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Audit Report: Hyundai Capital 2Q2011

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Hyundai Capital Audit report 2Q 2011

Hyundai Capital Audit report 2Q 2011

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  • 1. Hyundai Capital Services, Inc. andSubsidiariesInterim Consolidated Financial StatementsJune 30, 2011 and 2010
  • 2. Hyundai Capital Services, Inc. and SubsidiariesIndexJune 30, 2011Report on Review of Interim Financial Statements ..........................................................................1-2Interim Consolidated Financial StatementsInterim Consolidated Statements of Financial Position .........................................................................3-5Interim Consolidated Statements of Comprehensive Income................................................................6-8Interim Consolidated Statements of Changes in Shareholders’ Equity .............................................. 9-10Interim Consolidated Statements of Cash Flows .................................................................................... 11Notes to the Interim Consolidated Financial Statements.................................................................. 12-72
  • 3. Report on Review of Interim Financial StatementsTo the Shareholders and Board of Directors ofHyundai Capital Services, Inc.Reviewed Financial StatementsWe have reviewed the accompanying interim consolidated financial statements of HyundaiCapital Services, Inc. and subsidiaries. These financial statements consist of consolidatedstatements of financial position of the Company and subsidiaries as of June 30, 2011 andDecember 31, 2010, and the related consolidated statements of comprehensive income forthe three-month and the six-month periods ended June 30, 2011 and 2010, and statements ofchanges in equity and cash flows for the six-month periods ended June 30, 2011 and 2010,and a summary of significant accounting policies and other explanatory notes, expressed inKorean won.Managements Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these interimconsolidated financial statements in accordance with the International Financial ReportingStandards as adopted by the Republic of Korea (Korean IFRS) 1034, Interim FinancialReporting, and for such internal control as management determines is necessary to enablethe preparation of interim consolidated financial statements that are free from materialmisstatement, whether due to fraud or error.Auditors ResponsibilityOur responsibility is to issue a report on these interim consolidated financial statements basedon our reviews.We conducted our reviews in accordance with the quarterly and semi-annual reviewstandards established by the Securities and Futures Commission of the Republic of Korea. Areview of interim financial information consists of making inquiries, primarily of personsresponsible for financial and accounting matters, and applying analytical and other reviewprocedures. A review is substantially less in scope than an audit conducted in accordance withauditing standards generally accepted in the Republic of Korea and consequently does notenable us to obtain assurance that we would become aware of all significant matters thatmight be identified in an audit. Accordingly, we do not express an audit opinion. 1
  • 4. ConclusionBased on our reviews, nothing has come to our attention that causes us to believe theaccompanying interim consolidated financial statements do not present fairly, in all materialrespects, in accordance with the Korean IFRS 1034, Interim Financial Reporting.Emphasis of MatterWithout qualifying our opinion, as mentioned in Note 2, we draw attention to the fact thatthese interim consolidated financial statements are prepared in accordance with Korean IFRSand the interpretations which are effective as of this report date. Therefore, there may bechanges in the Korean IFRS and related interpretations adopted in the preparation of theseconsolidated financial statements when Company prepares its first full Korean IFRS financialstatements.Review standards and their application in practice vary among countries. The procedures andpractices used in the Republic of Korea to review such interim consolidated financialstatements may differ from those generally accepted and applied in other countries.Accordingly, this report is for use by those who are informed about Korean review standardsand their application in practice.Seoul, KoreaAugust 12, 2011 This report is effective as of August 12, 2011, the review report date. Certain subsequent events or circumstances, which may occur between the review report date and the time of reading this report, could have a material impact on the accompanying consolidated interim financial statements and notes thereto. Accordingly, the readers of the review report should understand that there is a possibility that the above review report may have to be revised to reflect the impact of such subsequent events or circumstances, if any. 2
  • 5. Hyundai Capital Services, Inc. and SubsidiariesInterim Consolidated Statements of Financial PositionJune 30, 2011 and December 31, 2010(In millions of Korean won) 2011 2010 Assets Cash and deposits Cash and cash equivalents (Note 25) 1,382,779 1,224,866 Deposits (Note 4) 23 25 1,382,802 1,224,891 Securities (Note 5) Available-for-sale securities 20,598 20,577 Equity method investments 52,573 48,483 73,171 69,060 Loans receivable (Notes 6 and 7) 11,108,709 10,434,141 Allowances for doubtful accounts (255,690) (215,703) 10,853,019 10,218,438 Installment financial assets (Notes 6 and 7) Auto installment financing receivables 4,917,092 5,023,945 Allowances for doubtful accounts (29,470) (27,489) Durable goods installment financing receivables 3,222 6,801 Allowances for doubtful accounts (161) (633) Mortgage installment financing receivables 31,573 40,025 Allowances for doubtful accounts (259) (403) Machinery installment financing receivables 5,247 14,653 Allowances for doubtful accounts (46) (117) 4,927,198 5,056,782 Lease receivables (Notes 6 and 7) Finance lease receivables (Note 9) 2,096,875 1,777,477 Cancelled lease receivables 1,115 961 2,097,990 1,778,438 Leased assets (Note 10) Operating leased assets 1,171,873 1,282,845 Cancelled leased assets 4,134 3,192 1,176,007 1,286,037 3
  • 6. Hyundai Capital Services, Inc. and SubsidiariesInterim Consolidated Statements of Financial PositionJune 30, 2011 and December 31, 2010(In millions of Korean won) 2011 2010 Property and equipment (Note 11) 251,360 242,369 Other assets Intangible assets (Note 12) 60,998 52,612 Non-trade receivables 40,867 40,833 Allowances for doubtful accounts (977) (964) Accrued revenues 111,891 115,278 Allowances for doubtful accounts (4,027) (3,472) Advance payments 98,017 99,842 Allowances for doubtful accounts (1,538) (3,212) Prepaid expenses 25,628 18,186 Leasehold deposits 34,474 31,954 Derivative assets (Note 18) 426,616 521,530 791,949 872,587 Total assets 21,553,496 20,748,602Liabilities and Shareholders’ EquityBorrowings Borrowings (Note 13) 1,930,000 2,646,945 Debentures (Note 14) 15,457,222 14,396,741 17,387,222 17,043,686Other liabilities Non-trade payables 317,615 362,539 Accrued expenses 139,937 110,225 Unearned revenue 65,363 69,338 Withholdings 26,882 21,939 Defined benefit liability (Note 15) 13,205 11,687 Leasehold deposits received 762,124 746,532 Deferred income tax liabilities (Note 16) 83,497 2,617 Provisions (Note 17) 13,111 46,624 Derivative liabilities (Note 18) 230,905 96,568 1,652,639 1,468,069 Total liabilities 19,039,861 18,511,755Commitments and contingencies (Note 26) 4
