................................................6-7Interim Consolidated Statements of Changes in Shareholders’ Equity ................................................ 8-9Interim Consolidated Statements of Cash Flows ....................................................................................10Notes to the Interim Consolidated Financial Statements...................................................................11-61
  3. 3. Report on Review of Interim Financial StatementsTo the Shareholders and Board of Directors ofHyundai Commercial, Inc.Reviewed Financial StatementsWe have reviewed the accompanying interim consolidated financial statements of HyundaiCommercial, Inc. (the Company) and subsidiaries. These financial statements consist of theconsolidated statement of financial position of the Company and subsidiaries as of June 30,2011, and the related consolidated statements of comprehensive income for the three-monthand the six-month periods ended June 30, 2011, and statements of changes in equity andcash flows for the six-month period ended June 30, 2011, and a summary of significantaccounting policies and other explanatory notes, expressed in Korean won.Managements Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these interimconsolidated financial statements in accordance with the International Financial ReportingStandards as adopted by the Republic of Korea (Korean IFRS) 1034, Interim FinancialReporting, and for such internal control as management determines is necessary to enablethe preparation of interim consolidated financial statements that are free from materialmisstatement, whether due to fraud or error.Auditors ResponsibilityOur responsibility is to issue a report on these interim consolidated financial statements basedon our review.We conducted our review in accordance with the quarterly and semi-annual review standardsestablished by the Securities and Futures Commission of the Republic of Korea. A review ofinterim financial information consists of making inquiries, primarily of persons responsible forfinancial and accounting matters, and applying analytical and other review procedures. Areview is substantially less in scope than an audit conducted in accordance with auditingstandards generally accepted in the Republic of Korea and consequently does not enable usto obtain assurance that we would become aware of all significant matters that might beidentified in an audit. Accordingly, we do not express an audit opinion. 1
  4. 4. ConclusionBased on our review, nothing has come to our attention that causes us to believe theaccompanying interim consolidated financial statements do not present fairly, in all materialrespects, in accordance with the Korean IFRS 1034, Interim Financial Reporting.Emphasis of MatterWithout qualifying our opinion, as mentioned in Note 2, we draw attention to the fact thatthese interim consolidated financial statements are prepared in accordance with Korean IFRSand the interpretations which are effective as of this report date. Therefore, there may bechanges in the Korean IFRS and related interpretations adopted in the preparation of theseconsolidated financial statements when Company prepares its first full Korean IFRS financialstatements.OthersThe consolidated statement of financial position as of December 31, 2010, and the relatedconsolidated statements of comprehensive income for the three-month and the six-monthperiods ended June 30, 2010, and statements of changes in equity and cash flows for the six-month period ended June 30, 2010, presented herein for comparative purposes, were notreviewed.Review standards and their application in practice vary among countries. The procedures andpractices used in the Republic of Korea to review such interim consolidated financialstatements may differ from those generally accepted and applied in other countries.Accordingly, this report is for use by those who are informed about Korean review standardsand their application in practice.Seoul, KoreaAugust 25, 2011 This report is effective as of August 25, 2011, the review report date. Certain subsequent events or circumstances, which may occur between the review report date and the time of reading this report, could have a material impact on the accompanying interim consolidated financial statements and notes thereto. Accordingly, the readers of the review report should understand that there is a possibility that the above review report may have to be revised to reflect the impact of such subsequent events or circumstances, if any. 2
  5. 5. Hyundai Commercial, Inc. and SubsidiariesInterim Consolidated Statements of Financial PositionJune 30, 2011 and December 31, 2010(In Korean won) June 30, December 31, 2011 2010 (Non-reviewed) Assets Cash and deposits Cash and cash equivalents (Note 24) 164,895,256,232 99,938,403,013 Deposits (Note 4) 11,500,000 11,500,000 164,906,756,232 99,949,903,013 Securities (Note 5) Available-for-sale securities 19,245,582,500 17,657,945,000 Equity method investment 141,404,313,845 133,160,973,077 160,649,896,345 150,818,918,077 Loans receivable (Notes 6 and 7) Factoring 859,634,492 1,185,464,975 Allowance for doubtful accounts (11,229,125) (15,550,313) Loans 2,205,761,749,704 1,789,237,279,462 Allowance for doubtful accounts (16,922,573,593) (12,780,139,160) 2,189,687,581,478 1,777,627,054,964 Installment financial assets (Notes 6 and 7) Auto installment financing receivables 453,182,771,031 487,175,195,698 Allowance for doubtful accounts (3,366,916,393) (3,055,399,069) Durable goods installment financing receivables 80,058,055,945 81,485,373,499 Allowance for doubtful accounts (554,651,283) (553,627,898) 529,319,259,300 565,051,542,230 Lease receivables (Notes 6, 7 and 9) 63,491,720,805 40,950,640,964 Property and equipment (Note 10) Vehicles 144,561,065 119,066,527 Fixtures and furniture 1,713,612,376 1,986,277,290 Others 410,999,664 410,999,664 2,269,173,105 2,516,343,481 3
  6. 6. Hyundai Commercial, Inc. and SubsidiariesInterim Consolidated Statements of Financial PositionJune 30, 2011 and December 31, 2010(In Korean won) June 30, December 31, 2011 2010 (Non-reviewed) Other assets Intangible assets (Note 11) ₩ 2,780,325,178 ₩ 2,481,402,934 Non-trade receivables 37,147,569,939 39,739,949,691 Allowance for doubtful accounts (272,116,269) (279,400,536) Accrued revenues 15,400,435,507 13,110,214,431 Allowance for doubtful accounts (115,360,061) (93,573,786) Advance payments 246,330,329 770,372,440 Prepaid expenses 4,204,873,165 8,350,859,781 Leasehold deposits 9,101,650,774 7,233,368,763 Derivative assets (Note 17) - 6,151,267,007 Others 4,709,566,420 5,319,566,420 73,203,274,982 82,784,027,145 Total assets ₩3,183,527,662,247 ₩2,719,698,429,874Liabilities and Shareholders’ EquityBorrowings Borrowings (Note 12) ₩ 817,409,986,992 ₩ 774,749,000,000 Debentures (Note 13) 1,703,378,977,128 1,504,362,479,869 Securitized debts (Note 14) 379,204,999,136 199,530,274,091 2,899,993,963,256 2,478,641,753,960Other liabilities Non-trade payables 5,049,421,358 4,345,884,784 Accrued expenses 18,383,954,957 22,977,718,513 Unearned revenue 4,637,289,868 2,897,710,421 Advances 96,122,929 216,279,513 Withholdings 2,936,942,216 2,809,860,961 Accrued income taxes 9,693,915,619 10,125,301,190 Defined benefit liability (Note 15) 2,635,533,361 1,681,174,959 Leasehold deposits received 9,734,860,095 2,824,085,004 Deferred income tax liabilities (Note 16) 12,708,808,816 8,472,287,159 Derivative liabilities (Note 17) 5,668,407,164 4,088,617,272 71,545,256,383 60,438,919,776 Total liabilities 2,971,539,219,639 2,539,080,673,736 4
