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Hci con audit_report_2012_final
Hci con audit_report_2012_final
Hci con audit_report_2012_final
Hci con audit_report_2012_final
Hci con audit_report_2012_final
Hci con audit_report_2012_final
Hci con audit_report_2012_final
Hci con audit_report_2012_final
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Hci con audit_report_2012_final

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  • 1. Hyundai Commercial, Inc. andSubsidiariesConsolidated Financial StatementsDecember 31, 2012 and 2011
  • 2. Hyundai Commercial, Inc. and SubsidiariesIndexDecember 31, 2012 and 2011Report of Independent Auditors .........................................................................................................1-2Consolidated Financial StatementsConsolidated Statements of Financial Position......................................................................................3-5Consolidated Statements of Comprehensive Income............................................................................6-7Consolidated Statements of Changes in Equity ................................................................................... 8-9Consolidated Statements of Cash Flows ................................................................................................10Notes to the Consolidated Financial Statements ...............................................................................11-62
  • 3. Report of Independent AuditorsTo the Shareholders and Board of Directors ofHyundai Commercial, Inc.We have audited the accompanying consolidated statements of financial position of HyundaiCommercial, Inc. (the ”Company”) and its subsidiaries as of December 31, 2012 and 2011,and the related statements of comprehensive income, changes in equity and cash flows forthe years then ended, expressed in Korean won. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion onthese consolidated financial statements based on our audits.We conducted our audits in accordance with auditing standards generally accepted in theRepublic of Korea. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the consolidated financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that our audits provide areasonable basis for our opinion.In our opinion, the consolidated financial statements, referred to above, present fairly, in allmaterial respects, the financial position of Hyundai Commercial, Inc. and its subsidiaries as ofDecember 31, 2012 and 2011, and their financial performance and cash flows for the yearsthen ended, in conformity with International Financial Reporting Standards as adopted by theRepublic of Korea (“Korean IFRS”). 1
  • 4. Auditing standards and their application in practice vary among countries. The procedures andpractices used in the Republic of Korea to audit such financial statements may differ fromthose generally accepted and applied in other countries. Accordingly, this report is for use bythose who are informed about Korean auditing standards and their application in practice.Seoul, KoreaMarch 19, 2013 This report is effective as of March 19, 2013, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any. 2
  • 5. Hyundai Commercial, Inc. and SubsidiariesConsolidated Statements of Financial PositionDecember 31, 2012 and 2011(In Korean won) Notes 2012 2011AssetsCash and deposits Cash and cash equivalents 24 282,825,795,422 276,009,118,714 Deposits 3 9,000,000 9,000,000 282,834,795,422 276,018,118,714Securities 4 Available-for-sale securities 26,984,327,193 26,848,232,720 Investments in associates 285,401,945,483 147,539,965,125 312,386,272,676 174,388,197,845Loans receivable 5,6 Factoring 108,000,000 575,109,250 Allowance for doubtful accounts (270,108) (3,163,206) Loans 2,800,613,129,940 2,408,864,450,819 Allowance for doubtful accounts (19,258,899,976) (18,165,997,032) 2,781,461,959,856 2,391,270,399,831Installment financial assets 5,6 Auto installment financing receivables 333,721,265,726 402,435,731,643 Allowances for doubtful accounts (2,351,089,917) (2,700,210,858) Durable goods installment financing receivables 25,624,608,935 68,855,356,831 Allowances for doubtful accounts (176,228,378) (475,143,590) 356,818,556,366 468,115,734,026Lease receivables 5,6 Finance lease receivables 9 131,329,553,468 84,053,398,124Property and equipment 10 Vehicles 69,799,497 114,731,133 Fixtures and furniture 2,701,927,277 2,382,936,140 Others 410,999,664 410,999,664 3,182,726,438 2,908,666,937 3
  • 6. Hyundai Commercial, Inc. and SubsidiariesConsolidated Statements of Financial PositionDecember 31, 2012 and 2011 Notes 2012 2011Other assets Intangible assets 11 3,453,010,248 3,072,304,012 Non-trade receivables 15,919,893,264 29,912,441,707 Allowance for doubtful accounts (106,582,840) (218,049,341) Accrued revenues 16,979,241,639 18,075,550,289 Allowance for doubtful accounts (120,891,875) (112,338,978) Advance payments 1,157,855,722 635,365,367 Prepaid expenses 3,258,141,295 3,383,242,667 Leasehold deposits 11,083,913,915 9,963,176,364 Derivative assets 17 137,774,538 1,369,008,885 Others 3,885,995,860 3,885,995,860 55,648,351,766 69,966,696,832 Total assets 3,923,662,215,992 3,466,721,212,309Liabilities and EquityBorrowings Borrowings 12 723,883,961,368 725,523,723,026 Debentures 13 2,428,295,638,414 1,937,737,884,950 Securitized debts 14 309,637,147,861 359,361,741,945 3,461,816,747,643 3,022,623,349,921Other liabilities Non-trade payables 15,199,624,950 7,907,799,257 Accrued expenses 27,995,752,026 26,857,795,596 Unearned revenue 4,660,074,481 4,869,902,233 Advances 245,291,834 231,248,416 Withholdings 3,470,180,556 3,073,415,790 Accrued income taxes 9,539,343,812 14,047,411,098 Defined benefit liability 15 2,056,215,563 2,232,465,895 Leasehold deposits received 33,014,098,305 16,493,405,207 Deferred income tax liabilities 16 20,052,096,124 16,336,206,889 Derivative liabilities 17 7,505,990,273 2,691,394,681 123,738,667,924 94,741,045,062 Total liabilities 3,585,555,415,567 3,117,364,394,983 4
  • 7. Hyundai Commercial, Inc. and SubsidiariesConsolidated Statements of Financial PositionDecember 31, 2012 and 2011 Notes 2012 2011Equity Capital stock 1,18 Common stock 100,000,000,000 100,000,000,000 Preferred stock 25,000,000,000 25,000,000,000 125,000,000,000 125,000,000,000 Capital surplus 18 Paid-in capital in excess of par value 74,608,059,537 74,608,059,537 Accumulated other comprehensive 23 income and expenses Gain(loss) on valuation of derivatives (1,914,821,981) (1,082,947,513) Gain(loss) on valuation of available- 713,160,297 6,047,837,848 for-sale securities Accumulated comprehensive income(expense) of equity method 3,811,298,060 (1,702,584,378) investee 2,609,636,376 3,262,305,957 Retained earnings 18 135,869,284,512 146,466,631,832 Non-controlling interests 19,820,000 19,820,000 Total equity 338,106,800,425 349,356,817,326 Total liabilities and equity 3,923,662,215,992 3,466,721,212,309 The accompanying notes are an integral part of these consolidated financial statements. 5
  • 8. Hyundai Commercial, Inc. and SubsidiariesConsolidated Statements of Comprehensive IncomeYears Ended December 31, 2012 and 2011(In Korean won) Notes 2012 2011Operating revenue Interest income ₩ 11,194,567,834 ₩ 6,385,667,020 Income on loans 272,663,892,191 241,502,294,832 Income on installment financial 42,262,441,366 59,443,408,359 receivables Income on leases 7,957,875,306 5,075,932,880 Gain on disposal of loans 6,163,108,697 3,068,122,478 Gain on foreign transactions Gain on foreign currency transactions - 3,348,000,000 Gain on foreign exchanges translation 4,521,000,000 - 4,521,000,000 3,348,000,000 Dividend income 250,000,000 300,000,000 Other operating income Gain on valuation of derivatives - 1,950,000,000 Gain on disposal of securities - 1,638,531,160 Others 1,678,784,874 1,238,686,585 1,678,784,874 4,827,217,745 Total operating revenue 346,691,670,268 323,950,643,314Operating expenses Interest expenses 163,476,708,039 148,412,645,722 Bad debts expense 6 21,565,121,705 19,453,710,768 Loss on disposal of loans 3,302,529,161 1,530,676,971 Loss on foreign transactions Loss on foreign currency transactions - 1,962 Loss on foreign exchange translation - 1,950,000,000 - 1,950,001,962 General and administrative expenses 21 66,024,037,995 59,362,164,162 Other operating expenses Loss on valuation of derivatives 4,948,370,220 65,894,204 Loss on derivatives transactions - 3,348,000,000 Others 4,566,451,085 1,608,626,717 9,514,821,305 5,022,520,921 Total operating expenses 263,883,218,205 235,731,720,506 Operating income 82,808,452,063 88,218,922,808 6
  • 9. Hyundai Commercial, Inc. and SubsidiariesConsolidated Statements of Comprehensive IncomeYears Ended December 31, 2012 and 2011(In Korean won) Notes 2012 2011Non-operating income 2 Gain on equity method valuation 4 ₩ 10,609,149,548 ₩ 13,220,845,753 Gain on disposal of property and 2,856,483 4,346,390 equipment Miscellaneous income 659,947,262 409,288,746 11,271,953,293 13,634,480,889Non-operating expenses 2 Loss on equity method valuation 4 18,716,248,681 - Loss on disposal of property and 113,850,242 50,146,430 equipment Impairment loss on other investment - 1,433,570,560 assets Contribution 50,000,000 250,186,484 Miscellaneous losses 534,359,600 - Other non-operating expenses 8,582,824,000 - 27,997,282,523 1,733,903,474 Income before income taxes 66,083,122,833 100,119,500,223Income tax expense 16 22,435,670,215 26,366,919,900 Net income ₩ 43,647,452,618 ₩ 73,752,580,323Net income attributable to: Owners of the parent 43,647,452,618 73,752,580,323 Non-controlling interests - - 43,647,452,618 73,752,580,323Other comprehensive income, 23 net of income taxes Gain(Loss) on valuation of derivatives (831,874,468) 579,611,987 Gain(Loss) on valuation of available-for- (5,334,677,551) 3,867,781,032 sale financial securities Other comprehensive income of equity 5,513,882,438 (322,805,606) method investees Actuarial losses (729,564,515) (392,526,703) (1,382,234,096) 3,732,060,710Total comprehensive income ₩ 42,265,218,522 ₩ 77,484,641,033Total comprehensive income attributable to: Owners of the parent 42,265,218,522 77,484,641,033 Non-controlling interests - - 42,265,218,522 77,484,641,033Earnings per share attributable to the 22 ordinary equity holders of the company Basic earnings per share ₩ 1,882 ₩ 3,388 Diluted earnings per share 1,746 3,388 The accompanying notes are an integral part of these consolidated financial statements. 7
  • 10. Hyundai Commercial, Inc. and Subsidiaries Consolidated Statements of Changes in Equity Years Ended December 31, 2012 and 2011 Accumulated(In Korean won) other Total attributable Non- comprehensive income and to owners of the controlling Capital stock Capital surplus expenses Retained 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 - - - 73,752,580,323 73,752,580,323 - 73,752,580,323Other comprehensive income Gain(loss) on valuation of - - 579,611,987 - 579,611,987 - 579,611,987 derivatives Gain(loss) on valuation of - - 3,867,781,032 - 3,867,781,032 - 3,867,781,032 available-for-sale securities Other comprehensive income(expense) of equity - - (322,805,606) 1,636,450,618 1,313,645,012 - 1,313,645,012 method investees Actuarial losses - - - (392,526,703) (392,526,703) - (392,526,703)Total comprehensive income - - 4,124,587,413 74,996,504,238 79,121,091,651 - 79,121,091,651Transactions with ownersCapital increase(preferred stock) 25,000,000,000 74,608,059,537 - - 99, 608,059,537 - 99, 608,059,537Establishment of special - - - - - 9,910,000 9,910,000 purpose entityYear-end dividends - - - (10,000,000,000) (10,000,000,000) - (10,000,000,000)Total transactions with owners 25,000,000,000 74,608,059,537 - (10,000,000,000) 89,608,059,537 9,910,000 89,617,969,537Balances as of December 31, 125,000,000,000 74,608,059,537 3,262,305,957 146,466,631,832 349,336,997,326 19,820,000 349,356,817,3262011 8