  • 7. Hyundai Capital Services, Inc. and SubsidiariesInterim Consolidated Statements of Financial PositionJune 30, 2011 and December 31, 2010(In millions of Korean won) 2011 2010Shareholders equity Common stock (Notes 1 and 19) 496,537 496,537 Capital surplus Paid-in capital in excess of par value 369,339 369,339 Other capital surplus 38,200 38,200 407,539 407,539 Accumulated other comprehensive income and expenses (Note 24) Gain on valuation of available-for-sale 105 512 securities Accumulated comprehensive income of equity 9 24 method investees Loss on valuation of derivatives (40,315) (67,924) Cumulative effect of overseas operation (159) 17 translation (40,360) (67,371) Retained earnings (Note 19) 1,649,790 1,400,013 Non-controlling interests 129 129 Total shareholders equity 2,513,635 2,236,847 Total liabilities and shareholders equity 21,553,496 20,748,602 The accompanying notes are an integral part of these interim consolidated financial statements. 5
  • 8. Hyundai Capital Services, Inc. and Subsidiaries Interim Consolidated Statements of Comprehensive Income Three-Month and Six-Month Periods ended June 30, 2011 and 2010(In millions of Korean won, except per share amounts) Three months Six months 2011 2010 2011 2010Operating revenue Interest income (Note 20) Interest on bank deposits 9,760 5,926 18,848 12,280 Other interest income 124 343 254 682 9,884 6,269 19,102 12,962 Gain on valuation and disposal of securities Gain on disposal of available-for- 480 489 2,084 1,268 sale securities Reversal of impairment loss on - - - 1,078 available-for-sale securities 480 489 2,084 2,346 Income on loans (Notes 20 and 21) 392,318 337,039 773,337 657,123 Income on installment financial 109,696 124,841 224,289 254,412 receivables (Notes 20 and 21) Income on leases (Notes 20 and 21) 215,548 217,346 438,066 431,607 Gain on disposal of loans 72,075 - 72,075 - Gain on foreign currency transactions Gain on foreign exchanges 98,261 - 244,804 134,851 translation Gain on foreign currency 27,800 1,472 29,822 8,766 transactions 126,061 1,472 274,626 143,617 Dividend income 13 168 3,251 3,680 Other operating income Gain on valuation of derivatives 40,344 341,757 73,016 240,487 Gain on derivatives transactions - 7,185 715 19,702 Others 56,401 13,474 81,077 28,889 96,745 362,416 154,808 289,078 Total operating revenue 1,022,820 1,050,040 1,961,638 1,794,825 6
  • 9. Hyundai Capital Services, Inc. and Subsidiaries Interim Consolidated Statements of Comprehensive Income Three-Month and Six-Month Periods ended June 30, 2011 and 2010(In millions of Korean won, except per share amounts) Three months Six months 2011 2010 2011 2010Operating expenses Interest expenses (Note 20) 237,999 219,215 477,921 439,251 Lease expenses (Note 21) 123,787 137,449 255,356 287,000 Bad debts expense (Note 7) 79,709 27,525 139,425 34,374 Loss on foreign transactions Loss on foreign exchange translation 40,349 341,553 73,025 239,378 Loss on foreign currency transactions - 7,185 715 18,944 40,349 348,738 73,740 258,322 General and administrative expenses 127,991 139,421 261,177 242,214 (Note 22) Other operating expenses Loss on valuation of derivatives 98,273 - 244,821 134,468 Loss on derivatives transactions 27,810 1,485 29,837 10,625 Others 10,974 12,772 21,558 28,234 137,057 14,257 296,216 173,327 Total operating expenses 746,892 886,605 1,503,835 1,434,488 Operating income 275,928 163,435 457,803 360,337Non-operating income Gain on equity method valuation 1,894 1,982 4,749 6,505 (Note 5) 1,894 1,982 4,749 6,505Non-operating expenses Loss on equity method valuation - - - 243 (Note 5) - - - 243 Income before income taxes 277,822 165,417 462,552 366,599Income tax expense (Note 16) 68,897 44,572 108,503 90,948 Net income 208,925 120,845 354,049 275,651Net income attributable to: Owners of the parent 208,925 120,845 354,049 275,651 Non-controlling interests - - - - 208,925 120,845 354,049 275,651 7
  • 10. Hyundai Capital Services, Inc. and Subsidiaries Interim Consolidated Statements of Comprehensive Income Three-Month and Six-Month Periods ended June 30, 2011 and 2010(In millions of Korean won, except per share amounts) Three months Six months 2011 2010 2011 2010Other comprehensive income,net of income taxes (Note 24) Gain(Loss) on valuation of available- for-sale financial securities (441) 732 (407) 1,024 Other comprehensive income of (118) (80) (15) (65) equity method investees Gain (Loss) on valuation of (34,712) (45,795) 27,609 (49,205) derivatives Effect of overseas operation 8 22 (176) 22 translation (35,263) (45,121) 27,011 (48,224)Total comprehensive income 173,662 75,724 381,060 227,427Total comprehensive income attributable to: Owners of the parent 173,662 75,724 381,060 227,427 Non-controlling interests - - - - 173,662 75,724 381,060 227,427Earnings per share attributable to the ordinary equity holders of the company (Note 23) Basic earnings per share (Note 23) 2,104 1,217 3,565 2,776 The accompanying notes are an integral part of these interim consolidated financial statements. 8
  • 11. Hyundai Capital Services, Inc. and Subsidiaries Interim Consolidated Statements of Changes in Shareholders’ Equity Six-Month Periods ended June 30, 2011 and 2010 Accumulated Total(In millions of Korean won) other attributable Non- comprehensive Capital Capital income and Retained to owners of controlling stock surplus expenses earnings the parent interests Total equityBalances as of January 1, 2010 496,537 407,539 (5,470) 1,318,186 2,216,792 129 2,216,921Total comprehensive incomeNet income - - - 275,651 275,651 - 275,651Other comprehensive income Gain on valuation of available- - - 1,024 - 1,024 - 1,024 for-sale securities Other comprehensive income of - - (65) - (65) - (65) equity method investees Loss on valuation of derivatives - - (49,205) - (49,205) - (49,205) Effect of overseas operation - - 22 - 22 - 22 translationTotal comprehensive income - - (48,224) 275,651 227,427 - 227,427Transactions with ownersTransfer from dividends payable - - - 3 3 - 3Dividends - - - (203,580) (203,580) - (203,580)Total transactions with owners - - - (203,577) (203,577) - (203,577)Balances as of June 30, 2010 496,537 407,539 (53,694) 1,390,260 2,240,642 129 2,240,771 9