  7. 7. Hyundai Commercial, Inc. and SubsidiariesInterim Consolidated Statements of Financial PositionJune 30, 2011 and December 31, 2010(In Korean won) June 30, December 31, 2011 2010 (Non-reviewed)Shareholders equity Common stock (Notes 1 and 18) ₩100,000,000,000 ₩100,000,000,000 Accumulated other comprehensive income and expenses (Note 23) Loss on valuation of derivatives (892,637,586) (1,662,559,500) Gain on valuation of available-for-sale 6,016,687,482 2,180,056,816 securities Accumulated comprehensive income of equity (1,703,960,565) (1,379,778,772) method investees 3,420,089,331 (862,281,456) Retained earnings (Note 18) 108,548,533,277 81,470,127,594 Non-controlling interests 19,820,000 9,910,000 Total shareholders equity 211,988,442,608 180,617,756,138 Total liabilities and shareholders equity ₩3,183,527,662,247 ₩2,719,698,429,874 The accompanying notes are an integral part of these interim consolidated financial statements. 5
  8. 8. Hyundai Commercial, Inc. and Subsidiaries Interim Consolidated Statements of Comprehensive Income Three-Month and Six-Month Periods ended June 30, 2011 and 2010(In Korean won) Three months Six months 2011 2010 2011 2010 (Non-reviewed) (Non-reviewed)Operating revenue Interest income ₩1,279,969,441 ₩ 661,268,689 ₩2,387,169,557 ₩1,074,705,465 Income on loans 59,945,849,276 35,809,768,908 113,805,600,081 65,858,728,797 Income on installment financial 15,401,001,549 16,528,814,530 31,475,076,372 32,101,601,256 receivables Income on leases 1,092,108,442 962,744,369 2,335,488,860 2,024,004,098 Gain on disposal of loans 653,969,795 379,761,240 1,117,030,921 424,975,973 Gain on foreign currency transactions Gain on foreign currency 3,348,000,000 - 3,348,000,000 - transactions Gain on foreign exchange - - 2,186,000,000 - translation 3,348,000,000 - 5,534,000,000 - Dividend income - - 300,000,000 - Other operating income Gain on valuation of derivatives 825,500,000 4,770,000,000 - 2,562,000,000 Others 416,170,031 291,131,587 754,483,806 560,862,830 1,241,670,031 5,061,131,587 754,483,806 3,122,862,830 Total operating revenue 82,962,568,534 59,403,489,323 157,708,849,597 104,606,878,419Operating expenses Interest expenses 36,938,859,569 26,153,993,436 70,920,446,952 49,685,394,262 Bad debts expense (Note 7) 5,817,998,892 1,776,906,611 10,960,116,735 2,782,210,661 Loss on disposal of loans 148,596,245 349,846,215 286,474,469 655,408,600 Loss on foreign transactions Loss on foreign currency 346 - 1,962 - transactions Loss on foreign exchange 825,500,000 4,770,000,000 - 2,562,000,000 translation 825,500,346 4,770,000,000 1,962 2,562,000,000 General and administrative expenses 13,278,632,714 11,666,031,790 27,065,419,592 20,615,512,969 (Note 21) Other operating expenses Loss on valuation of derivatives - - 2,186,000,000 - Loss on derivatives transactions 3,348,000,000 - 3,348,000,000 - Others 1,123,744,947 731,129,226 1,549,202,834 921,668,365 4,471,744,947 731,129,226 7,083,202,834 921,668,365 Total operating expenses 61,481,332,713 45,447,907,278 116,315,662,544 77,222,194,857 Operating income 21,481,235,821 13,955,582,045 41,393,187,053 27,384,683,562 6
  9. 9. Hyundai Commercial, Inc. and Subsidiaries Interim Consolidated Statements of Comprehensive Income Three-Month and Six-Month Periods ended June 30, 2011 and 2010 (In Korean won) Three months Six months 2011 2010 2011 2010 (Non-reviewed) (Non-reviewed)Non-operating income Gain on equity method valuation ₩ 4,557,764,212 ₩ 3,810,931,304 ₩ 8,660,056,384 ₩ 7,610,947,725 (Note 5)Non-operating expenses Donations - - - 1,197,915 Income before income taxes 26,039,000,033 17,766,513,349 50,053,243,437 34,994,433,372Income tax expense (Note 16) 6,365,741,803 4,270,843,376 12,974,837,754 8,461,294,375 Net income ₩19,673,258,230 ₩13,495,669,973 ₩37,078,405,683 ₩26,533,138,997Net income attributable to: Owners of the parent 19,673,258,230 13,495,669,973 37,078,405,683 26,533,138,997 Non-controlling interests - - - - 19,673,258,230 13,495,669,973 37,078,405,683 26,533,138,997Other comprehensive income,net of income taxes (Note 23) Gain (Loss) on valuation of (102,132,583) 297,598,074 769,921,914 76,114,849 derivatives Gain(Loss) on valuation of available-for-sale financial (1,230,487,830) (245,700,000) 3,836,630,666 (128,700,000) securities Other comprehensive income of (305,379,086) (465,831,660) (324,181,793) (140,948,079) equity method investees (1,637,999,499) (413,933,586) 4,282,370,787 (193,533,230)Total comprehensive income ₩18,035,258,731 ₩13,081,736,387 ₩41,360,776,470 ₩26,339,605,767Total comprehensive income attributable to: Owners of the parent 18,035,258,731 13,081,736,387 41,360,776,470 26,339,605,767 Non-controlling interests - - - - 18,035,258,731 13,081,736,387 41,360,776,470 26,339,605,767Earnings per share attributable tothe ordinary equity holders of theParent Company (Note 22) Basic earnings per ₩ 984 ₩ 675 ₩ 1,854 ₩ 1,327 share (Note 22) The accompanying notes are an integral part of these interim consolidated financial statements. 7
  10. 10. Hyundai Commercial, Inc. and Subsidiaries Interim Consolidated Statements of Changes in Shareholders’ Equity Six-Month Periods ended June 30, 2011 and 2010 Accumulated Total(In Korean won) other attributable to Non- comprehensive Capital income and Retained owners of the controlling Capital stock surplus expenses earnings parent interests Total equityBalances as of January 1, 2010 100,000,000,000 (663,810,140) (1,931,396,310) 25,005,933,366 122,410,726,916 - 122,410,726,916Total comprehensive incomeNet income - - - 26,533,138,997 26,533,138,997 - 26,533,138,997Other comprehensive income Gain on valuation of derivatives - - 76,114,849 - 76,114,849 - 76,114,849 Loss on valuation of available-for- - - (128,700,000) - (128,700,000) - (128,700,000) sale securities Other comprehensive income of - - (140,948,079) - (140,948,079) - (140,948,079) equity method investeeTotal comprehensive income - - (193,533,230) 26,533,138,997 26,339,605,767 - 26,339,605,767Transactions with ownersDiscount on stock issuance - 663,810,140 - (663,810,140) - - -Establishment of special purpose - - - - - 9,910,000 9,910,000 entityOther - - - (11,510,884) (11,510,884) - (11,510,884)Total transactions with owners - 663,810,140 - (675,321,024) (11,510,884) 9,910,000 (1,600,884)Balances as of June 30, 2010 (Non-reviewed) 100,000,000,000 - (2,124,929,540) 50,863,751,339 148,738,821,799 9,910,000 148,748,731,799 8