  • 11. Hyundai Commercial, Inc. and Subsidiaries Consolidated Statements of Changes in Equity Years Ended December 31, 2012 and 2011 Accumulated(In Korean won) other Total attributable Non- comprehensive income and to owners of the controlling Capital stock Capital surplus expenses Retained earnings parent interests Total equityBalances as of January 1,2012 125,000,000,000 74,608,059,537 3,262,305,957 146,466,631,832 349,336,997,326 19,820,000 349,356,817,326Total comprehensive incomeNet income - - - 43,647,452,618 43,647,452,618 - 43,647,452,618Other comprehensive income Gain(loss) on valuation of - - (831,874,468) - (831,874,468) - (831,874,468) derivatives Gain(loss) on valuation of - - (5,334,677,551) - (5,334,677,551) - (5,334,677,551) available-for-sale securities Other comprehensive income(expense) of equity - - 5,513,882,438 1,484,764,577 6,998,647,015 - 6,998,647,015 method investees Actuarial losses - - - (729,564,515) (729,564,515) (729,564,515)Total comprehensive income - - (652,669,581) 44,402,652,680 43,749,983,099 - 43,749,983,099Transactions with ownersYear-end dividends - - - (30,000,000,000) (30,000,000,000) - (30,000,000,000)Interim dividends - - - (25,000,000,000) (25,000,000,000) - (25,000,000,000)Total transactions with owners - - - (55,000,000,000) (55,000,000,000) - (55,000,000,000)Balances as of December 31,2012 125,000,000,000 74,608,059,537 2,609,636,376 135,869,284,512 338,086,980,425 19,820,000 338,106,800,425 The accompanying notes are an integral part of these consolidated financial statements. 9
  • 12. Hyundai Commercial, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 2012 and 2011 (In Korean won) 2012 2011Cash flows from operating activitiesCash generated from operations (Note 24) (62,299,924,616) (298,750,493,285)Interest received 9,681,332,266 5,225,913,229Interest paid (158,384,342,272) (143,239,155,283)Dividends received 250,000,000 300,000,000Income taxes paid (21,083,558,210) (15,721,051,020) Net cash used in operating activities (231,836,492,832) (452,184,786,359)Cash flows from investing activitiesDisposal of available-for-sale securities - 6,293,531,160Acquisition of available-for-sale securities (6,302,089,113) (9,229,761,600)Acquisition of investments in associates (138,913,060,000) -Disposal of vehicles 63,107,858 27,020,000Acquisition of vehicles (76,172,300) (79,715,188)Disposal of fixtures and furniture 1,360,000 -Acquisition of fixtures and furniture (1,418,127,063) (1,591,801,249)Acquisition of intangible assets (1,030,108,684) (926,643,626)Decrease in leasehold deposits 1,106,291,200 -Increase in leasehold deposits (2,005,013,700) (2,993,535,000)Decrease in deposits - 2,500,000 Net cash used in investing activities (148,573,811,802) (8,498,405,503)Cash flows from financing activitiesProceeds from borrowings 757,578,850,000 989,336,265,307Repayments of borrowings (759,218,611,658) (1,031,967,542,281)Issuance of debentures 1,128,866,743,000 740,644,889,400Repayments of debentures (635,000,000,000) (310,334,000,000)Issuance of securitized debts - 199,456,325,600Repayments of securitized debts (50,000,000,000) (40,000,000,000)Cash inflows of transactions with subsidiaries - 9,910,000Payments of dividends (55,000,000,000) (10,000,000,000)Capital increase through preferred stock issuance - 99,608,059,537 Net cash generated from financing activities 387,226,981,342 636,753,907,563Net increase in cash and cash equivalents 6,816,676,708 176,070,715,701Cash and cash equivalents(Note 24) Beginning of year 276,009,118,714 99,938,403,013 End of year 282,825,795,422 276,009,118,714 The accompanying notes are an integral part of these consolidated financial statements. 10
  • 13. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 20111. 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 of common stock are as follows: 2012 2011 Shareholders Ownership Ownership Hyundai Motor Company 50.00% 50.00% Myung-yi Chung 33.33% 33.33% Tae-young Chung 16.67% 16.67% Total 100.00% 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 SPC(trust) and another subsidiary(collectively the “Group”), while Hyundai Card Co., Ltd. and Hyundai Life Insurance Co., Ltd. are accounted for under the equity method. Subsidiaries as of December 31, 2012 and 2011 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%. 2012 2011 Commercial Auto First SPC(trust) Commercial Auto First SPC(trust) Special Purpose Commercial Auto Second Commercial Auto Second Entities SPC(trust) SPC(trust) The Group’s financial statements for the annual period beginning on January 1, 2011, have been prepared in accordance with Korean IFRS. These are the standards and related interpretations issued by the International Accounting Standards Board ("IASB") that have been adopted by the Republic of Korea. The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 2.3. The Group has adopted the method of calculating operating income retroactively in accordance 11
  • 14. Hyundai Commercial, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2012 and 2011 with amendment of Korean IFRS 1001, Presentation of financial statements, and the related consolidated statements of comprehensive income was rewritten with reflecting changed facts as Korean IFRS 1001 has been adopted. Effects on change of the Group’s accounting policies for the years ended December 31, 2012 and 2011, are as follows:(In thousands ofKorean won, exceptearnings per share) 2012 2011 1 1 Before Effect After Before Effect AfterOperating income 2 81,810,559 35,407 81,845,966 86,380,810 1,320,268 87,701,078 2Net income 42,917,888 - 42,917,888 73,360,054 - 73,360,054 2Earnings per share 1,846 1,846 3,368 3,368 1 The amounts of effect previously classified as operating income(loss) before amendment of Korean IFRS 1001, and excluded from operating income(loss) after amendment of Korean IFRS 1001 are as follows: Type 2012 2011 Non-operating income Gain on disposal of property and 2,856 4,346 equipment Miscellaneous income 659,947 409,289 662,803 413,635 Non-operating income Loss on disposal of property and 113,850 50,146 equipment Impairment loss on other investment - 1,433,571 assets Contribution 50,000 - Miscellaneous loss 534,360 250,186 698,210 1,733,903 2 The amendments to Korean IFRS 1019 are not applied. The amendments to K-IFRS 1019, Employee Benefits were early adopted in 2012. The approach for the recognition of actuarial gains and losses has changed and the effects on financial statements are as follows. The Group has recognized the effects incurred from the amendments retroactively. The consolidated statement of comprehensive income for year ended December 31, 2011, has been restated to reflect all the changes comparatively.(In thousands ofKorean won) 2012 2011 Before Effect After Before Effect AfterOperating income 1 81,845,966 962,486 82,808,452 87,701,078 517,845 88,218,923 1Income tax expense 22,202,749 232,921 22,435,670 26,241,601 125,319 26,366,920 12
  • 15. Hyundai Commercial, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2012 and 2011 1Net income 42,917,888 729,565 43,647,453 73,360,054 392,526 73,752,580Retained earnings 135,869,285 - 135,869,285 146,466,632 - 146,466,632 1 The amendments to Korean IFRS 1001, Presentation of financial statements, are applied. New standards, amendments and interpretations issued but not effective for the financial year beginning January 1, 2012, and not early adopted by the Group are as follows: - Amendment of Korean IFRS 1001, Presentation of financial statements Korean IFRS 1001, Presentation of financial statements, was amended to require the other comprehensive income items to be presented into two groups on the basis of whether they are potentially reclassificable to profit or loss subsequently. An entity shall apply those amendments for annual periods beginning on or after July 1, 2012. Earlier application is permitted. The Group expects the application of the above amended Korean IFRS requirement would not have a material impact on its consolidated financial statements. - Enactment of Korean IFRS 1113, Fair value measurement Korean IFRS 1113, Fair value measurement, aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across Korean IFRS. Korean IFRS1113 does not extend the use of fair value accounting but provides guidance on how it should be applied where its use is already required or permitted by other standards within Korean IFRS. This amendment will be effective for the Group as of January 1, 2013, and the Group is assessing the impact of application of the amended Korean IFRS 1113 on its consolidated financial statements. - Enactment of Korean IFRS 1110, Consolidated Financial Statements Korean IFRS 1110, Consolidated Financial Statements, builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included in the consolidated financial statements of the Parent Company. An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. This enactment will be effective for annual periods beginning on or after January 1, 2013, and the Group is reviewing the impact of this standard. - Enactment of Korean IFRS 1112, Disclosures of Interests in Other Entities Korean IFRS 1112, Disclosures of Interests in Other Entities, provides the disclosure requirements for all forms of interests in other entities, including a subsidiary, a joint arrangement, an associate, a consolidated structured entity and an unconsolidated structured entity. This enactment will be effective for annual periods beginning on or after January 1, 2013, and the Group is reviewing the impact of this standard. 13
  • 16. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 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.2.1 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. The Group also assesses existence of control where it does not have more than 50% of the voting power but is able to govern the financial and operating policies by virtue of de-facto control. De-facto control may arise in circumstances where the size of the Group’s voting rights relative to the size and dispersion of holdings of other shareholders give the Group the power to govern the financial and operating policies and others. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are de-consolidated 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. 14
  • 17. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011 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. 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. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealized 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 15