  • 12. Hyundai Capital Services, Inc. and Subsidiaries Interim Consolidated Statements of Changes in Shareholders’ Equity Six-Month Periods ended June 30, 2011 and 2010 Accumulated Total(In millions of Korean won) other attributable Non- comprehensive Capital Capital income and Retained to owners of controlling stock surplus expenses earnings the parent interests Total equityBalances as of January 1, 2011 496,537 407,539 (67,371) 1,400,013 2,236,718 129 2,236,847Total comprehensive incomeNet income - - - 354,049 354,049 - 354,049Other comprehensive income Loss on valuation of available- - - (407) - (407) - (407) for-sale securities Other comprehensive income of - - (15) - (15) - (15) equity method investees Gain on valuation of derivatives - - 27,609 - 27,609 - 27,609 Effect of overseas operation - - (176) - (176) - (176) translationTotal comprehensive income - - 27,011 354,049 381,060 - 381,060Transactions with ownersDividends - - - (104,272) (104,272) - (104,272)Balances as of June 30, 2011 496,537 407,539 (40,360) 1,649,790 2,513,506 129 2,513,635 The accompanying notes are an integral part of these interim consolidated financial statements. 10
  • 13. Hyundai Capital Services, Inc. and SubsidiariesInterim Consolidated Statements of Cash FlowsSix-Month Periods ended June 30, 2011 and 2010(In millions of Korean won) 2011 2010 Cash flows from operating activities Cash generated from operations (Note 25) 181,944 351,117 Interest received 17,935 11,111 Interest paid (412,390) (414,018) Dividends received 3,251 3,680 Income taxes paid (87,925) (98,803) (297,185) (146,913) Cash flows from investing activities Decrease in deposits 3 1,913 Dividends from equity method investments 707 1,226 Acquisition of land (1,853) - Acquisition of building (5,243) (1,408) Disposal of vehicles 37 - Acquisition of vehicles (166) (46) Disposal of fixtures and furniture 14 - Acquisition of fixtures and furniture (15,955) (3,453) Acquisition of other tangible assets (496) - Increase in construction in progress (2,604) (5,234) Disposal of intangible assets 71 29 Acquisition of intangible assets (5,910) (581) Decrease in leasehold deposits 1,912 1,180 Increase in leasehold deposits (4,183) - (33,666) (6,374) Cash flows from financing activities Proceeds from borrowings 1,300,000 1,665,650 Repayments of borrowings (2,016,945) (2,086,549) Issuance of debentures 3,152,196 2,557,179 Repayments of debentures (1,842,033) (1,750,312) Payments of dividends (104,273) (203,578) 488,945 182,390 Exchange losses on cash and cash equivalents (5) (14) Increase(decrease) in other cash and cash equivalents (176) 23 Net increase in cash and cash equivalents 157,913 29,112 Cash and cash equivalents Beginning of period 1,224,866 990,835 End of period 1,382,779 1,019,947 The accompanying notes are an integral part of these interim consolidated financial statements. 11
  • 14. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 20101. General Information Hyundai Capital Services, Inc. was established on December 22, 1993, to engage in installment financing, facilities lease and new technology financing. The Company changed its trade name from Hyundai Auto Finance Co., Ltd. to Hyundai Financial Services Co. on April 21, 1995, and changed its trade name once again to Hyundai Capital Services, Inc. on December 31, 1998. In accordance with the Monopoly Regulation and Fair Trade Act, the Company is incorporated into Hyundai Motor Company Group. As of June 30, 2011, the Company’s operations are headquartered in Yeouido, Seoul. Its major shareholders are Hyundai Motor Company and GE International Holdings Corporation with 56.47% and 43.30% ownership, respectively.2. Summary of Significant Accounting Policies The consolidated financial statements have been prepared and presented which included the accounts of Hyundai Capital Services, Inc. (the “Company”), as the parent company according to Korean IFRS 1027, and Autopia Thirty-third trust and SPC and other subsidiaries(collectively the “Group”), while HK Mutual Saving Bank and six other entities are accounted for using the equity method. Subsidiaries as of June 30, 2011 and December 31, 2010, are as follows. The Company has the substantial power over the subsidiaries established as special purpose entities for asset securitization even though its ownership interests over the subsidiaries do not exceed 50%. 2011 2010 Special Autopia Thirty-third trust and SPC Autopia Thirty-third trust and SPC Purpose Autopia Thirty-fifth trust and SPC Autopia Thirty-fourth trust and SPC Entities Autopia Thirty-sixth trust and SPC Autopia Thirty-fifth trust and SPC Autopia Thirty-seventh trust and SPC Autopia Thirty-sixth trust and SPC Autopia Thirty-eighth trust and SPC Autopia Thirty-seventh trust and SPC Autopia Thirty-ninth trust and SPC Autopia Thirty-eighth trust and SPC Autopia Fortieth trust and SPC Autopia Thirty-ninth trust and SPC Autopia Forty-first trust and SPC Autopia Fortieth trust and SPC Autopia Forty-second trust and SPC Autopia Forty-first trust and SPC Autopia Forty-third trust and SPC Autopia Forty-second trust and SPC Autopia Forty-fourth trust and SPC Autopia Forty-third trust and SPC Autopia Forty-fifth trust and SPC Autopia Forty-fourth trust and SPC Autopia Forty-sixth trust and SPC Autopia Forty-fifth trust and SPC Stock 1 Hyundai Capital Europe GmbH Hyundai Capital Europe GmbH Company 1 It holds 100% shares of Hyundai Capital Services Limited Liability Company established during the first half of 2011. The Group financial statements are prepared in the Korean language (Hangul) in conformity with International Financial Reporting Standards as adopted by the Republic of Korea (“Korean IFRS”). 12
  • 15. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 The Group’s Korean IFRS transition date is January 1, 2010, and the adoption date is January 1, 2011. The interim consolidated financial statements are stated at historical cost unless otherwise stated in the notes. The reconciliations and descriptions of the effect of the transition from the consolidated financial statements of the Group prepared in accordance with accounting principles generally accepted in the Republic of Korea (“K-GAAP”) before the adoption date to Korean IFRS on the Group’s equity as of January 1, 2010, June 30, 2010, and December 31, 2010, its comprehensive income and cash flows for the six-month period ended June 30, 2010 and year ended December 31, 2010, are provided in Note 3. The interim consolidated financial statements for the six-month periods ended June 30, 2011 and 2010, have been prepared in accordance with Korean IFRS 1034. Because these interim consolidated financial statements are a part of financial statements prepared by Korean IFRS as of December 31, 2011, these are subject to Korean IFRS 1101, ‘First-time Adoption of Korean IFRS’. These interim consolidated financial statements have been prepared in accordance with the Korean IFRS standards and interpretations issued and effective at the reporting date. The Korean IFRS standards and interpretations that will be applicable at December 31, 2011, including those that will be applicable on an optional basis, are not known with certainty at the time of preparing these interim consolidated financial statements. The legislative and amended standards and interpretations the Group has not adopted earlier, which have been promulgated but are not yet effective for the fiscal year starting from January 1, 2011, are as follows. - Amendments to Korean IFRS 1101, ‘Deletion of Hyperinflation and the particular date’ (announced in December, 2010) The date of prospective application, the exceptions to retrospective application in derecognition of financial assets, has been changed from the particular date(January 1, 2004) to Korean IFRS transition date according to the amendment above. Therefore, derecognition transactions occurred before the transition date are not restated in accordance with Korean IFRS. The modification is required to be adopted from July 1, 2011. - Amendments to Korean IFRS 1012, ‘Income Taxes’ If there is no disproof, investment property measured at fair value when measuring deferred income tax assets and liabilities should be measured in consideration of recovered tax effects by selling. This will be effective on January 1, 2011. - Amendments to Korean IFRS 1107, ‘Financial Instruments: Disclosures’ The financial assets transferred to counterparts but still remained in the financial statements are required to be disclosed in terms of the nature of the assets, the book value, the risks and rewards. If an entity is exposed to the particular risks and rewards on the derecognized financial assets, 13