  11. 11. Hyundai Commercial, Inc. and Subsidiaries Interim Consolidated Statements of Changes in Shareholders’ Equity Six-Month Periods ended June 30, 2011 and 2010 Accumulated Total(In Korean won) other attributable to Non- comprehensive Capital income and Retained owners of the controlling Capital stock surplus expenses earnings parent interests Total equityBalances as of January 1, 2011 100,000,000,000 - (862,281,456) 81,470,127,594 180,607,846,138 9,910,000 180,617,756,138Total comprehensive incomeNet income - - - 37,078,405,683 37,078,405,683 - 37,078,405,683Other comprehensive income Gain on valuation of derivatives - - 769,921,914 - 769,921,914 - 769,921,914 Gain on valuation of available-for- - - 3,836,630,666 - 3,836,630,666 - 3,836,630,666 sale securities Other comprehensive income of - - (324,181,793) - (324,181,793) - (324,181,793) equity method investeeTotal comprehensive income - - 4,282,370,787 37,078,405,683 41,360,776,470 - 41,360,776,470Transactions with ownersEstablishment of special purpose - - - - - 9,910,000 9,910,000 entityDividends - - - (10,000,000,000) (10,000,000,000) - (10,000,000,000)Total transactions with owners - - - (10,000,000,000) (10,000,000,000) 9,910,000 (9,990,090,000)Balances as of June 30, 2011 100,000,000,000 - 3,420,089,331 108,548,533,277 211,968,622,608 19,820,000 211,988,442,608 The accompanying notes are an integral part of these interim consolidated financial statements. 9
  12. 12. Hyundai Commercial, Inc. and Subsidiaries Interim Consolidated Statements of Cash Flows Six-Month Periods ended June 30, 2011 and 2010 (In Korean won) 2011 2010 (Non-reviewed)Cash flows from operating activitiesCash generated from operations (Note 24) (275,138,668,439) (402,151,289,248)Interest received 2,537,128,759 794,840,631Interest paid (68,918,870,047) (47,777,377,333)Dividends received 300,000,000 -Income taxes paid (10,358,293,801) (3,081,958,436)Net cash used in operations (351,578,703,528) (452,215,784,386)Cash flows from investing activitiesDividends from equity method investments - 5,778,254,300Disposal of vehicles 27,020,000 -Acquisition of vehicles (79,715,188) -Acquisition of fixtures and furniture (416,747,741) (159,788,993)Acquisition of intangible assets (85,415,316) (138,658,420)Decrease in leasehold deposits - 29,532,250Increase in leasehold deposits (2,161,847,000) (152,900,000)Disposal of other investment assets - 25,000,000Net cash provided by(used in) investing activities (2,716,705,245) 5,381,439,137Cash flows from financing activitiesProceeds from borrowings 525,939,158,071 696,400,000,000Repayments of borrowings (483,278,171,079) (688,400,000,000)Issuance of debentures 440,865,039,400 409,333,150,000Repayments of debentures (233,740,000,000) (185,000,000,000)Issuance of securitized debts 199,456,325,600 249,316,692,300Repayments of securitized debts (20,000,000,000) -Cash inflows of transactions with subsidiaries 9,910,000 9,910,000Payments of dividends (10,000,000,000) -Net cash provided by financing activities 419,252,261,992 481,659,752,300Net increase in cash and cash equivalents 64,956,853,219 34,825,407,051Cash and cash equivalents Beginning of period 99,938,403,013 26,810,646,159 End of period 164,895,256,232 61,636,053,210 The accompanying notes are an integral part of these interim consolidated financial statement 10
  13. 13. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 20101. General Information Hyundai Commercial, Inc. (the Company) was established on March 27, 2007, by taking over all the assets, liabilities, rights and obligations related with the loans of the industrial product division of Hyundai Capital Services, Inc. and its installment financing and lease financing division. It is engaged in installment financing, and leasing of facilities. The Company’s operations are headquartered in Yeouido, Seoul. Its shareholders are as follows: Shareholders Ownership Hyundai Motor Company 50.00% Myung-yi Chung 33.33% Tae-young Chung 16.67% Total 100.00%2. Summary of Significant Accounting Policies The consolidated financial statements have been prepared and presented which included the accounts of Hyundai Commercial, Inc., as the parent company according to the Korean IFRS 1027, and Commercial Auto First trust and SPC and another subsidiary(collectively the “Group”), while Hyundai Card Co., Ltd. is accounted for under the equity method. Subsidiaries as of June 30, 2011 and December 31, 2010, are as follows. The Company has the substantial power over the subsidiaries established as special purpose entities for asset securitization even though its ownership interests over the subsidiaries do not exceed 50%. 2011 2010 Special Commercial Auto First Trust and SPC Commercial Auto First Trust and SPC Purpose Commercial Auto Second Trust and SPC Entities The Company’s interim consolidated financial statements are prepared in the Korean language (Hangul) in conformity with International Financial Reporting Standards as adopted by the Republic of Korea (“Korean IFRS”). The Company’s Korean IFRS transition date is January 1, 2010, and the adoption date is January 1, 2011. The interim consolidated financial statements are stated at historical cost unless otherwise stated in the notes. The reconciliations and descriptions of the effect of the transition from the consolidated financial statements of the Company prepared in accordance with accounting principles generally accepted in the Republic of Korea (“K-GAAP”) before the adoption date to Korean IFRS on the Company’s equity as of January 1, 2010, June 30, 2010, and December 31, 2010, its comprehensive income and cash flows for the six-month period ended June 30, 2010 and year ended December 31, 2010, are provided in Note 3. 11
  14. 14. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 The interim consolidated financial statements for the six-month periods ended June 30, 2011 and 2010, have been prepared in accordance with Korean IFRS 1034. Because these interim consolidated financial statements are a part of financial statements prepared by Korean IFRS as of December 31, 2011, these are subject to Korean IFRS 1101, ‘First-time Adoption of Korean IFRS’. These interim consolidated financial statements have been prepared in accordance with the Korean IFRS standards and interpretations issued and effective at the reporting date. The Korean IFRS standards and interpretations that will be applicable at December 31, 2011, including those that will be applicable on an optional basis, are not known with certainty at the time of preparing these interim consolidated financial statements. The legislative and amended standards and interpretations the Group has not adopted earlier, which have been promulgated but are not yet effective for the fiscal year starting from January 1, 2011, are as follows. - Amendments to Korean IFRS 1101, ‘Deletion of Hyperinflation and the particular date’ (announced in December, 2010) The date of prospective application, the exceptions to retrospective application in derecognition of financial assets, has been changed from the particular date(January 1, 2004) to Korean IFRS transition date according to the amendment above. Therefore, derecognition transactions that occurred before the