  • 18. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011 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 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 market, comparison 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. c. Defined benefit liability The present value of the defined benefit liability depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net cost (income) for pensions include the discount rate. Any changes in these 16
  • 19. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011 assumptions will impact the carrying amount of the defined benefit liability. The Group determines the appropriate discount rate at the end of each year. This is the interest rate that is used to determine the present value of estimated future cash outflows expected to be required to settle the defined benefit liability. In determining the appropriate discount rate, the Group considers the interest rates of high-quality corporate bonds that are denominated in the currency in which the pension benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability. Other key assumptions for defined benefit liability are based in part on current market conditions. Additional information is disclosed in Note 2.16.2.4 Revenue recognition The Group recognizes capital lent to customers as loans receivable. 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.2.5 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 and other short- term highly liquid investments with original maturities of three months or less.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. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are also categorized as held for trading unless they are designated as hedges. Meanwhile, the Group has no financial asset at fair value through profit or loss other than financial assets held for trading. 17
  • 20. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011 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. Investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognized at fair value, and transaction costs are expensed in the income statement. Available-for- sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are subsequently carried at amortized cost using the effective interest method. Changes in the fair value of financial assets at fair value through profit or loss are recognized in income statement as gain or loss. 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. If the Group transfers substantially all the risks and rewards of ownership of the financial asset, the Group shall derecognize the financial asset and recognize separately as assets or liabilities any rights and obligations created or retained in the transfer. If the Group retains substantially all the risks and rewards of ownership of the financial asset, the Group shall continue to recognize the financial asset. d. Impairment of financial assets (1) Assets carried at amortized cost 18
  • 21. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011 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.2.9 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 19
  • 22. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011 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. 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. Write-off decision of 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 lessor 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 the 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, or ⑤the leased assets are of such a specialized nature that only the lessee can use them without major modifications. 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, 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 20
  • 23. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011 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 Works of art classified under other tangible assets are not amortized due to their indefinite useful life in nature. 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 consolidated statements of comprehensive income.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: Amortization Method Useful life Development costs Straight-line 5 years 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 21
  • 24. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011 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 Financial Liabilities (a) Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss are financial instruments held for trading. Financial liabilities are classified as financial liabilities at fair value through profit or loss when incurred principally for the purpose of repurchasing it in the near term. Derivatives or embedded derivatives are also categorized as this category unless they are designated as hedges. (b) Financial liabilities carried at amortized cost The Group classifies non-derivative financial liabilities, except for financial liabilities at fair value through profit or loss and financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition, as financial liabilities carried at amortized cost and as ‘trade payables’, ‘borrowings’, and ‘other financial liabilities’ in the statement of financial position. In case when a transfer of a financial asset does not qualify for derecognition, the transferred asset is continuously recognized as asset and the consideration received is recognized as financial liabilities.2.15 Financial Guarantee Contract Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Financial guarantees are initially recognized in the financial statements at fair value on the date the guarantee was given. Subsequent to initial recognition, the Group’s liabilities under such guarantees are measured at the higher of the amounts below. Any increase in the liability relating to guarantees is reported as other financial liabilities. - The amount calculated in accordance with Korean IFRS 1037, Provisions, Contingent Liabilities and Contingent Assets; or - The initial amount, less accumulated amortization recognized in accordance with Korean IFRS 1018, Revenue.2.16 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 22
  • 25. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011 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 other comprehensive income or loss in the period in which they arise.2.17 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. 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.2.18 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. 23
  • 26. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011 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 and profits and losses reclassified from equity. 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 applying hedging accounting, the relative profits or losses are reclassified to interest expenses and gain or loss on foreign exchange translation. 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 profits or losses.2.19 Current and deferred income tax The tax expense for the period comprises current and deferred tax. Tax is recognized in the income statement, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the statement of financial position date in the countries where the Group operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. 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 recognized if they arise from 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 statement of financial position date 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. 24
  • 27. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011 Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures 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 where there is an intention to settle the balances on a net basis.2.20 Earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Group by the weighted average number of ordinary shares in issue during the period excluding ordinary shares purchased by the Group 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.2.21 Dividend Distribution Dividend distribution to the Company’s shareholders is recognized as a liability in the financial statements in the period in which the dividends are approved by the Company’s shareholders.2.22 Approval of Issuance of the Financial Statements The issuance of the December 31, 2012 consolidated financial statements of the Group was approved by the Board of Directors on February 28, 2013.3. Restricted Financial Instruments Restricted financial instruments are as follows:(in thousands of Korean won) Type Entities 2012 2011 Restriction Kookmin Bank Maintaining deposits forDeposits 9,000 9,000 and 2 others checking account 25
  • 28. Hyundai Commercial, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2012 and 2011 4. Securities Securities are as follows: (in thousands of Korean won) Type 2012 2011 Available-for-sale securities Marketable equity 10,650,000 18,200,000 Equity securities securities Unlisted equity 5,607,645 3,083,604 securities 16,257,645 21,283,604 Debt securities 10,726,682 5,564,629 26,984,327 26,848,233 Investments in associates 285,401,945 147,539,965 312,386,272 174,388,198 Available-for-sale securities Available-for-sale securities are as follows: (in thousands of Korean won) Book Value Number of Ownership Acquisition 2012 2011 shares (%) costMarketable equity securities JNK Heaters Co., Ltd. 1,000,000 12.5 10,126,881 10,650,000 18,200,000Unlisted equity securities 1 Leehan Corp. 136,000 12.3 3,199,762 3,304,936 3,082,984 Anyang KDC Project Corp. 389,999 15.0 2,293,275 2,293,275 - Anyang KDC Asset 1,499 15.0 8,814 8,814 - Management Corp. Isung Eng, Corp. 24 - 620 620 620 5,502,471 5,607,645 3,083,604Debt securities 2 Leehan Corp. - - 5,469,801 6,726,682 5,564,629 Commercial Auto Third SPC - - 4,000,000 4,000,000 - 9,469,801 10,726,682 5,564,629 25,099,153 26,984,327 26,848,233 1 The fair value of the securities of Leehan Corp. is the valuation price provided by an external appraiser, Korea Asset Pricing. The external appraisers valuated the fair value as the average of valuation prices using the discounted cash flow model and the imputed market value model. 2 The debt security is a convertible bond issued by Leehan Corp. The fair value of the convertible bond for Leehan Corp. is the valuation price provided by an external appraiser, Korea Asset Pricing. The difference 26
  • 29. Hyundai Commercial, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2012 and 2011 between the fair value of convertible bond and the book value of normal bond by effective interest rate is recognized in the gain or loss on valuation of debt securities, and the fluctuation of conversion right and advanced redemption right is recognized in the gain or loss on embedded derivatives. Investments in associates Investments in associates are as follows: (in thousands of Korean won) 2012 Number of Ownership Acquisition Net asset Book value shares (%) cost value Hyundai Card 1 8,889,622 5.54 113,820,162 121,460,539 158,386,190 Co., Ltd. Hyundai Life Insurance 10,685,620 39.07 138,913,060 102,391,658 127,015,755 Co., Ltd. 252,733,222 223,852,197 285,401,945 (in thousands of Korean won) 2011 Number of Ownership Acquisition Net asset Book value shares (%) cost value Hyundai Card 1 8,889,622 5.54 113,820,162 110,613,215 147,539,965 Co., Ltd. 1 The Group’s shareholding in Hyundai Card Co., Ltd. is less than 20%. However, the Group 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 are as follows: (in thousands of Korean won) 2012 Changes in accumulated Changes in Beginning Gain (loss) Ending Acquisition other retained Balance on valuation Balance comprehen- earnings 1 sive incomeHyundai Card 147,539,965 - 10,609,150 237,075 - 158,386,190 Co., Ltd.Hyundai Life Insurance - 138,913,060 (18,716,249) 5,334,179 1,484,765 127,015,755 Co., Ltd. 147,539,965 138,913,060 (8,107,099) 5,571,254 1,484,765 285,401,945 27