  • 16. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 additional disclosures are required to the understand effects of the risks. The amendments are applicable from July 1, 2011. The following is a summary of significant accounting policies followed by the Group in the preparation of its consolidated financial statements. These policies have been consistently applied to all the periods presented, unless otherwise stated.2.1 Consolidation a. Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Group 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 Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. The Group uses the acquisition method to account for business combinations. The consideration transferred is measured as the fair values of the assets transferred, equity interests issued and liabilities incurred or assumed at the acquisition date. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by- acquisition basis, the Group recognizes any non-controlling interest in the acquiree at the non- controlling interest’s proportionate share of the acquiree’s net assets. The excess of the consideration transferred and the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognized directly in the statement of comprehensive income. Inter-company 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 Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 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 and joint ventures Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognized at cost. The Group’s investment in associates includes goodwill identified on acquisition, net of any accumulated impairment loss. The Group’s share of its associates’ post-acquisition profits or losses is recognized in the income statement, and its share of post-acquisition movements in other comprehensive income is recognized in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.2.2 Foreign currency translation a. Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in Korean won, which is the Group’s functional currency. b. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign 15
  • 18. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 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.2.4 Revenue recognition The Group recognizes capital lent to customers as loans receivable, when installment payments or deferred payments on services and goods are made. While installment financial capital paid by the Group to manufacturers or sellers on behalf of customers is recognized as installment financial 16
  • 19. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 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, other short-term highly liquid investments with original maturities of six months or less and bank overdrafts.2.7 Financial assets a. Classification The Group classifies its financial assets as financial assets at fair value through profit or loss, loans and receivables and available-for-sale financial assets. Management determines the classification of its financial assets at initial recognition. 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. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. b. Recognition and measurement Regular purchases and sales of financial assets are recognized on the trade-date (the date on which the Group commits to purchase or sell the asset). Investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognized at fair value, and 17
  • 20. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 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 profit and 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. The Group can transfer an asset in statement of financial position but retains parts of or all the risks and rewards of ownership of the transferred asset substantially. To the extent that a transfer of a financial asset retains rights and obligations, the Group accounts both asset and liability at the same time. After the Group transfers a financial asset and still retains control, it shall continue to recognize the asset to the extent of its continuing involvement in the asset. d. Impairment of financial assets (1) Assets carried at amortized cost The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset is impaired. Impairment losses are incurred only if there is objective evidence of impairment and that loss event has an impact on the estimated future cash flows of the financial asset. The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the reversal of the previously recognized impairment loss is recognized in the income statement. (2) Available-for-sale financial assets The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. For equity securities classified as 18
  • 21. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 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 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. 19
  • 22. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 20102.10 Leases a. Classification The Group classifies leases based on the extent to which risks and rewards incidental to ownership of a leased asset lie with the lesser or the lessee. The lease arrangement classified as a financial lease is where: ①the lease transfers ownership of the asset to the lessee by the end of the lease term, ②the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised, ③the lease term is for the major part of the economic life of the asset even if title is not transferred, ④at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset, and ⑤the leased assets are of such a specialized nature that only the lessee can use them without major modifications. Minimum lease payments include that part of the residual value that is guaranteed by the lessee, by a party related to the lessee or by a third party unrelated to the Group that is financially capable of discharging the obligations under the guarantee. b. Finance leases Where the Group has substantially all the risks and rewards of ownership, leases of property, plant and equipment are classified as finance lease. An amount equal to the net investment in the lease is presented as a receivable. Expenses that are incurred with regard to the lease contract made but not executed at the date of the statement of financial position