transition date are not restated in accordance with Korean IFRS. The modification is required to be adopted from July 1, 2011. - Amendments to Korean IFRS 1012, ‘Income Taxes’ If there is no disproof, investment property measured at fair value when measuring deferred income tax assets and liabilities should be measured in consideration of recovered tax effects by selling. This will be effective on January 1, 2011. - Amendments to Korean IFRS 1107, ‘Financial Instruments: Disclosures’ The financial assets transferred to counterparts but still remained in the financial statements are required to be disclosed in terms of the nature of the assets, the book value, the risks and rewards. If an entity is exposed to the particular risks and rewards on the derecognized financial assets, additional disclosures are required to the understand effects of the risks. The amendments are applicable from July 1, 2011. The following is a summary of significant accounting policies followed by the Group in the preparation of its consolidated financial statements. These policies have been consistently applied to all the periods presented, unless otherwise stated. 12
  15. 15. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 20102.1 Consolidation a. Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Company has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are deconsolidated from the date that control ceases. The Group uses the acquisition method to account for business combinations. The consideration transferred is measured as the fair values of the assets transferred, equity interests issued and liabilities incurred or assumed at the acquisition date. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by- acquisition basis, the Group recognizes any non-controlling interest in the acquiree at the non- controlling interest’s proportionate share of the acquiree’s net assets. The excess of the consideration transferred and the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognized directly in the statement of comprehensive income. Intercompany transactions, balances and unrealized gains on transactions between Group companies are eliminated. b. Special purpose entities The Group established several SPEs for the purpose of asset-backed securitization, but owns none of the shares directly or indirectly. The Group consolidates the SPEs when the risks, rewards and substance of the relationship indicated that the Group consolidates the SPEs. SPEs controlled by the Group are created with conditions that impose strict limits on the decision-making power over the operations therefore the Group obtains all benefits from the SPEs’ operation and net assets, and that the Group may be exposed to risks incident to the activities of the SPEs or the Group retains the majority of the residual or ownership risks related to the SPEs’ assets. c. Transactions with non-controlling interests The Group treats transactions with non-controlling interests as transactions with equity owners of the Group. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. 13
  16. 16. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 d. Associates Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognized at cost. The Group’s investment in associates includes goodwill identified on acquisition, net of any accumulated impairment loss. The Group’s share of its associates’ post-acquisition profits or losses is recognized in the income statement, and its share of post-acquisition movements in other comprehensive income is recognized in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.2.2 Foreign currency translation a. Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in Korean won, which is the Group’s functional currency. b. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, except when deferred in other comprehensive income as qualifying cash flow hedges.2.3 Critical accounting estimates and assumptions Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The resulting accounting estimates will, by definition, seldom equal the related 14
  17. 17. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below. a. Allowance for doubtful accounts The Group presents the allowance for doubtful accounts calculated based on the best estimates that are necessary to reflect the impairment incurred at each reporting date. Allowance for doubtful accounts is recognized as individual and collective units considering the financial circumstances of customers, net realizable value, credit quality, size of portfolio, concentrativeness, economic factors and others. According to the change in these factors, the allowance for doubtful accounts will be changed in a future period. b. Fair value of financial instruments Fair value of financial assets and liabilities is based on quoted market prices, exchange-broker prices of financial instruments traded in an active market. If there is no quoted price for a financial instrument, the Group establishes fair value by using valuation techniques and advanced self- valuation techniques. Valuation techniques include the Discount Cash Flow method using variables observable in the market, comparative method with similar instruments that have observable market transactions, and option pricing model. For more complicated financial instruments, the Group uses advanced self- valuation techniques. Parts of or all the variables used in this valuation technique may not be observable in market, or may be derived from quoted prices and market ratio, or may be measured based on specific assumption. At initial recognition, if the difference between the fair value of valuation technique and transaction price occurs, then the transaction price as the best estimate of fair value is recognized as fair value. This fair value difference presents in profit immediately on any available observable market data according to individual factors and changes of environment.2.4 Revenue recognition The Group recognizes capital lent to customers as loans receivable, when installment payments or deferred payments on services and goods are made. While installment financial capital paid by the Group to manufacturers or sellers on behalf of customers is recognized as installment financial assets. Financial lease receivables classified as financial leases are recognized as lease receivables. The expected future cash flows from loans receivable, installment financial assets and lease receivables (“Financial receivables”) described above are amortized under the effective interest method over the period of the financial receivables being used by customers. 15