  • 30. Hyundai Commercial, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2012 and 2011(in thousands of Korean won) 2011 Changes in accumulated Changes in Beginning Gain (loss) on other retained Others Ending Balance Balance valuation comprehen- earnings 1 sive incomeHyundai Card 133,160,973 13,220,846 (477,206) 1,636,450 (1,098) 147,539,965 Co., Ltd. 1 Tax effects are not deducted. Summary of financial information of investees follows: (in thousands of Korean won) 2012 Closing Operating Net income Assets Liabilities month revenue (loss) Hyundai Card December 11,252,488,244 9,060,021,557 2,524,941,896 191,504,230 Co., Ltd. Hyundai Life Insurance March 3,824,606,629 3,562,563,039 885,330,384 (6,045,704) 1 Co., Ltd. 1 Hyundai Life Insurance Co., Ltd. is a corporation with fiscal year ending on March 31. But its assets and liabilities above are as of December 31, 2012, and the results of its operations are for the nine-month period ended December 31, 2012. The recognition of deemed cost was on February 29, 2012. 2011 Closing Operating Assets Liabilities Net income month revenue Hyundai Card December 10,851,933,716 8,855,250,685 2,407,597,301 238,647,582 Co., Ltd. 5. Financial Receivables Financial receivables are as follows: (in thousands of Korean won) 2012 Deferred loan Allowance for origination Present value Principal doubtful Book value fees and discounts accounts costs Loans receivable Factoring 108,000 - - (270) 107,730 Receivables Loans 2,764,943,740 35,870,003 (200,613) (19,258,900) 2,781,354,230 2,765,051,740 35,870,003 (200,613) (19,259,170) 2,781,461,960 Installment financial assets Auto 331,018,925 2,702,341 - (2,351,090) 331,370,176 Durable goods 25,765,456 (140,848) - (176,228) 25,448,380 356,784,381 2,561,493 - (2,527,318) 356,818,556 28
  • 31. Hyundai Commercial, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2012 and 2011Lease receivables Finance lease 132,355,777 687 - (1,026,911) 131,329,553 receivables 3,254,191,898 38,432,183 (200,613) (22,813,399) 3,269,610,069 2011 Deferred loan Allowance for origination Present value Principal doubtful Book value fees and discounts accounts costsLoans receivable Factoring 575,109 - - (3,163) 571,946 Receivables Loans 2,390,384,894 18,629,791 (150,234) (18,165,997) 2,390,698,454 2,390,960,003 18,629,791 (150,234) (18,169,160) 2,391,270,400Installment financial assets Auto 402,751,465 (315,733) - (2,700,211) 399,735,521 Durable goods 69,532,615 (677,259) - (475,143) 68,380,213 472,284,080 (992,992) - (3,175,354) 468,115,734Lease receivables Finance lease 84,693,337 (19,542) - (620,397) 84,053,398 receivables 2,947,937,420 17,617,257 (150,234) (21,964,911) 2,943,439,532 6. Allowance for Doubtful Accounts Changes in allowance for doubtful accounts for the years ended December 31, 2012 and 2011, are as follows: (in thousands of Korean won) 2012 Loans Installment Lease Other assets Total receivable financial assets receivables Beginning balance 18,169,160 3,175,354 620,397 330,388 22,295,299 Amounts written off (4,168,839) (396,392) - - (4,565,231) Recoveries of amounts 772,833 86,527 - - 859,360 previously written off Disposal of receivables (14,903,755) (1,921,390) (34,163) - (16,859,308) Unwinding of discount (226,349) (28,019) - - (254,368) Additional(reversed) 19,616,120 1,611,238 440,677 (102,913) 21,565,122 allowance Ending balance 19,259,170 2,527,318 1,026,911 227,475 23,040,874 29
  • 32. Hyundai Commercial, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of Korean won) 2011 Loans Installment Lease Other assets Total receivable financial assets receivables Beginning balance 12,795,689 3,609,027 214,613 372,974 16,992,303 Amounts written off (2,091,482) (213,575) - - (2,305,057) Recoveries of amounts 374,021 12 119,541 - 493,574 previously written off Disposal of receivables (10,613,501) (1,556,907) (977) - (12,171,385) Unwinding of discount (151,126) (16,612) (108) - (167,846) Additional(reversed) 17,855,559 1,353,409 287,328 (42,586) 19,453,710 allowance Ending balance 18,169,160 3,175,354 620,397 330,388 22,295,299 7. Financial Instruments The fair values of financial instruments are as follows:(in thousands of Korean won) 2012 2011 Book value Fair value Book value Fair valueAssetsFinancial assets Cash and deposits 282,834,795 282,834,795 276,018,119 276,018,119 Available-for-sale securities 26,984,327 26,984,327 26,848,233 26,848,233 Loans receivable 2,781,461,960 2,775,937,581 2,391,270,400 2,398,975,565 Installment financial assets 356,818,556 357,631,944 468,115,734 473,294,235 Lease receivables 131,329,553 132,353,718 84,053,398 85,401,075 Derivative assets 137,775 137,775 1,369,009 1,369,009 Non-trade receivables 15,813,310 15,813,310 29,694,392 29,694,392 Accrued revenues 16,858,350 16,858,350 17,963,211 17,963,211 Leasehold deposits 11,083,914 11,201,215 9,963,176 9,861,028 3,623,322,540 3,619,753,015 3,305,295,672 3,319,424,867LiabilitiesFinancial liabilities Borrowings 723,883,961 730,188,793 725,523,723 730,010,502 Debentures 2,428,295,638 2,494,275,095 1,937,737,885 1,983,599,328 Securitized debts 309,637,148 319,737,569 359,361,742 367,266,231 Derivative liabilities 7,505,990 7,505,990 2,691,395 2,691,395 Non-trade payables 15,199,625 15,199,625 7,907,799 7,907,799 Accrued expenses 27,995,752 27,995,752 26,857,796 26,857,796 1 Withholdings 3,045,893 3,045,893 2,731,628 2,731,628 Leasehold deposits received 33,014,098 33,618,900 16,493,405 16,677,090 3,548,578,105 3,631,567,617 3,079,305,373 3,137,741,769 1 Excluding taxes. 30
  • 33. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011The fair value hierarchy of financial assets and liabilities carried at fair value are as follows:(in thousands of Korean won) 2012 1 Book Fair Fair value hierarchy Type value value level 1 level 2 level 3Financial assets Available-for-sale 26,984,327 26,984,327 10,650,000 - 16,334,327 securities Derivative assets 137,775 137,775 - 137,775 - 27,122,102 27,122,102 10,650,000 137,775 16,334,327Financial liabilities Derivative liabilities 7,505,990 7,505,990 - 7,505,990 - 1 The levels of fair value hierarchy have been defined as follows: Level 1: Quoted prices in active markets for identical assets or liabilities. Listed stocks and derivatives Level 2: Inputs for the asset or liability included within valuation techniques that are observable market data. Most bonds issued in Korean won and foreign currency, general unlisted derivatives like swap, forward, option Level 3: Inputs for the asset or liability that are not based on observable market data. Unlisted stocks, complicated structured bonds, complicated unlisted derivatives and others.(in thousands of Korean won) 2011 1 Book Fair Fair value hierarchy Type value value level 1 level 2 level 3Financial assets Available-for-sale 26,848,233 26,848,233 18,200,000 - 8,648,233 securities Derivative assets 1,369,009 1,369,009 - 1,369,009 - 28,217,242 28,217,242 18,200,000 1,369,009 8,648,233Financial liabilities Derivative liabilities 2,691,395 2,691,395 - 2,691,395 - 31
  • 34. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011 The changes in financial instruments of level 3 for the years ended December 31, 2012 and 2011, are as follows: (in thousands of Korean won) Available-for-sale securities 2012 2011 Beginning balance 8,648,233 17,657,945 Acquisition 6,302,089 8,670,183 Interest revenues 871,838 72,492 Gain on valuation 512,167 (1,579,387) (Other comprehensive income) Disposal - (4,655,000) 1 Reclassification - (11,518,000) Ending balance 16,334,327 8,648,233 1 The fair value hierarchy of the available-for-sale securities has been reclassified from level 3 to level 1 as JNK Heaters Co., Ltd. was listed during the previous period. The book values of financial instruments by categories are as follows:(in thousands of Korean won) 2012 Financial Hedging assets at fair Loans and Available-for-sale derivative Total value through receivables financial assets instruments profit or lossFinancial assets Cash and deposits - 282,834,795 - - 282,834,795 Available-for- sale - - 26,984,327 - 26,984,327 securities Loans receivable - 2,781,461,960 - - 2,781,461,960 Installment - 356,818,556 - - 356,818,556 financial assets Lease receivables - 131,329,553 - - 131,329,553 Derivative assets 74,423 - - 63,352 137,775 Non-trade - 15,813,310 - - 15,813,310 receivables Accrued revenues - 16,858,350 - - 16,858,350 Leasehold - 11,083,914 - - 11,083,914 deposits 74,423 3,596,200,438 26,984,327 63,352 3,623,322,540 32
  • 35. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011(in thousands of Korean won) 2011 Financial Hedging assets at fair Loans and Available-for-sale derivative Total value through receivables financial assets instruments profit or lossFinancial assets Cash and deposits - 276,018,119 - - 276,018,119 Available-for- sale - - 26,848,233 - 26,848,233 securities Loans receivable - 2,391,270,400 - - 2,391,270,400 Installment - 468,115,734 - - 468,115,734 financial assets Lease receivables - 84,053,398 - - 84,053,398 Derivative assets 501,793 - - 867,216 1,369,009 Non-trade - 29,694,392 - - 29,694,392 receivables Accrued revenues - 17,963,211 - - 17,963,211 Leasehold - 9,963,176 - - 9,963,176 deposits 501,793 3,277,078,430 26,848,233 867,216 3,305,295,672(in thousands of Korean won) 2012 Financial liabilities Hedging derivative Total at amortized cost instrumentsFinancial liabilities Borrowings 723,883,961 - 723,883,961 Debentures 2,428,295,638 - 2,428,295,638 Securitized debts 309,637,148 - 309,637,148 Derivative - 7,505,990 7,505,990 liabilities Non-trade payables 15,199,625 - 15,199,625 Accrued expenses 27,995,752 - 27,995,752 Withholdings 3,045,893 - 3,045,893 Leasehold deposits received 33,014,098 - 33,014,098 3,541,072,115 7,505,990 3,548,578,105 33