are accounted for as prepaid leased assets and are reclassified as finance lease receivables at the inception of the lease. Lease receivables include amounts such as commissions, legal fees and internal costs that are incremental and directly attributable to negotiating and arranging a lease. Each lease payment is allocated between principal and finance income. Financial income on an uncollected part of net investment shall be allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. If a lease agreement is cancelled in the middle of lease term, the Group reclassifies the amount of financial lease receivables into cancelled leased receivables, while the amount of financial lease receivables not yet due is reclassified as cancelled leased assets. c. Operating leases The property on operating leases is stated at acquisition cost, net of accumulated depreciation. Expenditures that are incurred for 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 operating leased assets at the inception of the lease term. Rentals from operating lease other than any guaranteed residual value are reported as revenues on a straight-line basis over the lease term. Initial direct costs incurred during the period of preparing the lease contract are recognized as 20
  • 23. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 operating leased assets and are amortized over the lease term in proportion to the recognition of income on leased assets. If a lease agreement is cancelled in the middle of lease term, the balance of operating leased assets is substituted for cancelled leased assets. The cancelled leased assets are depreciated over its residual useful life, but are mostly disposed of in the month of cancellation.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 Buildings Straight-line 40 years Structures Straight-line 40 years Fixtures and furniture Straight-line 3-4 years Vehicles Straight-line 4 years Others - Indefinite useful life 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 recognised within other operating income (expenses) in the income statement.2.12 Intangible assets Intangible assets are stated at cost, which includes acquisition cost and directly related costs required to prepare the asset for its intended use. Intangible assets are stated net of accumulated amortization calculated based on using the following amortization method and estimated useful lives: Amortization Method Useful life Development costs Straight-line 5 years Rights of trademark Straight-line 5 years Other intangible assets Straight-line 5 years Memberships classified under other intangible assets are not amortized over their indefinite useful life. 21
  • 24. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 20102.13 Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets that are subject to amortization suffered impairment are reviewed for possible reversal of the impairment at each reporting date.2.14 Pension obligations The Group operates a defined benefit plan. The liability recognized in the statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets, together with adjustments for unrecognized past-service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension obligation. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized in profits or losses in the period in which they arise.2.15 Provisions and contingent liabilities When there is a probability that an outflow of economic benefits will occur due to a present obligation resulting from a present legal or as a result of past events, and whose amount is reasonably estimable, a corresponding amount of provision is recognized in the financial statements. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. 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 22
  • 25. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 from past events but is not certain to occur, or cannot be reliably estimated, a disclosure regarding the contingent liability is made in the notes to the financial statements.2.16 Derivative financial instruments The Group has applied hedging policies using derivatives to deal with the risk of changes in foreign currency exchange rates and interest rates arising from liabilities. The Group has contracted currency swap and interest swap derivative financial instruments to deal with the risk of changes in foreign currency exchange rates arising from foreign currency liabilities and the risk of changes in interest rates arising from floating-rate liabilities. Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group applies cash flow hedge, which are hedges of a particular risk associated with a recognized asset or liability or a highly probable forecast transaction. The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions to apply hedging accounting. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in profits or losses. The cumulative gain or loss that was reported in equity is recognized when the hedged items affect profits and losses. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the forecast transaction is ultimately recognized in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to profits or losses.2.17 Current and deferred income tax Interim period income tax expense is calculated by applying to an interim period’s pre-tax income the tax rate that would be applicable to expected total annual earnings. Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax assets and liabilities are not accounted for if they arise from the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred 23
  • 26. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 income tax is determined using tax rates and laws that have been enacted or substantially enacted by the date of the statement of financial position and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.2.18 Earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the 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.2.19 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker is responsible for allocating resources and assessing performance of the operating segments.3. Transition to Korean IFRS The interim consolidated financial statements as of June 30, 2011, are prepared according to Korean IFRS at the adoption date of January 1, 2011. The statements of financial position as of December 31, 2010 and as of June 30, 2010, which were prepared previously under K-GAAP are restated in accordance with Korean IFRS 1101, “First-time adoption of Korean IFRS”, for the comparative purposes at the transition date of January 1, 2010. 24