  18. 18. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 20102.5 Statements of cash flows The Group prepares statements of cash flows using indirect method.2.6 Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of six months or less and bank overdrafts.2.7 Financial assets a. Classification The Group classifies its financial assets as financial assets at fair value through profit or loss, loans and receivables and available-for-sale financial assets. Management determines the classification of its financial assets at initial recognition. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. b. Recognition and measurement Regular purchases and sales of financial assets are recognized on the trade-date (the date on which the Group commits to purchase or sell the asset). Investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Available-for-sale financial assets are subsequently carried at fair value. Loans and receivables are subsequently carried at amortized cost using the effective interest method. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognized in equity are transferred to the income statement as gain or loss on disposal of securities. Interest on available-for-sale securities calculated using the effective interest method is recognized in the income statement as part of interest income. Dividends on available-for sale equity instruments are recognized in the income statement as dividend income when the Group’s right to receive payments is established. c. Derecognition of financial assets A financial asset is derecognized only if the contractual rights on cash flow of the financial asset terminate or all the risks and rewards of ownership of the financial asset are substantially transferred. 16
  19. 19. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 The Group can transfer an asset in statement of financial position but retains parts of or all the risks and rewards of ownership of the transferred asset substantially. To the extent that a transfer of a financial asset retains rights and obligations, the Group accounts both asset and liability at the same time. After the Group transfers a financial asset and still retains control, it shall continue to recognize the asset to the extent of its continuing involvement in the asset. d. Impairment of financial assets (1) Assets carried at amortized cost The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset is impaired. Impairment losses are incurred only if there is objective evidence of impairment and that loss event has an impact on the estimated future cash flows of the financial asset. The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the reversal of the previously recognized impairment loss is recognized in the income statement. (2) Available-for-sale financial assets The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. For equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is also evidence that the assets are impaired. If any such evidence exists for available-for-sale financial assets, the difference between carrying amount and current fair value is recognized in profit or loss. Impairment losses recognized in profit or loss for an investment in an equity instrument classified as available for sale are not be reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed.2.8 Deferral of loan origination fee and loan origination cost Loan origination fee, which is a processing fee in relation to the loan origination process such as upfront fee, is deferred and deducted from the loan account, adjusted over the life of the loan based on the effective interest rate method. Loan origination cost, which relates to activities performed by the lender such as soliciting potential borrowers, is deferred and added to the loan account, adjusted over the life of the loan based on the effective interest rate method when the future economic benefit in connection with the cost incurred can be identified on a per loan basis. 17
  20. 20. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 20102.9 Allowances for financial receivables a. Calculation of allowances for doubtful accounts The Group recognizes the impairment of receivables as an allowance for doubtful accounts. It is based on the impairment estimates made through impairment assessment of receivables carried at amortized cost. Allowance for doubtful accounts consists of impairments related to individually material financial receivables and allowances of collective assessment for impairment incurred in homogeneous assets. Individually material receivables undertake the individual assessment of the difference between the assets’ carrying amount and the present value of estimated future cash flows. Unimpaired assets from individual assessments and individually immaterial assets undertake the collective assessment classified by asset groups that have analogous risk attributes. The Group uses statistical model in the collective assessment based on the expected probability of default, periodic collect amounts, loss-given default based on the past losses, loss emergency period, and management’s decision about the current economy and credit circumstances. The material factors used in statistical model for the collective assessment are evaluated to compare with actual data regularly. The amount of impairment loss is reflected in allowance for doubtful accounts as profit or loss. And the interest for impaired assets is recognized through the amortization of present value discounts. b. Write-off policy The Group writes off the doubtful receivables when the assets are deemed unrecoverable. This decision considers the information about significant changes of financial position such that a borrower or an obligor is in default, or the amount recoverable from security is not enough. The decision to write off a standard small loan is generally made based on the delinquent status of loan.2.10 Leases a. Classification The Group classifies leases based on the extent to which risks and rewards incidental to ownership of a leased asset lie with the lesser or the lessee. The lease arrangement classified as a financial lease is where: ①the lease transfers ownership of the asset to the lessee by the end of the lease term, ②the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised, ③the lease term is for the major part of the economic life of the asset even if title is not transferred, ④at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset, and ⑤the leased assets are of such a specialized nature that only the lessee can use them without major modifications. 18