  • 36. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011 2011 Financial liabilities Hedging derivative Total at amortized cost instrumentsFinancial liabilities Borrowings 725,523,723 - 725,523,723 Debentures 1,937,737,885 - 1,937,737,885 Securitized debts 359,361,742 - 359,361,742 Derivative - 2,691,395 2,691,395 liabilities Non-trade payables 7,907,799 - 7,907,799 Accrued expenses 26,857,796 - 26,857,796 Withholdings 2,731,628 - 2,731,628 Leasehold deposits received 16,493,405 - 16,493,405 3,076,613,978 2,691,395 3,079,305,3738. Transfer of financial assets The financial assets that are not entirely derecognized are as follows: The Group issued senior and subordinated asset-backed securities based on loans and the associated securitized debts and has recourse only to the transferred assets. Details of financial assets transferred and not derecognized as of December 31, 2012 and 2011, are as follows: (in thousands of Korean won) Type 2012 2011 Book value of assets Loans receivable 539,978,100 463,531,752 Installment assets 35,652,795 96,910,381 575,630,895 560,442,133 Book value of related liabilities 309,637,148 359,361,742 Liabilities having right of resource on transferred assets : Fair value of assets 574,639,694 563,007,792 Fair value of related liabilities (319,737,569) (367,266,231) Net position 254,902,125 195,741,561 The financial assets that are entirely derecognized are as follows: The Group derecognized loans receivable from the consolidated financial statements by transferring them for 101,598,233 thousand to Commercial Auto Third SPC(Trustee Bank : Citibank Korea, Inc.) on December 18, 2012. The gains related to the transaction amounted to 2,450,829 thousand. 34
  • 37. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011 Meanwhile, the Group has continuing involvement in the transferred asset after taking over debt securities issued by Commercial Auto Third SPC. Details of continuing involvement are as follows: (in thousands of Korean won) Book value of Maximum Continuing involvement exposure to loss Available-for-sale securities Acquisition on debt 4,000,000 4,000,000 securities9. Finance Lease Receivables Details of total lease investments and present value of minimum lease receipts are as follows: (in thousands of Korean won) 2012 2011 Present value Present value Type Total lease of minimum Total lease of minimum investments lease investments lease receipts receipts Less than 1 year 55,614,516 48,968,100 38,319,151 33,136,156 1 to 5 years 88,188,405 83,388,364 55,204,893 51,537,639 143,802,921 132,356,464 93,524,044 84,673,795 Details of unearned interest income are as follows: (in thousands of Korean won) Type 2012 2011 Total lease investments 143,802,921 93,524,044 Net lease investments Minimum lease receipts (present value) 132,356,464 84,673,795 Unguaranteed residual value(present value) - - 132,356,464 84,673,795 Unearned interest income 11,446,457 8,850,249 35
  • 38. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 201110. Property and Equipment Property and equipment consist of: (in thousands of Korean won) 2012 Type Acquisition Accumulated Book value cost depreciation Vehicles 235,096 (165,297) 69,799 Fixtures and furniture 7,965,357 (5,263,430) 2,701,927 Others 411,000 - 411,000 8,611,453 (5,428,727) 3,182,726 (in thousands of Korean won) 2011 Type Acquisition Accumulated Book value cost depreciation Vehicles 238,639 (123,908) 114,731 Fixtures and furniture 7,065,590 (4,682,654) 2,382,936 Others 411,000 - 411,000 7,715,229 (4,806,562) 2,908,667 Changes in property and equipment for the years ended December 31, 2012 and 2011, are as follows: (in thousands of Korean won) 2012 Beginning Ending Acquisition Disposal Depreciation balance balance Vehicles 114,731 76,172 (61,447) (59,657) 69,799 Fixtures and 2,382,936 1,418,127 (114,015) (985,121) 2,701,927 furniture Others 411,000 - - - 411,000 2,908,667 1,494,299 (175,462) (1,044,778) 3,182,726 (in thousands of Korean won) 2011 Beginning Ending Acquisition Disposal Depreciation balance balance Vehicles 119,066 79,715 (22,673) (61,377) 114,731 Fixtures and 1,986,277 1,591,801 (50,146) (1,144,996) 2,382,936 furniture Others 411,000 - - - 411,000 2,516,343 1,671,516 (72,819) (1,206,373) 2,908,667 36
  • 39. Hyundai Commercial, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2012 and 2011 As of December 31, 2012, the Group carries comprehensive property insurance with Hyundai Marine and Fire Insurance for its fixtures and furniture, and other tangible assets for up to ₩ 4,008,254 thousand (2011: 2,196,426 thousand), vehicle insurance for its vehicles, and group accident insurance, travel insurance and business damage insurance for its employees. And the Group carries comprehensive property insurance with Hyundai Marine and Fire Insurance for its machine tool installment financial assets and lease assets for up to ₩ 92,452,845 thousand (2011: 74,430,948 thousand) thousand. 11. Intangible Assets Intangible assets consist of:(in thousands of Korean won) 2012 Acquisition Accumulated Book cost depreciation valueDevelopment costs 2,847,793 (869,745) 1,978,048Software 6,422,131 (4,947,389) 1,474,742Other intangible assets 25,851 (25,631) 220 9,295,775 (5,842,765) 3,453,010(in thousands of Korean won) 2011 Acquisition Accumulated Book cost depreciation valueDevelopment costs 2,153,280 (390,261) 1,763,019Software 5,637,719 (4,331,112) 1,306,607Other intangible assets 25,851 (23,173) 2,678 7,816,850 (4,744,546) 3,072,304 Changes in intangible assets for the years ended December 31, 2012 and 2011, are as follows: (in thousands of Korean won) 2012 1 Beginning balance Increase Amortization Ending balance Development costs 1,763,019 694,513 (479,484) 1,978,048 Software 1,306,607 784,411 (616,276) 1,474,742 Other intangible assets 2,678 - (2,458) 220 3,072,304 1,478,924 (1,098,218) 3,453,010 1 Inclusive of transfer from advance payments. 37
  • 40. Hyundai Commercial, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of Korean won) 2011 1 Beginning balance Increase Amortization Ending balance Development costs 841,359 1,263,403 (341,743) 1,763,019 Software 1,632,196 677,297 (1,002,886) 1,306,607 Other intangible assets 7,848 - (5,170) 2,678 2,481,403 1,940,700 (1,349,799) 3,072,304 12. Borrowings Borrowings consist of: (in thousands of Korean won) Annual Lender 2012 2011 interest rate (%) Borrowings in won SK Securities Commercial paper 2.91 ~ 4.17 210,000,000 140,000,000 and 7 others Woori Bank and General loans 3.22 ~ 5.80 513,883,961 585,523,723 8 others 723,883,961 725,523,723 13. Debentures Debentures issued by the Group and outstanding are as follows: (in thousands of Korean won) Annual 2012 2011 interest rates (%) Par value Issue price Par value Issue priceCurrent portion of debenture Debenture 3.05 ~ 6.00 847,488,500 847,488,500 635,000,000 635,000,000 Less: Discount on - (313,409) - (253,677) debentures 847,488,500 847,175,091 635,000,000 634,746,323Non-current portion of debenture Debenture 3.10 ~ 8.00 1,582,704,000 1,582,704,000 1,304,713,500 1,304,713,500 Less: Discount on - (1,583,453) - (1,721,938) debentures 1,582,704,000 1,581,120,547 1,304,713,500 1,302,991,562 2,430,192,500 2,428,295,638 1,939,713,500 1,937,737,885 38
  • 41. Hyundai Commercial, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2012 and 2011 14. Securitized debts The amounts of securitized debts which are secured by loans and installment financial assets in accordance with Asset Backed Securitization Act are as follows: (in thousands of Korean won) Annual 2012 2011 interest rates (%) Par value Issue price Par value Issue priceCurrent portion of securitized debts Securitized debts 4.78 ~ 4.92 50,000,000 50,000,000 50,000,000 50,000,000 Less: Discount on - (33,752) - (62,214) securitized debts 50,000,000 49,966,248 50,000,000 49,937,786Non-current portion of securitized debts Securitized debts 4.76 ~ 5.43 260,000,000 260,000,000 310,000,000 310,000,000 Less: Discount on - (329,100) - (576,044) securitized debts 260,000,000 259,670,900 310,000,000 309,423,956 310,000,000 309,637,148 360,000,000 359,361,742 15. Defined Benefit Liability The amounts of defined benefit plans recognized in the statements of financial position are as follows: (in thousands of Korean won) 2012 2011 Present value of funded obligations 10,602,378 7,596,812 Fair value of plan assets (8,546,162) (5,364,346) Defined benefit liability 2,056,216 2,232,466 Changes in present value of defined benefit obligations for the years ended December 31, 2012 and 2011: (in thousands of Korean won) 2012 2011 Beginning balance 7,596,812 5,493,658 Current service cost 2,065,107 1,785,154 Interest cost 312,346 277,272 Actuarial losses 966,673 513,811 Transfer of severance benefits from 1,301,233 452,920 related parties Transfer of severance benefits to related (1,230,543) (522,962) parties Benefits paid (409,250) (403,041) 39
  • 42. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011 Ending balance 10,602,378 7,596,812 Changes in the fair value of plan assets for the years ended December 31, 2012 and 2011: (in thousands of Korean won) 2012 2011 Beginning balance 5,364,346 3,812,483 Expected return on plan assets 220,433 148,352 Actuarial gains/(losses) 4,187 (4,034) Transfer of severance benefits from 600,148 386,412 related parties Transfer of severance benefits to (294,075) (487,862) related parties Contributions by plan participants 3,000,000 1,800,000 Benefits paid (348,877) (291,005) Ending balance 8,546,162 5,364,346 Details of the amounts recognized in the income statement for the years ended December 31, 2012 and 2011: (in thousands of Korean won) 2012 2011 Current service cost 2,065,107 1,785,154 Interest cost 312,346 277,272 Expected return on plan assets (220,433) (148,352) 2,157,020 1,914,074Actual return on plan assets for the years ended December 31, 2012 and 2011: (in thousands of Korean won) 2012 2011 Actual return on plan assets 224,620 144,318 Details of plan assets consist of : (in thousands of Korean won) 2012 2011 Amount Ratio(%) Amount Ratio(%) Cash 26,399 0.31 821,162 15.30 Deposits¹ 5,061,344 59.22 2,165,895 40.38 Interest rate guaranteed asset 3,458,419 40.47 2,377,289 44.32 for 1-year 8,546,162 100.00 5,364,346 100.00 ¹ As of December 31, 2012, contribution to the National Pension Fund of 5,321 thousand is included 40
  • 43. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011 ( December 31, 2011 : 5,321 thousand). Actuarial assumptions required to recognize defined benefit liability are as follows: 2012 2011 Discount rate 3.43% 4.28% Expected return on plan assets 2.79% 3.97% Future salary increases 5.60% 5.65% Assumptions regarding future mortality experience are set based on actuarial advice published by Korea Insurance Development Institute. Adjustments for the differences Adjustments for the differences between initial assumptions and actual figures for the years ended December 31, 2012 and 2011, are as follows : (in thousands of Korean won) 2012 2011 Defined benefit obligations 483,119 207,271 Plan assets (4,187) 4,034 41
  • 44. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 201116. Income Tax Income tax expense for the years ended December 31, 2012 and 2011, consists of: (in thousands of Korean won) 2012 2011 Current tax 16,380,716 19,643,160 Changes in deferred tax assets(liabilities) 3,715,889 7,863,920 Deferred tax credited directly to equity 2,144,291 (1,140,160) Supplementary pay of corporation tax 194,774 - Income tax 22,435,670 26,366,920 Deferred tax credited directly to equity (in thousands of Korean won) 2012 2011 Gain(loss) on valuation of derivatives 265,585 (185,048) Gain(loss) on valuation of available-for- 1,703,156 (1,234,832) sale financial securities Accumulated comprehensive income(expense) of equity method (57,372) 154,401 investees Actuarial losses 232,922 125,319 2,144,291 (1,140,160) Reconciliation between income before income tax and income tax expense : (in thousands of Korean won) 2012 2011 Profit before tax 66,083,123 100,119,500 Current tax 15,530,117 23,766,919 Adjustments: Income not subject to tax 83,818 - Expenses not deductible for tax - 1,382,045 purposes Unrecognized deferred tax 6,415,522 - Supplementary payment of corporate 194,774 - tax Others 211,439 1,217,956 Income tax 22,435,670 26,366,920 Effective tax rate 34.0% 26.3% (Income tax over net income before tax) 42