  • 27. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 a. Exemptions of Korean IFRS 1101 elected by the Group The Group has elected to apply the following optional exemptions from full retrospective application. (1) Business combination The Group has not retrospectively applied Korean IFRS 1103 (Business combination) to the business combinations that took place prior to the transition date. (2) Deemed cost of property and equipment The Group has elected to use carrying amount of property and equipment under K-GAAP as deemed cost at the date of transition to Korean IFRS. b. Explanation on the reconciliation of K-GAAP and Korean IFRS Major reconciliations of the transition between K-GAAP and Korean IFRS are as follows: (1) Impairment of financial assets (allowance for financial assets) Under K-GAAP, allowances for financial receivables are calculated based on the long-term average expected loss. In case the allowance calculated based on the expected loss is smaller than the allowance calculated in accordance to the guidelines provided in the Act on the Specialized Credit Financial Business, the Group recognizes an allowance in accordance to the guidelines provided in the Act on the Specialized Credit Financial Business. Under Korean IFRS, impairment losses are recognized where there is evidence that impairment occurred. Allowance for financial receivables is measured individually for assets that are individually significant and on a collective basis for portfolios with similar risk characteristics. (2) Provision for unused loan commitment Under K-GAAP, provision for unused loan commitment is not recognised. Under Korean IFRS, the expected losses of unused loan commitment are recognized as provision for unused credit lines. (3) Accrued revenue for overdue receivables Under K-GAAP, accrued revenue for receivables which are overdue is not recognized. Under Korean IFRS, accrued revenue for past due and impaired receivables and the interests on impaired receivable are recognized using expected cash flow after impairments. (4) Measurement of financial assets carried at amortized cost Under K-GAAP, non-marketable loan and receivables are measured at nominal value if the difference between nominal value and discounted value is not substantial. Under Korean IFRS, 25
  • 28. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 loan and receivables are initially measured at fair value and subsequently carried at amortized cost using the effective interest method. (5) Recognition of unused compensated absences According to K-GAAP, unused compensated absences given to employees are recognized as liabilities at the end of the reporting period only when the right to be paid has been established. Under Korean IFRS, the Group recognizes liabilities when an employee has provided service in exchange for compensated absences. (6) Depreciation method for property and equipment Under K-GAAP, depreciation method for certain property and equipment was declining-balance method. Under Korean IFRS, the Group uses the straight-line method to reflect properly the matching of the future economic benefits. (7) Retirement benefit obligations Under K-GAAP, the Group recognizes the amount which would be payable assuming all eligible employees and directors were to terminate their employment as of the statement of financial position date as accrued severance benefits represent. Under Korean IFRS, the Group recognizes the estimated amount using the projected unit credit method which is on an actuarial basis as the defined benefit obligation. (8) Reclassification of memberships as intangible assets Under K-GAAP, memberships are classified as investments. Under Korean IFRS, the Group reclassifies memberships held for operating purposes as an intangible asset with an infinite useful life. (9) Consolidation Under K-GAAP, Autopia Thirty-third SPC, trust and other subsidiaries were previously excluded from consolidation in accordance with Article 1.3, Clause 1 of Enforcement Decree of the Act on External Audit of Stock Companies. Under Korean IFRS, they are consolidated (Note 2). (10) Income tax effects The Group recognized changes in deferred tax representing the impact of deferred taxes on the adjustments for the transition to Korean IFRS. 26
  • 29. Hyundai Capital Services, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements June 30, 2011 and 2010, and December 31, 2010 c. Effects on the consolidated financial position and comprehensive income (1) Reconciliation of financial position as of January 1, 2010(in millions of Korean won) Shareholders’ Assets Liabilities equityK-GAAP 15,854,426 13,698,696 2,155,730Conversion effects to Korean IFRS Allowance for doubtful accounts 220,443 - 220,443 Provision for unused loan commitments - 26,416 (26,416) Accrued revenues 21,259 - 21,259 Measurement of amortized cost (6,395) - (6,395) Recognition of unused compensated - 2,267 (2,267) absences Depreciation 11,748 - 11,748 Retirement benefit obligations - 91 (91) Others (3,945) 3,335 (7,280) Scope of consolidation 2,903,721 2,998,859 (95,138) Deferred income taxes - 54,672 (54,672) Total effect of transition 3,146,831 3,085,640 61,191Korean IFRS 19,001,257 16,784,336 2,216,921 (2) Reconciliation of financial position as of June 30, 2010(in millions of Korean won) Shareholders’ Assets Liabilities equityK-GAAP 16,366,363 14,160,619 2,205,744Conversion effects to Korean IFRS Allowance for doubtful accounts 215,735 - 215,735 Provision for unused loan commitments - 32,589 (32,589) Accrued revenues 21,398 - 21,398 Measurement of amortized cost (443) - (443) Recognition of unused compensated - 3,341 (3,341) absences Depreciation 464 - 464 Retirement benefit obligations 991 - 991 Others (1,266) (916) (350) Scope of consolidation 2,682,383 2,818,663 (136,280) Deferred income taxes - 30,559 (30,559) Total effect of transition 2,919,262 2,884,236 35,026Korean IFRS 19,285,625 17,044,855 2,240,770 27
  • 30. Hyundai Capital Services, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements June 30, 2011 and 2010, and December 31, 2010 (3) Reconciliation of results of operations for the three-month and the six-month periods ended June 30, 2010(in millions of Korean won) Three months Six months Total Total comprehensive Net Income comprehensive Net Income income incomeK-GAAP 93,071 119,000 253,591 288,022Conversion effects to Korean IFRS Allowance for doubtful (5,913) (5,913) (4,708) (4,708) accounts Provision for unused loan (2,925) (2,925) (6,173) (6,173) commitments Accrued revenues 2,233 2,233 139 139 Measurement of amortized 3,260 3,260 5,952 5,952 cost Recognition of unused (270) (270) (1,074) (1,074) compensated absences Depreciation (542) (542) (11,284) (11,284) Retirement benefit obligations 374 374 1,082 1,082 Others 58 5,466 6,930 6,930 Scope of consolidation (38,355) (24,571) (41,141) (27,348) Deferred income taxes 24,733 24,733 24,113 24,113 Total effect of transition (17,347) 1,845 (26,164) (12,371)Korean IFRS 75,724 120,845 227,427 275,651 28