  21. 21. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 Minimum lease payments include that part of the residual value that is guaranteed by the lessee, by a party related to the lessee or by a third party unrelated to the Group that is financially capable of discharging the obligations under the guarantee. b. Finance leases Where the Group has substantially all the risks and rewards of ownership, leases of property, plant and equipment are classified as finance lease. An amount equal to the net investment in the lease is presented as a receivable. Expenses that are incurred with regard to the lease contract made but not executed at the date of the statement of financial position are accounted for as prepaid leased assets and are reclassified as finance lease receivables at the inception of the lease. Lease receivables include amounts such as commissions, legal fees and internal costs that are incremental and directly attributable to negotiating and arranging a lease. Each lease payment is allocated between principal and finance income. Financial income on an uncollected part of net investment shall be allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.2.11 Property and equipment Property and equipment are stated at historical cost less accumulated depreciation and accumulated impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Depreciation method and estimated useful lives used by the Group are as follows: Depreciation Method Useful life Vehicles Straight-line 4 years Fixtures and furniture Straight-line 4 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized within other operating income (expenses) in the income statement.2.12 Intangible assets Intangible assets are stated at cost, which includes acquisition cost and directly related costs required to prepare the asset for its intended use. Intangible assets are stated net of accumulated amortization calculated based on using the following amortization method and estimated useful lives: 19
  22. 22. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 Amortization Method Useful life Software Straight-line 4 years Other intangible assets Straight-line 5 years2.13 Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets that are subject to amortization suffered impairment are reviewed for possible reversal of the impairment at each reporting date.2.14 Pension obligations The Group operates a defined benefit plan. The liability recognized in the statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets, together with adjustments for unrecognized past-service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension obligation. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized in profits or losses in the period in which they arise.2.15 Provisions and contingent liabilities When there is a probability that an outflow of economic benefits will occur due to a present obligation resulting from a present legal or as a result of past events, and whose amount is reasonably estimable, a corresponding amount of provision is recognized in the financial statements. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. 20
  23. 23. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 Provisions are the best estimate of the expenditure required to settle the present obligation that consider the risks and uncertainties inevitably surround many events and circumstances at the reporting date. Where the effect of the time value of money is material, the amount of a provision is the present value of the expenditures expected to be required to settle the obligation. A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future events, or a present obligation that arises from past events but is not certain to occur, or cannot be reliably estimated, a disclosure regarding the contingent liability is made in the notes to the financial statements.2.16 Derivative financial instruments The Group has applied hedging policies using derivatives to deal with the risk of changes in foreign currency exchange rates and interest rates arising from liabilities. The Group has contracted currency swap and interest swap derivative financial instruments to deal with the risk of changes in foreign currency exchange rates arising from foreign currency liabilities and the risk of changes in interest rates arising from floating-rate liabilities. Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group applies cash flow hedge, which are hedges of a particular risk associated with a recognized asset or liability or a highly probable forecast transaction. The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions to apply hedging accounting. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in profits or losses. The cumulative gain or loss that was reported in equity is recognized when the hedged items affect profits and losses. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the forecast transaction is ultimately recognized in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to profit or loss. 21
  24. 24. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 20102.17 Current and deferred income tax Interim period income tax expense is calculated by applying to an interim period’s pre-tax income the tax rate that would be applicable to expected total annual earnings. Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax assets and liabilities are not accounted for if they arise from the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates and laws that have been enacted or substantially enacted by the date of the statement of financial position and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.2.18 Earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the period excluding ordinary shares purchased by the Company and held as treasury shares. Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. Only dilutive potential ordinary shares are dilutive, they are added to the number of ordinary shares outstanding in the calculation of diluted earnings per share.3. Transition to Korean IFRS The interim consolidated financial statements as of June 30, 2011, are prepared according to Korean IFRS at the adoption date of January 1, 2011. The statements of financial position as of 22
  25. 25. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 December 31, 2010 and as of June 30, 2010, which were prepared previously under K-GAAP are restated in accordance with Korean IFRS 1101, “First-time adoption of Korean IFRS”, for the comparative purposes, at the transition date of January 1, 2010. a. Exemptions of Korean IFRS 1101 elected by the Group The Group has elected to apply the following optional exemptions from full retrospective application. (1) Business combination The Group has not retrospectively applied Korean IFRS 1103 (Business combination) to the business combinations that took place prior to the transition date. (2) Deemed cost of property and equipment The Group has elected to use the carrying amount of property and equipment under K-GAAP as deemed cost at the date of transition to Korean IFRS. b. Explanation on the reconciliation of K-GAAP and Korean IFRS Major reconciliations of the transition between K-GAAP and Korean IFRS are as follows: (1) Impairment of financial assets (allowance for financial assets) Under K-GAAP, allowances for financial receivables are calculated based on the long-term average expected loss. In case the allowance calculated based on the expected loss is smaller than the allowance calculated in accordance to the guidelines provided in the Act on the Specialized Credit Financial Business, the Group recognizes an allowance in accordance to the guidelines provided in the Act on the Specialized Credit Financial Business. Under Korean IFRS, impairment losses are recognized where there is evidence that impairment occurred. Allowance for financial receivables is measured individually for assets that are individually significant and on a collective basis for portfolios with similar risk characteristics. (2) Accrued revenue for overdue receivables Under K-GAAP, accrued revenue for receivables which are overdue is not recognized. Under Korean IFRS, accrued revenue for past due and impaired receivables is recognized. (3) Measurement of financial assets carried at amortized cost Under K-GAAP, non-marketable loan and receivables are measured at nominal value if the difference between nominal value and discounted value is not substantial. Under Korean IFRS, loan and receivables are initially measured at fair value and subsequently carried at amortized cost using the effective interest method. 23