  • 45. Hyundai Commercial, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2012 and 2011 Changes in temporary differences and deferred assets (liabilities)(in thousands of Korean won) 2012 Temporary differences Deferred assets (liabilities) Type Beginning Changes Ending Beginning EndingDeferred loan origination (35,993,974) (10,203,343) (46,197,317) (8,710,542) (11,179,751) fees and costsAllowances for doubtful (1,451,636) 1,451,636 - (351,296) - accountsInvestments in (33,719,804) 9,633,904 (24,085,900) (8,160,192) (10,784,979) associatesDerivatives 1,428,819 1,583,237 3,012,056 345,774 728,917Goodwill 1,273,333 (1,273,333) - 308,147 -Accrued expenses 4,707,815 (552,293) 4,155,522 1,139,291 1,005,636Available-for-sale (7,992,763) 6,107,588 (1,885,175) (1,934,249) (456,212) securitiesOthers 4,243,223 (1,622,180) 2,621,043 1,026,860 634,293 (67,504,987) 5,125,216 (62,379,771) (16,336,207) (20,052,096)(in thousands of Korean won) 2011 Temporary differences Deferred assets (liabilities) Type Beginning Changes Ending Beginning EndingDeferred loan origination (32,402,378) (3,591,596) (35,993,974) (6,963,514) (8,710,542) fees and costsAllowances for doubtful (9,058,852) 7,607,216 (1,451,636) (2,192,242) (351,296) accountsInvestments in (19,472,745) (14,247,059) (33,719,804) (3,845,072) (8,160,192) associatesDerivatives 2,193,350 (764,531) 1,428,819 530,790 345,774Goodwill 8,913,333 (7,640,000) 1,273,333 2,157,027 308,147Accrued expenses 5,284,115 (576,300) 4,707,815 1,278,756 1,139,291Available-for-sale (2,876,064) (5,116,699) (7,992,763) (696,007) (1,934,249) securitiesOthers 5,446,886 (1,203,663) 4,243,223 1,257,975 1,026,860 (41,972,355) (25,532,632) (67,504,987) (8,472,287) (16,336,207) Realization of the future tax benefits related to the deferred tax assets is dependent on many factors, including the Group’s ability to generate taxable income within the period during which the temporary differences reverse, the outlook of the Korean economic environment, and the overall future industry outlook. Management periodically considers these factors in reaching its conclusion and recognized the deferred income tax asset based on future realization. As of December 31, 2012, the Group did not recognize deferred income tax assets of 27,299,073 thousand related to temporary differences in investments in associates which may not be realized (2011: nil). 43
  • 46. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 201117. Derivative Financial Instruments and Hedge Accounting The Group acquired the convertible bonds issued by Leehan Corp. in 2011, and recorded the difference between the acquisition cost of convertible bond and the fair value of bond without convertible right as derivative assets. The Group recognized derivatives assets of 74,423 thousand as of December 31, 2012 (2011: 501,793 thousand), and net losses on trading derivatives of 427,370 thousand during the year ended December 31, 2012 (2011 : 58,406 thousand). Derivatives designated as cash flow hedges as of December 31, 2012 and 2011, are as follows: (in millions of Korean won) 2012 2011 Type Other Other Assets Liabilities comprehen- Assets Liabilities comprehen- sive income sive incomeInterest rate 63,352 2,084,383 (1,531,844) - 241,837 (899,733)swapsCurrency swaps - 5,421,607 (382,978) 867,216 2,449,558 (183,215) 63,352 7,505,990 (1,914,822) 867,216 2,691,395 (1,082,948) The amount recognized as other comprehensive income, representing the effective portion related to cash flow hedge, is (-)831,874 thousand for the year ended December 31, 2012, and the reclassified amount from other comprehensive income to profit or loss is 751,792 thousand (before tax). There is no amount recognized as other comprehensive income, representing the ineffective portion related to cash flow hedge, for the year ended December 31, 2012.18. Equity Capital stock The Company is authorized to issue 80,000,000 shares(5,000 per share). The capital stock of the Company consists of 20,000,000 shares of common stock and 5,000,000 shares of preferred stock. Capital stock as of December 31, 2012, is as follows: (in thousands of Korean won) Type Common stock Preferred Stock Total Capital Stock 100,000,000 25,000,000 125,000,000 Paid-in capital in excess of 74,608,060 - 74,608,060 par value The convertible preferred stocks are non-cumulative, non-participating, nominative, non- permanent preferred stocks without voting right, the stocks will be converted to common stock after seven years from issue date. 44
  • 47. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011 Legal reserve The Korean Commercial Law requires the Company to appropriate, as a legal reserve, an amount equal to a minimum of 10% of annual cash dividends declared, until the reserve equals 50% of its issued capital stock. This reserve is not available for the payment of cash dividends, but may be transferred to capital stock or used to reduce accumulated deficit, if any. Discretionary reserve The Company appropriates a reserve in accordance with Electronic Financial Transactions Act. If allowances for doubtful accounts do not meet the minimum amount calculated in accordance with allowance reserve standards of Regulation on Supervision under Article 11 of the Specialized Credit Financial Business Law, the Group appropriates a reserve for bad loans in an amount more than the difference between the allowance and the requirement. The reserve for bad loans is discretionary that could be reversed when the appropriated reserve exceeds the amount liable for the fiscal year. When the Company has unappropriated deficit, the reserve for bad loans is appropriated only after the unappropriated deficit has been recovered. Appropriated and expected reserves for bad loans as of December 31, 2012 and 2011, are as follows: (in thousands of Korean won) 2012 2011 Appropriated reserve for bad loans 3,357,192 - Expected reserve for bad loans 11,932,446 3,357,192 15,289,638 3,357,192 Transfer to reserve for bad loans and net income in consideration of effect of changes in reserve for bad loans for the year ended December 31, 2012, are as follows: (in thousands of Korean won) Amounts Net income 43,647,453 1 Transfer to reserve for bad loans 11,932,446 Net income in consideration of changes in reserve for 2 31,715,007 bad loans Net income per share in consideration of changes in 3 1,286 reserve for bad loans (In won) 1 Estimated additional accumulated amount. 2 Net income in consideration of changes in reserve for bad loans is not accordance with K-IFRS, and the amount is the sum of the transfer to reserve for bad loans before income tax and net income. 3 Net income per share in consideration of changes is calculated by subtracting the transfer to reserves bad loans from the net income for common stock (Note 22). 45
  • 48. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011 Legal reserve and discretionary reserve are as follows: (in thousands of Korean won) 2012 2011 Legal reserve Revenue reserve 4,000,000 1,000,000 Reserve for bad loans 3,357,192 - Discretionary reserve Reserve for electronic financial 100,000 100,000 transactions 3,457,192 100,000 Unappropriated retained earnings (Expected reserve for bad loans 128,412,093 145,366,632 December 31, 2012: 11,932,446 thousand December 31, 2011: 3,357,192 thousand) 135,869,285 146,466,632 The dividend for year 2012 is to be proposed at the annual general meeting on March 20, 2013. The December 31, 2012 consolidated financial statements do not reflect this dividend payable. Dividends for fiscal year of 2012 and 2011 are as follows :(in thousands of Korean won) 2012 2011 Number of shares eligible for 20,000,000 - dividends Interim Common Par value for share (won) 5,000 - Dividends stock Dividends rate 25.0% - Dividends 25,000,000 - Number of shares eligible for - 20,000,000 dividends Common Par value for share (won) - 5,000 stock Dividends rate - 24.0% Year-end Dividends - 24,000,000 dividends Number of shares eligible for 5,000,000 5,000,000 dividends Preferred Par value for share (won) 5,000 5,000 stock Dividends rate 24.0% 24.0% Dividends 6,000,000 6,000,000 Total dividends 31,000,000 30,000,000 Net income 43,647,453 73,752,580 Dividends payout ratio (Dividends/ Net income) 71.0% 40.7% 46
  • 49. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 201119. Net Interest Income Net interest income for the years ended December 31, 2012 and 2011, is as follows: (in thousands of Korean won) 2012 2011 Interest income Cash and deposits 9,672,871 6,030,227 Loans receivable 256,376,955 228,896,693 Installment financial assets 40,624,910 57,700,311 Lease receivables 7,858,325 4,871,923 1 Other 1,521,697 368,205 316,054,758 297,867,359 Interest expenses Borrowings 35,084,314 37,653,353 Debentures 109,711,708 92,624,733 Securitized debts 17,464,262 17,626,190 1 Other 1,216,424 508,370 163,476,708 148,412,646 Net interest income 152,578,050 149,454,713 1 Amortization of present value discount using the effective interest method.20. Net Commission Income Net commission income for the years ended December 31, 2012 and 2011, is as follows: (in thousands of Korean won) 2012 2011 Commission income Loans receivable 16,286,937 12,605,602 Installment financial assets 1,637,531 1,743,098 Lease receivables 99,550 204,010 18,024,018 14,552,710 Commission expenses - - Net Commission Income 18,024,018 14,552,710 47
  • 50. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 201121. General and Administrative Expenses General and administrative expenses for the years ended December 31, 2012 and 2011, are as follows: (in thousands of Korean won) 2012 2011 Payroll 22,858,689 22,215,849 Severance benefits 2,156,981 1,914,074 Fringe benefits 5,503,659 4,731,682 Outsourcing service charges 4,070,340 3,144,764 Sales commission 12,897,058 11,564,790 Commission 3,310,244 2,402,530 Outsourcing service 2,179,596 1,837,194 commission Depreciation 1,044,778 1,206,373 Amortization 1,098,218 1,349,799 Taxes and dues 1,852,051 1,724,416 Electronic data processing 2,678,454 1,774,341 expenses Rent 1,368,111 866,538 Administrative expenses for 1,111,377 944,723 building Travel and transportation 671,526 562,465 Training expenses 649,914 620,046 Communication 600,760 539,203 Other expenses 1,972,282 1,963,377 66,024,038 59,362,16422. Earnings Per Share Basic earnings per share attributable to common stock for the years ended December 31, 2012 and 2011, is as follows: (In Korean won) 2012 2011 (1) Net income to owners of the parent 43,647,452,618 73,752,580,323 (2) Dividend on preferred (6,000,000,000) (6,000,000,000) stocstock (3) Net income attributable to common stock (In 37,647,452,618 67,752,580,323 won) (4) Weighted average of number of outstanding 20,000,000 20,000,000 common shares 48