  • 31. Hyundai Capital Services, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements June 30, 2011 and 2010, and December 31, 2010 (4) Reconciliation of financial position and results of operations as of and for the year ended December 31, 2010(in millions of Korean won) Total Assets Liabilities Total equity comprehensive Net Income incomeK-GAAP 17,931,200 15,727,686 2,203,514 454,942 511,545Conversion effects to Korean IFRS Allowance for doubtful 208,187 - 208,187 (12,256) (12,256) accounts Provision for unused loan - 46,624 (46,624) (20,208) (20,208) commitments Accrued revenues 22,471 - 22,471 1,212 1,212 Measurement of 2,443 - 2,443 8,838 8,838 amortized cost Recognition of unused - 2,524 (2,524) (257) (257) compensated absences Depreciation 1,113 - 1,113 (10,636) (10,636) Retirement benefit - 3,823 (3,823) (2,299) (2,299) obligations Others 39,865 39,926 (61) 8,645 8,645 Scope of consolidation 2,543,323 2,604,768 (61,445) (15,673) (10,375) Deferred income taxes - 86,404 (86,404) 14,776 14,776 Total effect of transition 2,817,402 2,784,069 33,333 (27,858) (22,560)Korean IFRS 20,748,602 18,511,755 2,236,847 427,084 488,985 d. Adjustments of cash flows in 2010 According to Korean IFRS, cash flows of the related income (expenses) and assets (liabilities) are adjusted to separately disclose the cash flows from interest received, interest paid and cash payments of income taxes that were not presented separately under K-GAAP. And the effects of the change in exchange rate on cash and cash equivalents held or due in a foreign currency are presented separately from cash flows from operating, investing and financing activities. There are no other significant differences between cash flows under Korean IFRS and K-GAAP. e. Adjustments of operating income and expenses The Group reclassified certain non-operating income and expenses under K-GAAP to other operating income and expenses according to Korean IFRS. 29
  • 32. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 Adjustments for the three-month and the six-month periods ended June 30, 2011 and 2010, are as follows: (in millions of Korean won) 2011 2010 Three Six Three Six Type months months months months Other operating income 35 6,963 5,133 12,488 Other operating expenses 126 2,700 4,522 10,9464. Restricted Financial Instruments Restricted financial instruments as of June 30, 2011 and December 31, 2010, are as follows: (in millions of Korean won) Amount Type Entities 2011 2010 Restriction Kookmin Bank Maintaining deposits Deposits and 5 others 23 25 for opening account5. Securities Securities as of June 30, 2011 and December 31, 2010, are as follows: (in millions of Korean won) Type 2011 2010 Available-for-sale securities Marketable equity securities 6,526 7,318 Equity securities Unlisted equity securities 10,128 9,887 16,654 17,205 Government and Debt securities public bonds 3,944 3,372 Sub-total 20,598 20,577 Equity method investments 52,573 48,483 73,171 69,060 30
  • 33. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 Available-for-sale securities Available-for-sale securities as of June 30, 2011 and December 31, 2010, are as follows: (1) Equity securities (in millions of Korean won) Book value Number of Ownership Acquisition 2011 2010 shares (%) costMarketable equity securities NICE Information Service 136,593 2.25 3,312 3,797 4,221 NICE Holdings 49,162 1.42 3,491 2,729 3,097Unlisted equity securities Hyundai Finance 1 1,700,000 9.29 9,888 10,128 9,887 Corp. 16,691 16,654 17,205 1 The fair value for Hyundai Finance Corp. was valued as the average of valuation prices provided by two external appraisers, KIS Pricing Inc. and Korea Asset Pricing, using the discounted cash flow model. The five-year financial statements, projected based on past performance, were used in measuring the fair value assuming that the operational structure will remain as is for the next five years. Operating income and expenses were estimated based on the past performance, business plan and expected market conditions. (2) Debt securities (in millions of Korean won) Book value Interest Acquisition Issuer rate (%) cost 2011 2010Government and Metropolitan Rapid public bonds Transit and others 2.50 3,766 3,944 3,372 Equity method investments Equity method investments as of June 30, 2011 and December 31, 2010, are as follows: (in millions of Korean won) 2011 Number of Ownership Acquisition Net asset Book value shares (%) cost valueHK Mutual Saving Bank 1 4,990,438 20.00 45,719 34,953 47,201 1HI Network, Inc. 13,332 19.99 76 542 542 1Korea Credit Bureau 140,000 7.00 3,800 2,728 3,765Hyundai Capital Germany GmbH 600,200 30.01 1,065 966 1,065 50,660 39,189 52,573 31
  • 34. Hyundai Capital Services, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements June 30, 2011 and 2010, and December 31, 2010 (in millions of Korean won) 2010 Number of Ownership Acquisition Net asset Book value shares (%) cost value HK Mutual Saving Bank 1 4,990,438 20.00 45,719 30,601 42,849 1 HI Network, Inc. 13,332 19.99 76 1,055 1,055 1 Korea Credit Bureau 140,000 7.00 3,800 2,477 3,514 Hyundai Capital Germany GmbH 600,200 30.01 1,065 908 1,065 50,660 35,041 48,483 1 The Group’s shareholdings in HK Mutual Saving Bank, HI Network, Inc. and Korea Credit Bureau are less than 20%. However, the Group is able to significantly influence such involvement in the financial and operating processes, and thus the equity method is applied. Valuations of equity method investments for the six-month periods ended June 30, 2011 and 2010, are as follows: (in millions of Korean won) 2011 Changes in accumulated Beginning Gain (loss) Ending Acquisition other Dividends Balance on valuation comprehensive Balance incomeHK Mutual Saving Bank 42,849 - 4,305 47 - 47,201HI Network, Inc. 1,055 - 193 - (706) 542Korea Credit Bureau 3,514 - 251 - - 3,765Hyundai Capital Germany GmbH 1,065 - - - - 1,065 48,483 - 4,749 47 (706) 52,573 (in millions of Korean won) 2010 Changes in accumulated Beginning Gain (loss) Ending Acquisition other Dividends Balance on valuation comprehensive Balance incomeHK Mutual Saving Bank 35,799 - 4,629 19 - 40,447HI Network, Inc. - 76 1,755 - (1,227) 604Korea Credit Bureau 3,191 - (121) - - 3,070Hyundai Capital Germany GmbH 1,065 - - - - 1,065 40,055 76 6,263 19 (1,227) 45,186 The difference between the acquired amounts of equity method investments and their corresponding net asset value as of June 30, 2011 and December 31, 2010, follow: 32
  • 35. Hyundai Capital Services, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements June 30, 2011 and 2010, and December 31, 2010 (in millions of Korean won) 2011 2010 HK Mutual Saving Bank 12,248 12,248 Korea Credit Bureau 1,037 1,037 13,285 13,285 Summary of financial information of investees as of June 30, 2011 and December 31, 2010, follows: (in millions of Korean won) 2011 Operating Net income Assets Liabilities revenue (loss)HK Mutual Saving Bank 2,488,211 2,313,445 180,413 21,527HI Network, Inc. 5,675 2,967 9,854 1,007Korea Credit Bureau 46,335 7,368 18,066 3,513Hyundai Capital 3,384 165 316 58 Germany GmbH (in millions of Korean won) 2010 Operating Net income Assets Liabilities revenue (loss)HK Mutual Saving Bank 2,439,109 2,286,106 158,559 23,455HI Network, Inc. 8,734 3,458 10,101 2,476Korea Credit Bureau 45,301 9,914 11,874 (2,010)Hyundai Capital 3,145 117 - - Germany GmbH 33