  26. 26. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 (4) Depreciation method for property and equipment Under K-GAAP, depreciation method used for certain property and equipment was the declining- balance method. Under Korean IFRS, the Group uses the straight-line method to reflect properly the matching of the future economic benefits. (5) Retirement benefit obligations Under K-GAAP, the Group recognizes the amount which would be payable assuming all eligible employees and directors were to terminate their employment as of the statement of financial position date as accrued severance benefits represent. Under Korean IFRS, the Group recognizes the estimated amount using the projected unit credit method which is on an actuarial basis as the defined benefit obligation. (6) Recognition of unused compensated absences According to K-GAAP, unused compensated absences given to employees are recognized as liabilities at the end of the reporting period only when the right to be paid has been established. Under Korean IFRS, the Group recognizes liabilities when an employee has provided service in exchange for compensated absences. (7) Consolidation Under K-GAAP, Commercial Auto First SPC, trust and other subsidiaries were previously excluded from consolidation in accordance with Article 1.3, Clause 1 of Enforcement Decree of the Act on External Audit of Stock Companies. Under Korean IFRS, they are consolidated (Note 2). (8) Income tax effects The Group recognized changes in deferred tax representing the impact of deferred taxes on the adjustments for the transition to Korean IFRS. 24
  27. 27. Hyundai Commercial, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements June 30, 2011 and 2010, and December 31, 2010 c. Effects on the comprehensive income and net income (1) Reconciliation of assets, liabilities and equity as of January 1, 2010(in thousands of Korean won) Assets Liabilities EquityK-GAAP 1,628,843,966 1,519,996,760 108,847,206Conversion effects to Korean IFRS Allowance for doubtful accounts 7,431,968 - 7,431,968 Accrued revenues 1,132,941 - 1,132,941 Measurement of amortized cost (1,378,454) - (1,378,454) Depreciation 2,001,667 - 2,001,667 Retirement benefit obligations - 5,711 (5,711) Recognition of unused compensated - 229,507 (229,507) absences Equity method investment 8,260,061 (92,431) 8,352,492 Others 366,621 33,745 332,876 Deferred income taxes (337,432) 3,737,319 (4,074,751) Total effect of transition 17,477,372 3,913,851 13,563,521Korean IFRS 1,646,321,338 1,523,910,611 122,410,727 (2) Reconciliation of assets, liabilities and equity as of June 30, 2010(in thousands of Korean won) Assets Liabilities EquityK-GAAP 1,925,114,227 1,782,858,632 142,255,595Conversion effects to Korean IFRS Allowance for doubtful accounts 7,266,798 - 7,266,798 Accrued revenues 1,279,385 - 1,279,385 Measurement of amortized cost (3,209,611) - (3,209,611) Depreciation 1,577,559 - 1,577,559 Retirement benefit obligations - (62,854) 62,854 Recognition of unused compensated - 326,448 (326,448) absences Equity method investment 9,180,671 (129,822) 9,310,493 Others 141,204 (199,763) 340,967 Scope of consolidation 224,241,180 231,922,186 (7,681,006) Deferred income taxes - 2,127,855 (2,127,855) Total effect of transition 240,477,186 233,984,050 6,493,136Korean IFRS 2,165,591,413 2,016,842,682 148,748,731 25
  28. 28. Hyundai Commercial, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements June 30, 2011 and 2010, and December 31, 2010 (3) Reconciliation of total comprehensive income and net income for the three-month and the six- month periods ended June 30, 2010(in thousands of Korean won) Three months Six months Total Total comprehensive Net Income comprehensive Net Income income incomeK-GAAP 19,275,097 19,165,102 33,408,390 33,510,140Conversion effects to Korean IFRS Allowance for doubtful 1,336,500 1,336,500 (165,170) (165,170) accounts Accrued revenues 55,774 55,774 146,444 146,444 Measurement of amortized (1,255,824) (1,255,824) (1,890,314) (1,890,314) cost Depreciation (206,837) (206,837) (424,108) (424,108) Retirement benefit obligations 27,320 27,320 66,774 66,774 Recognition of unused (44,153) (44,153) (96,942) (96,942) compensated absences Equity method investment 452,960 573,959 863,674 1,004,623 Others (378,952) 23,978 153,436 104,271 Scope of consolidation (7,690,916) (7,690,916) (7,690,916) (7,690,916) Deferred income taxes 1,510,767 1,510,767 1,968,337 1,968,337 Total effect of transition (6,193,361) (5,669,432) (7,068,785) (6,977,001)Korean IFRS 13,081,736 13,495,670 26,339,605 26,533,139 26
  29. 29. Hyundai Commercial, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements June 30, 2011 and 2010, and December 31, 2010 (4) Reconciliation of assets, liabilities, equity, total comprehensive income and net income as of and for the year ended December 31, 2010 (in thousands of Korean won) Total Assets Liabilities Total equity comprehensive Net Income incomeK-GAAP 2,534,174,650 2,359,395,222 174,779,428 65,932,223 64,833,503Conversion effects to Korean IFRS Allowance for doubtful 9,071,121 - 9,071,121 1,639,153 1,639,153 accounts Accrued revenues 495,782 - 495,782 (637,159) (637,159) Measurement of (4,130,557) - (4,130,557) (2,752,102) (2,752,102) amortized cost Depreciation 1,275,895 - 1,275,895 (725,772) (725,772) Retirement benefit - 378,378 (378,378) (372,667) (372,667) obligations Recognition of unused - 258,690 (258,690) (29,184) (29,184) compensated absences Equity method investment 6,603,813 (29,025) 6,632,838 (1,930,262) (1,900,657) Others - (135,307) 135,307 132,857 132,857 Scope of consolidation 172,207,726 177,075,156 (4,867,430) (4,877,341) (4,877,341) Deferred income taxes - 2,137,560 (2,137,560) 1,958,632 1,958,632 Total effect of transition 185,523,780 179,685,452 5,838,328 (7,593,845) (7,564,240)Korean IFRS 2,719,698,430 2,539,080,674 180,617,756 58,338,378 57,269,263 d. Adjustments of cash flows in 2010 According to Korean IFRS, cash flows of the related income (expenses) and assets (liabilities) are adjusted to separately disclose the cash flows from interest received, interest paid and cash payments of income taxes that were not presented separately under K-GAAP. There are no other significant differences between cash flows under Korean IFRS and K-GAAP. e. Adjustments of operating income and expenses The Group reclassified certain non-operating income and expenses under K-GAAP to other operating income and expenses according to Korean IFRS. 27