  • 51. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011 (5) Basic earnings per share (In won) (3)÷(4) 1,882 3,388 As there was no discontinued operation during the years ended December 31, 2012 and 2011, basic earnings per share is the same as basic earnings per share from continuing operations. 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. The Company has one category of dilutive potential ordinary share: convertible preferred stock. (In Korean won) 2012 2011 Profit attributable to ordinary shares 37,647,452,618 67,752,580,323 Dividend on convertible preferred stock 6,000,000,000 6,000,000,000 Profit used to determine diluted earnings per 43,647,452,618 73,752,580,323 share Weighted average number of ordinary 20,000,000 20,000,000 shares in issue Adjustments for: Assumed conversion of convertible 5,000,000 753,425 preferred stock Weighted average number of ordinary 25,000,000 20,753,425 shares for diluted earnings per share Diluted earnings per share 1,746 3,554 As convertible preferred stocks do not have an effect of dilution, the diluted earnings per share is the same as basic earnings per share for year ended December 31, 2011. 49
  • 52. Hyundai Commercial, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2012 and 2011 23. Other Comprehensive Income Other comprehensive income for the years ended December 31, 2012 and 2011, consists of:(in thousands of Korean won) 2012 Changes Beginning Reclassifi- Income tax Ending balance cation of Other effects balance profit or changes lossGain(loss) on valuation (1,082,948) 751,792 (1,849,251) 265,585 (1,914,822) of derivativesGain(loss) on valuation of available-for-sale 6,047,838 - (7,037,834) 1,703,156 713,160 financial assetsAccumulated comprehensive income(expense) of (1,702,584) - 5,571,254 (57,372) 3,811,298 equity method investees 3,262,306 751,792 (3,315,831) 1,911,369 2,609,636(in thousands of Korean won) 2011 Changes Beginning Reclassifi- Income tax Ending balance cation of Other effects balance profit or changes lossGain(loss) on valuation (1,662,560) 1,490,577 (725,917) (185,048) (1,082,948) of derivativesGain(loss) on valuation of available-for-sale 2,180,057 1,638,531 3,464,082 (1,234,832) 6,047,838 financial assetsAccumulated comprehensive income(expense) of (1,379,779) - (477,206) 154,401 (1,702,584) equity method investees (862,282) 3,129,108 2,260,959 (1,265,479) 3,262,306 50
  • 53. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 201124. Supplemental Cash Flow Information Cash and cash equivalents in cash flow statements consisting of cash on hand, deposits and short-term money-market instruments are as follows: (in thousands of Korean won) 2012 2011 Cash 2,000 2,000 Ordinary deposits 5,374,125 6,005,235 Short-term financial 277,449,670 270,001,884 instruments 282,825,795 276,009,119 Cash generated from operations for the years ended December 31, 2012 and 2011, is as follows:(in thousands of Korean won) 2012 2011Net income 43,647,453 73,752,580Adjustments Net interest expenses 152,282,140 142,026,979 Dividends (250,000) (300,000) Income tax 22,435,670 26,366,920 Income on loans 45,145,458 36,273,733 Income on installment financial receivables 4,560,032 (1,970,014) Income on leases (19,151) (27,153) Gain on foreign exchange translations (4,521,000) - Gain on valuation of derivatives - (1,950,000) Gain on disposal of property and equipment (2,856) (4,347) Gain on disposal of available-for-sale financial assets - (1,638,531) Gain on equity method valuation (10,609,150) (13,220,846) Bad debts expense 21,565,122 19,453,710 Severance benefits 2,157,020 1,914,074 Depreciation 1,044,778 1,206,373 Amortization of intangible assets 1,098,218 1,349,799 Loss on disposal of property and equipment 113,850 50,146 Impairment losses on investments - 1,433,571 Loss on foreign exchange translations - 1,950,000 Loss on valuation of derivatives 4,948,370 65,894 Loss on equity method valuation 18,716,249 - Other expenses without cash outflow - 1,098 258,664,750 212,981,406Changes in operating assets and liabilities 51
  • 54. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011 (Increase) in loans receivable (393,613,160) (619,248,834) Decrease in installment financing receivables 113,474,729 101,619,447 (Increase) in finance lease receivables (47,691,709) (43,516,916) (Increase) in deferred loan origination fees and costs (70,337,812) (51,878,621) (Increase) in present value discounts (1,808,341) (1,447,571) Increase (Decrease) in allowance for bad debts 501,748 (614,766) Decrease in non-trade receivables 13,992,548 9,827,508 Decrease (Increase) in accrued revenues 1,087,848 (4,161,011) (Increase) in advance payments (971,306) (879,050) Decrease in prepaid expenses 125,101 4,967,617 Increase in non-trade payables 7,291,826 3,561,915 Increase (Decrease) in accrued expenses (1,250,569) 704,615 Increase (Decrease) in unearned revenue (209,828) 1,972,193 Increase in advance receipts 14,043 14,969 Increase in withholdings 396,766 263,555 Payment of severance benefits (409,250) (403,041) (Increase) in plan assets (2,957,196) (1,407,545) Transfer of severance benefits from related parties 1,301,232 452,920 Transfer of severance benefits to related parties (1,230,543) (522,962) Increase in leasehold deposits received 17,681,745 15,211,099 (364,612,128) (585,484,479) (62,299,925) (298,750,493) For the year ended December 31, 2012, interest income cash flows from loans receivables, installment financial assets and lease receivables amount to 305,948,037 thousand ( 2011: 287,307,915 thousand). Significant investing and financing activities not affecting cash flows for the years ended December 31, 2012 and 2011, are as follows: (in thousands of Korean won) 2012 2011 Transferred from advance payments to 448,816 1,014,056 development costs Transferred to legal reserve 3,000,000 1,000,000 Transferred to discretionary reserve 3,357,192 100,00025. Commitments and Contingencies Details of unused credit line agreements of the Group are as follows:(in thousands of Korean won) Financial institutions 2012 2011 Limit of Woori Bank and 435 billion 385 billion 225 billion 175 billion overdraft 10 other banks Limit of L/C Shinhan Bank - - USD 8 million USD 8 million 52
  • 55. Hyundai Commercial, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2012 and 2011 Details of pending significant litigations involving the Group as of December 31, 2012, are as follows: (in thousands of Korean won) Number of litigations Amount of litigations Plaintiff 10 345,684 Defendant 4 325,620 As of report date, the outcome of these cases cannot be reasonably determined and no adjustments are reflected on the consolidated financial statements of the Group as of December 31, 2012. The Company enters into a financial support agreement with Shinhan Bank for acquisitions of mold equipment for Hyundai and Kia Motor Company’s component partner companies. The Company guarantees the loans of the component partner companies. The amount of payment guarantees as of December 31, 2012, is 1,905,528 thousand (2011: 12,542,306 thousand). Details of guarantees involving third parties as of December 31, 2012 and 2011, are as follows: (in thousands of Korean won) Guarantor Details 2012 2011 Guarantees on machinery installment Hyundai Wia 23,779,938 63,422,227 financing receivables Hyundai Motor Guarantees on finance lease 2,824,246 8,877,631 Company receivables Seoul Guarantee Deposit guarantee 13,449,276 13,213,256 Insurance Company 26. Related Party Transactions The parent company is Hyundai Motor Company. Related parties include associates, joint ventures, post-employment benefit plans, members of key management personnel and entities which the Group controls directly or indirectly, has joint control or significant influence over them. Significant transactions, which occurred in the normal course of business with related companies for the years ended December 31, 2012 and 2011, are as follows:(in thousands of Korean won) 2012 2011 Purchases Disposal Purchases DisposalParent Company 70,236 - 232,568 -Others 46,996,815 56,994,629 59,572,585 41,115,088 47,067,051 56,994,629 59,805,153 41,115,088 53
  • 56. Hyundai Commercial, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2012 and 2011 Revenues and expenses arising from transactions with related parties for the years ended December 31, 2012 and 2011, and receivables and payables as of December 31, 2012 and December 31, 2011, are as follows:(in thousands of Korean won) 2012 2011 Receivables Payables Receivables Payables Parent Company 116,435 851,685 209,920 173,830 Associates 4,923,830 11,061,020 3,504,434 2,870,760 Others 8,577,609 186,881 50,065,864 153,128 13,617,874 12,099,586 53,780,218 3,197,718(in thousands of Korean won) 2012 2011 Revenues Expenses Revenues Expenses Parent Company 1,966,639 305 3,050,516 8,517 Associates 1,145,603 1,598,892 727,680 699,920 Others 7,881,783 9,361,806 5,940,126 5,137,491 10,994,025 10,961,003 9,718,322 5,845,928 The Company has been provided with guarantees by related parties(Note 25). Changes in loans to related parties for the years ended December 31, 2012 and 2011, are as follows: (in thousands of Korean won) 2012 2011 Other related parties Beginning balance 46,410,456 6,902,580 New loan - 45,000,000 Repayment (45,540,946) (5,492,124) Interests charges 2,296,772 1,727,405 Interests collected (2,296,772) (1,727,405) Ending balance 869,510 46,410,456 Compensation for key management for the years ended December 31, 2012 and 2011, consists of: (in thousands of Korean won) 2012 2011 Short-term employee benefits 2,355,873 1,430,632 Severance benefits 976,693 745,419 The key management above consists of directors (including nonpermanent directors), who have significant authority and responsibilities for planning, operating and controlling of the Group. 54
  • 57. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 201127. Financial Risk Management The Group is exposed to credit risk, liquidity risk and market risk (exchange and rate risk). In order to manage these factors, the Group operates risk management policies and programs that monitor closely and respond to each of the risk factors. The Group uses derivatives to manage specific risks.27.1 Credit risk Exposures to credit risk are as follows: (in thousands of Korean won) 2012 2011 Cash and deposits 282,832,795 276,016,119 Loans receivable 2,781,461,960 2,391,270,400 Installment financial assets 356,818,556 468,115,734 Lease receivables 131,329,553 84,053,398 Non-trade receivables 15,813,310 29,694,392 Accrued revenue 16,858,350 17,963,211 Leasehold deposits 11,083,914 9,963,176 Derivative assets 137,775 1,369,009 Payment guarantee agreement 1,905,528 12,542,306 3,598,241,741 3,290,987,745 Credit quality of financial assets exposed to credit risk is as follows: 55