  30. 30. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 Adjustments for the three-month and the six-month periods ended June 30, 2011 and 2010, are as follows: (in thousands of Korean won) 2011 2010 Three Six Three Six Type months months months months Other operating income 159,450 242,649 79,289 141,025 Other operating expenses 99,087 130,144 36,429 49,5744. Restricted Financial Instruments Restricted financial instruments as of June 30, 2011 and December 31, 2010, are as follows: (in thousands of Korean won) Amount Type Entities 2011 2010 Restriction Kookmin Bank Maintaining deposits Deposits and 3 others 11,500 11,500 for opening accounts5. Securities Securities as of June 30, 2011 and December 31, 2010, are as follows: (in thousands of Korean won) Type 2011 2010 Available-for-sale securities Marketable equity securities 16,300,000 11,518,000 Equity securities Unlisted equity securities 2,945,582 6,139,945 Sub-total 19,245,582 17,657,945 Equity method investment 141,404,314 133,160,973 160,649,896 150,818,918 28
  31. 31. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 Available-for-sale securities Available-for-sale securities as of June 30, 2011 and December 31, 2010, are as follows: (in thousands of Korean won) Book value Number of Ownership Acquisition 2011 2010 shares (%) costMarketable equity securities JNK Heaters Co., Ltd. 1,000,000 12.5 10,126,881 16,300,000 11,518,000Unlisted equity securities West End Corporate Restructuring 4,655,000,000 17.24 1,405,000 2,945,582 6,139,945 1 Corp. 11,531,881 19,245,582 17,657,945 1 The fair value for West End Corporate Restructuring Corp. was valued at the valuation prices published by Korea Asset Pricing, using the net asset value approach. Its assets consist of the financial assets which have rational market values, and its assets and liabilities were adjusted to proper market values to approximate the fair value. Equity method investment Equity method investment as of June 30, 2011 and December 31, 2010, is as follows: (in thousands of Korean won) 2011 Number of Ownership Acquisition Net asset Book value shares (%) cost valueHyundai Card Co., Ltd. 1 8,889,622 5.54 113,820,162 104,477,564 141,404,314 (in thousands of Korean won) 2010 Number of Ownership Acquisition Net asset Book value shares (%) cost valueHyundai Card Co., Ltd. 1 8,889,622 5.54 113,820,162 96,233,125 133,160,973 1 The Company’s shareholdings in Hyundai Card Co., Ltd. are less than 20%. However, the Company is able to participate in the management and significantly influence the financial and operating processes. Thus, the equity method is applied. Valuations of equity method investment for the six-month periods ended June 30, 2011 and 2010, is as follows: 29
  32. 32. Hyundai Commercial, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements June 30, 2011 and 2010, and December 31, 2010 (in thousands of Korean won) 2011 Changes in accumulated Beginning Gain (loss) Ending Dividends other Others Balance on valuation Balance comprehensive incomeHyundai Card 133,160,973 8,660,056 - (415,618) (1,097) 141,404,314 Co., Ltd. (in thousands of Korean won) 2010 Changes in Changes accumulated Beginning Gain (loss) in Ending Dividends other Balance on valuation retained Balance comprehensive earnings incomeHyundai Card 127,357,477 7,610,947 (5,778,254) (180,703) (11,511) 128,997,957 Co., Ltd. The difference between the acquired amounts of equity method investment and its corresponding net asset value as of June 30, 2011 and December 31, 2010, follows: (in thousands of Korean won) 2011 2010 Hyundai Card Co., Ltd. 36,926,750 36,926,750 Summary of financial information of investee as of June 30, 2011 and December 31, 2010, and for the six-month periods follows: (in thousands of Korean won) 2011 Operating Assets Liabilities Net income revenue Hyundai Card Co., Ltd. 10,096,407,232 8,210,468,047 1,214,360,035 156,321,430 (in thousands of Korean won) 2010 Operating Assets Liabilities Net income revenue Hyundai Card Co., Ltd. 10,416,574,470 8,679,464,372 2,316,447,184 284,376,845 30
  33. 33. Hyundai Commercial, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements June 30, 2011 and 2010, and December 31, 2010 6. Financial Receivables Financial receivables as of June 30, 2011 and December 31, 2010, are as follows: (in thousands of Korean won) 2011 Deferred loan origination fees and Allowance Present value Principal costs for doubtful Book value discounts (Initial direct costs accounts for lease assets)Loan receivables Factoring 859,634 - - (11,229) 848,405 receivables Loans 2,193,260,868 12,661,532 (160,650) (16,922,573) 2,188,839,177 2,194,120,502 12,661,532 (160,650) (16,933,802) 2,189,687,582Installment financial assets Auto 456,045,728 (2,862,957) - (3,366,917) 449,815,854 Durable goods 80,909,122 (851,066) - (554,651) 79,503,405 536,954,850 (3,714,023) - (3,921,568) 529,319,259Lease receivables Finance lease 63,960,312 (27,663) - (440,928) 63,491,721 receivables 2,795,035,664 8,919,846 (160,650) (21,296,298) 2,782,498,562 (in thousands of Korean won) 2010 Deferred loan origination fees and Allowance Present value Principal costs for doubtful Book value discounts (Initial direct costs accounts for lease assets)Loan receivables Factoring 1,185,465 - - (15,550) 1,169,915 Loans 1,782,518,786 6,898,083 (179,590) (12,780,139) 1,776,457,140 1,783,704,251 6,898,083 (179,590) (12,795,689) 1,777,627,055Installment financial assets Auto 493,287,083 (6,111,888) - (3,055,399) 484,119,796 Durable goods 81,961,709 (476,335) - (553,628) 80,931,746 575,248,792 (6,588,223) - (3,609,027) 565,051,542Lease receivables Finance lease 41,206,800 (41,546) - (214,613) 40,950,641 receivables 2,400,159,843 268,314 (179,590) (16,619,329) 2,383,629,238 31
  34. 34. Hyundai Commercial, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements June 30, 2011 and 2010, and December 31, 2010 7. Allowance for Doubtful Accounts Changes in allowance for doubtful accounts for the six-month periods ended June 30, 2011 and 2010, are as follows:(in thousands of Korean won) 2011 Loan Installment Lease Type Other assets Total receivables financial assets receivablesBeginning balance 12,795,689 3,609,027 214,613 372,974 16,992,303Amounts written off (1,491,516) (108,512) - - (1,600,028)Recoveries of amounts (3,811,733) (790,425) (6,798) - (4,608,956) previously written offUnwinding of discount (52,619) (6,935) (108) - (59,662)Additional(reversed) 9,493,981 1,218,413 233,221 14,502 10,960,117 allowanceEnding balance 16,933,802 3,921,568 440,928 387,476 21,683,774(in thousands of Korean won) 2010 Loan Installment Lease Type Other assets Total receivables financial assets receivablesBeginning balance 10,110,193 3,420,293 233,056 387,760 14,151,302Amounts written off (179,201) - - - (179,201)Recoveries of amounts (1,378,555) (126,763) 453,608 - (1,051,710) previously written offUnwinding of discount (29,903) (5,798) (8,132) - (43,833)Additional(reversed) 2,132,653 586,579 9,691 53,288 2,782,211 allowanceEnding balance 10,655,187 3,874,311 688,223 441,048 15,658,769 32

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