  • 58. Hyundai Commercial, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of Korean won) 2012 2011 Normal Past due Impaired Normal Past due ImpairedCash and deposits 282,832,795 - - 276,016,119 - -Financial receivables Loans 2,654,370,184 111,212,235 15,879,541 2,307,457,660 79,791,576 4,021,164 receivable Installment financial 339,122,981 16,741,779 953,796 450,693,558 16,896,032 526,144 assets Lease 126,071,530 5,258,023 - 78,449,454 5,603,944 - receivables 3,119,564,695 133,212,037 16,833,337 2,836,600,672 102,291,552 4,547,308Non-trade 15,813,310 - - 29,694,392 - - receivablesAccrued revenue 16,858,350 - - 17,963,211 - -Leasehold 11,083,914 - - 9,963,176 - - depositsDerivative assets 137,775 - - 1,369,009 - -Unused loan 1,905,528 - - 12,542,306 - - commitments 3,448,196,367 133,212,037 16,833,337 3,184,148,885 102,291,552 4,547,308 Credit quality according to internal credit rating of financial receivables which are neither past due nor impaired are as follows: (in thousands of Korean won) 2012 Gross amount Allowance Book value First-rate 1,527,243,577 (1,320,528) 1,525,923,049 Second-rate 545,226,460 (1,288,166) 543,938,294 Third-rate 624,178,668 (4,580,773) 619,597,895 Fourth-rate 108,597,624 (1,310,169) 107,287,455 Fifth-rate 85,891,673 (2,380,201) 83,511,472 Sixth-rate 40,528,603 (2,718,120) 37,810,483 No rating 202,855,717 (1,359,670) 201,496,047 3,134,522,322 (14,957,627) 3,119,564,695 (in thousands of Korean won) 2011 Gross amount Allowance Book value First-rate 286,871,742 (194,844) 286,676,898 Second-rate 1,099,608,490 (1,473,737) 1,098,134,753 Third-rate 936,455,547 (5,663,424) 930,792,123 Fourth-rate 161,475,901 (1,954,387) 159,521,514 Fifth-rate 70,267,989 (2,470,217) 67,797,772 Sixth-rate 38,813,635 (2,584,630) 36,229,005 No rating 258,882,906 (1,434,299) 257,448,607 2,852,376,210 (15,775,538) 2,836,600,672 56
  • 59. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011 The Group classifies financial receivables into six internal credit rating based on the rating criteria and the characteristic of receivables. The internal credit rating is assessed based on the expected probability of default in the previous month. Meanwhile, some financial receivables are not given credit rating for reason of lacking in research data such as information on new loan accounts of the current month or requiring additional management. Financial receivables past due but not impaired are as follows: (in thousands of Korean won) 2012 Less than Between Between Over 1 Total 1 month 1 ~ 2 months 2~3 months 3 monthsLoans 99,058,460 15,125,448 - - 114,183,908 receivableInstallment 13,729,517 2,205,380 359,955 924,195 17,219,047 financial assetsLease 2,979,899 - - 2,307,262 5,287,161 receivables 115,767,876 17,330,828 359,955 3,231,457 136,690,116 Allowance (2,549,692) (917,506) (2,431) (8,450) (3,478,079) Book value 113,218,184 16,413,322 357,524 3,223,007 133,212,037 1 The Group does not include the receivables provided with guarantees from the related parties in the receivables which are past due for over three months (Note 25). (in thousands of Korean won) 2011 Less than Between Between Over 1 Total 1 month 1 ~ 2 months 2~3 months 3 monthsLoans 70,092,177 11,795,790 - - 81,887,967 receivableInstallment 14,046,556 2,839,682 244,776 162,441 17,293,455 financial assetsLease 531,398 6,916 - 5,080,257 5,618,571 receivables 84,670,131 14,642,388 244,776 5,242,698 104,799,993 Allowance (1,890,170) (613,402) (1,653) (3,216) (2,508,441) Book value 82,779,961 14,028,986 243,123 5,239,482 102,291,552 57
  • 60. Hyundai Commercial, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2012 and 2011 Impaired financial receivables (in thousands of Korean won) 2012 Gross amount Allowance Book valueLoans receivable 19,738,069 (3,858,528) 15,879,541Installment financial assets 1,472,960 (519,164) 953,796 21,211,029 (4,377,692) 16,833,337 (in thousands of Korean won) 2011 Gross amount Allowance Book valueLoans receivable 7,323,987 (3,302,823) 4,021,164Installment financial assets 904,253 (378,109) 526,144 8,228,240 (3,680,932) 4,547,308 Credit quality of other assets Credit quality according to external credit rating of other assets, excluding financial receivables, which are neither past due nor impaired are as follows: (in thousands of Korean won) 1 Cash and deposits 2012 2011 AAA 147,832,795 151,016,119 AA+ 45,000,000 5,000,000 AA 20,000,000 50,000,000 AA- 20,000,000 20,000,000 A+ 50,000,000 50,000,000 282,832,795 276,016,119 1 The average external credit rating of three domestic credit rating agencies is used. (in thousands of Korean won) 2 Derivative assets 2012 2011 AAA 63,352 - A- - 867,216 No rating 74,423 501,793 137,775 1,369,009 2 Derivative assets are classified based on S&P credit rating. 58
  • 61. Hyundai Commercial, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2012 and 2011 The assets pledged as collateral for financial receivables are as follows: (in thousands of Korean won) 2012 Unimpaired Impaired Total Delinquent Non-delinquent Total financial 16,833,337 133,212,037 3,119,564,695 3,269,610,069 receivables Collateralized assets Collateralized 9,774,223 113,563,749 2,038,596,606 2,161,934,578 vehicles Collateralized real 9,464,286 - 186,259,014 195,723,300 estate 19,238,509 113,563,749 2,224,855,620 2,357,657,878 (in thousands of Korean won) 2011 Unimpaired Impaired Total Delinquent Non-delinquent Total financial 4,547,308 102,291,552 2,836,600,672 2,943,439,532 receivables Collateralized assets Collateralized 6,223,117 92,976,078 2,074,357,242 2,173,556,437 vehicles Collateralized real - - 103,434,000 103,434,000 estate Collateralized - - 65,500,000 65,500,000 other assets 6,223,117 92,976,078 2,243,291,242 2,342,490,437 Credit risk concentration of financial receivables by debtors is as follows:(in thousands of Korean won) 2012 Excluding allowance Ratio Allowance Book value Finance 30,073,634 0.91% (53,931) 30,019,703 Manufacturing 99,521,470 3.02% (838,571) 98,682,899 Service 3,006,431,213 91.31% (19,719,010) 2,986,712,203 Others 156,397,151 4.75% (2,201,887) 154,195,264 3,292,423,468 100.00% (22,813,399) 3,269,610,069 59
  • 62. Hyundai Commercial, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2012 and 2011 (in thousands of Korean won) 2011 Excluding allowance Ratio Allowance Book value Finance 33,921,201 1.14% (67,728) 33,853,473 Manufacturing 131,928,411 4.45% (1,106,069) 130,822,342 Service 2,632,052,498 88.76% (16,929,438) 2,615,123,060 Others 167,502,333 5.65% (3,861,676) 163,640,657 2,965,404,443 100.00% (21,964,911) 2,943,439,532 27.2 Liquidity risk Cash flows of financial liabilities based on remaining contractual maturities are as follows: (in thousands of Korean won) 2012 Immediate 3 months to 1 Type Up to 3 months 1 to 5 years Over 5 years Total payment 1 yearBorrowings - 285,505,411 152,001,509 309,406,417 - 746,913,337Debentures - 162,092,468 765,499,842 1,600,216,128 109,290,500 2,637,098,938Securitized debts - 3,891,514 61,347,320 271,394,383 - 336,633,217Other liabilities 1,303,805 15,462,157 3,176,922 32,301,760 - 52,244,644Payment guarantee 1,905,528 - - - - 1,905,528 agreementsGross settlement 2 derivative liabilities Cash inflow - (2,471,523) (43,472,467) (26,822,836) - (72,766,826) Cash outflow - 2,981,955 49,596,533 27,733,383 - 80,311,871 3,209,333 467,461,982 988,149,659 2,214,229,235 109,290,500 3,782,340,709 1 The above amounts including the principal and future interest payments are contractual undiscounted cash flows and are not equal to the amounts in the statement of financial position based on the discounted cash flows. 2 Gross settlement derivatives and contractual undiscounted cash flows. (in thousands of Korean won) 2011 Immediate 3 months to 1 Type Up to 3 months 1 to 5 years Over 5 years Total payment 1 yearBorrowings - 287,311,811 150,244,775 319,199,274 - 756,755,860Debentures - 106,809,390 607,556,217 1,213,497,147 104,404,500 2,032,267,254Securitized debts - 4,428,867 62,788,662 336,633,216 - 403,850,745Other liabilities 1,798,476 17,975,817 1,318,441 16,796,669 - 37,889,403Payment guarantee 12,542,306 - - - - 12,542,306 agreementsGross settlement 60
  • 63. Hyundai Commercial, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2012 and 2011 2derivative liabilities Cash inflow - (1,562,742) (4,244,427) (45,948,302) - (51,755,471) Cash outflow - 1,745,180 4,890,469 48,610,256 - 55,245,905 14,340,782 416,708,323 822,554,137 1,888,788,260 104,404,500 3,246,796,002 In accordance with the contract on securitized assets, there is a trigger clause on various requirements for credit support. The Group has to comply with certain conditions of securitized debts. If these conditions are not met, the Group should redeem the securitized debts before maturity. 27.3 Market risk a. Interest rate risk The Group manages the interest rate risk through Value at Risk(VaR), Earnings at Risk(EaR) measurement and Interest Rate Gap Analysis that analyze the maturity between the interest revenue-generating assets and the interest-bearing liabilities. VaR is calculated using the standard framework of the Bank for International Settlements(BIS). The VaR model uses the proxy of modified duration per expiration interval proposed by the BIS and expected interest rate volatility of expiration interval by reason of interest rate fluctuation of 100bp. The interest rate risk using VaR are as follows: (in thousands of Korean won) 2012 2011 Interest rate VaR 4,157,195 5,146,625 VaR is a commonly used market risk measurement techniques but has some limitations. VaR estimates the expected loss under the specific reliability based on the historical changes in the market data. However, the past changes in market cannot reflect all conditions and environments that may occur in the future. Therefore, in the process of calculating, the timing and size of the actual loss may vary according to changes in assumptions. b. Foreign exchange risk The Group holds borrowings and debentures that are denominated in foreign currencies and is exposed to foreign exchange risk arising from various currency exposures. The Group undertakes hedging strategies with hedge accounting being applied to manage these foreign exchange risks. 61
  • 64. Hyundai Commercial, Inc. and SubsidiariesNotes to the Consolidated Financial StatementsDecember 31, 2012 and 2011 Foreign exchange position exposures of the Group are as follows:(in thousands of Korean won) Currency 2012 2011 USD 58,910,500 63,431,500 The Group’s exposure to foreign exchange risk is hedged by derivatives. Therefore, the foreign exchange risk of the Group is not significant. c. Price risk Marketable equity securities which are classified into available-for-sale securities are exposed to price risk. The effects of 10% price variation for comprehensive income and equity are as follows: (in thousands of Korean won) 2012 Comprehensive income 830,700 Equity 830,70027.4 Capital risk management The objective of the Group’s capital management is to maintain sound capital structure. The Group uses the adjusted capital adequacy ratio under the Supervision of Specialized Credit Financial Business Law as a capital management indicator. This ratio is calculated as adjusted total assets divided by adjusted equity. Adjusted capital adequacy ratios of the Group are as follows: (in thousands of Korean won) 2012 2011 Adjusted total assets (A) 3,625,546,783 3,187,354,902 Adjusted equity (B) 422,760,975 464,735,912 Adjusted capital adequacy ratio (B/A) 11.66% 14.58% The above adjusted capital adequacy ratio is calculated according to Supervision of Specialized Credit Financial Business Law. 62

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