  • 36. Hyundai Capital Services, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements June 30, 2011 and 2010, and December 31, 2010 6. Financial Receivables Financial receivables as of June 30, 2011 and December 31, 2010, are as follows: (in millions of Korean won) 2011 Deferred loan origination fees and Allowance Present value Principal costs for doubtful Book value discounts (Initial direct costs accounts for lease assets)Loan receivables Loans 11,220,286 (110,726) (851) (255,690) 10,853,019Installment financial assets Auto 5,000,809 (83,717) - (29,470) 4,887,622 Durable goods 3,208 14 - (161) 3,061 Mortgage 31,490 83 - (259) 31,314 Machinery 5,228 - 19 (46) 5,201 5,040,735 (83,620) 19 (29,936) 4,927,198Lease receivables Finance lease 2,117,538 (690) - (19,974) 2,096,874 receivables Cancelled lease 3,620 - - (2,504) 1,116 receivables 2,121,158 (690) - (22,478) 2,097,990 18,382,179 (195,036) (832) (308,104) 17,878,207 (in millions of Korean won) 2010 Deferred loan origination fees and Allowance Present value Principal costs for doubtful Book value discounts (Initial direct costs accounts for lease assets)Loan receivables Loans 10,545,431 (110,263) (1,027) (215,703) 10,218,438Installment financial assets Auto 5,123,218 (99,271) (2) (27,489) 4,996,456 Durable goods 6,762 39 - (633) 6,168 Mortgage 39,915 111 - (404) 39,622 Machinery 14,595 - 58 (117) 14,536 5,184,490 (99,121) 56 (28,643) 5,056,782Lease receivables Finance lease 1,797,372 (622) - (19,273) 1,777,477 receivables Cancelled lease 2,719 - - (1,758) 961 receivables 1,800,091 (622) - (21,031) 1,778,438 17,530,012 (210,006) (971) (265,377) 17,053,658 34
  • 37. Hyundai Capital Services, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements June 30, 2011 and 2010, and December 31, 2010 7. Allowance for Doubtful Accounts Changes in allowance for doubtful accounts for the six-month periods ended June 30, 2011 and 2010, are as follows:(in millions of Korean won) 2011 Loan Installment Lease Type Other assets Total receivables financial assets receivablesBeginning balance 215,703 28,643 21,031 7,649 273,026Amounts written off (137,115) (13,816) (11) (2,415) (153,357)Recoveries of amounts 48,063 6,726 62 4,010 58,861 previously written offDiscount unwind (3,091) (156) (62) - (3,309)Additional(reversed) 132,130 8,539 1,458 (2,702) 139,425 allowanceEnding balance 255,690 29,936 22,478 6,542 314,646(in millions of Korean won) 2010 Loan Installment Lease Type Other assets Total receivables financial assets receivablesBeginning balance 175,934 32,517 12,529 6,997 227,977Amounts written off (94,787) (16,763) (80) (1,770) (113,400)Recoveries of amounts 51,523 7,651 178 4,393 63,745 previously written offDiscount unwind (2,462) (210) (24) - (2,696)Additional(reversed) 33,977 3,276 979 (3,856) 34,376 allowanceEnding balance 164,185 26,471 13,582 5,764 210,002 35
  • 38. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 20108. Financial Instruments a. Fair value of financial instruments The fair values of financial instruments as of June 30, 2011 and December 31, 2010, are as follows: (in millions of Korean won) 2011 2010 Type Book Fair Book Fair value value value value Assets Financial assets Cash and deposits 1,382,802 1,382,802 1,224,891 1,224,891 Available-for-sale 20,598 20,598 20,577 20,577 securities Loans receivable 10,853,019 11,101,278 10,218,438 10,571,397 Installment financial 4,927,198 5,042,517 5,056,782 5,218,322 assets Derivative assets 426,616 426,616 521,530 521,530 Non-trade receivables 39,890 39,887 39,869 39,869 Accrued revenues 107,864 107,864 111,806 111,806 1 Advance payments 36,783 36,783 34,092 34,092 Leasehold deposits 34,474 34,394 31,955 31,872 17,829,244 18,192,739 17,259,940 17,774,356 Liabilities Financial liabilities Borrowings 1,930,000 1,932,840 2,646,945 2,652,759 Debentures 15,457,222 15,832,084 14,396,741 14,795,749 Derivative liabilities 230,905 230,905 96,568 96,568 2 Non-trade payables 240,668 240,668 240,414 240,414 Accrued expenses 139,937 139,937 110,225 109,943 2 Withholdings 14,310 14,316 10,791 10,791 Leasehold deposits 762,124 768,073 746,531 763,718 received 18,775,166 19,158,823 18,248,215 18,669,942 1 Certain portion of advance payments for customers. 2 Excluding taxes. 36
  • 39. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 b. Fair value hierarchy The fair value hierarchy of financial assets and liabilities carried at fair value as of June 30, 2011 and December 31, 2010, are as follows:(in millions of Korean won) 2011 1 Book Fair Fair value hierarchy Type value value level 1 level 2 level 3Financial assetsFinancial assets at fair value Available-for-sale securities 20,598 20,598 6,526 3,944 10,128 Derivative assets 426,616 426,616 - 426,616 - 447,214 447,214 6,526 430,560 10,128Financial liabilities Derivative liabilities 230,905 230,905 - 230,905 - 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 the liability that are not based on observable market data. Unlisted stocks, complicated structured bonds, complicated unlisted derivatives and others.(in millions of Korean won) 2010 Book Fair Fair value hierarchy(*) Type value value level 1 level 2 level 3Financial assetsFinancial assets at fair value Available-for-sale securities 20,577 20,577 7,318 3,372 9,887 Derivative assets 521,530 521,530 - 521,530 - 542,107 542,107 7,318 524,902 9,887Financial liabilities Derivative liabilities 96,568 96,568 - 96,568 - c. Changes in financial instruments of level 3 The changes in financial instruments of level 3 for the six-month periods ended June 30, 2011 and 2010 are as follows: 37
  • 40. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 (in millions of Korean won) Available-for-sale securities Type 2011 2010 Beginning balance 9,887 8,802 Gains on valuation 241 673 (Other comprehensive income) Disposal - (76) Ending balance 10,128 9,399 d. Financial instruments by categories The book value of financial instruments by categories as of June 30, 2011 and December 31, 2010, are as follows:(in millions of Korean won) 2011 Financial Available-for- Hedging assets at fair Loans and Type sale financial derivative Total value through receivables assets instruments profit or lossFinancial assets Cash and deposits - 1,382,802 - - 1,382,802 Available-for- sale - - 20,598 - 20,598 securities Loans receivable - 10,853,019 - - 10,853,019 Installment - 4,927,198 - - 4,927,198 financial assets Derivative assets 37 - - 426,579 426,616 Non-trade - 39,890 - - 39,890 receivables Accrued revenues - 107,864 - - 107,864 Advance payments - 36,783 - - 36,783 Leasehold - 34,474 - - 34,474 deposits 37 17,382,030 20,598 426,579 17,829,244 38
  • 41. Hyundai Capital Services, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements June 30, 2011 and 2010, and December 31, 2010 (in millions of Korean won) 2010 Financial Available-for- Hedging assets at fair Loans and Type sale financial derivative Total value through receivables assets instruments profit or loss Financial assets Cash and deposits - 1,224,891 - - 1,224,891 Available-for- sale - - 20,577 - 20,577 securities Loans receivable - 10,218,438 - - 10,218,438 Installment - 5,056,782 - - 5,056,782 financial assets Derivative assets 72 - - 521,458 521,530 Non-trade - 39,869 - - 39,869 receivables Accrued revenues - 111,806 - - 111,806 Advance payments - 34,092 - - 34,092 Leasehold - 31,955 - - 31,955 deposits 72 16,717,833 20,577 521,458 17,259,940 (in millions of Korean won) 2011 2010 Financial Financial liabilities Hedging Financial Hedging liabilities at Type at fair value derivative Total liabilities at derivative Total amortized through instruments amortized cost instruments cost profit or lossFinancial liabilities Borrowings - 1,930,000 - 1,930,000 2,646,945 - 2,646,945 Debentures - 15,457,222 - 15,457,222 14,396,741 - 14,396,741 Derivative 2 - 230,903 230,905 - 96,568 96,568 liabilities Non-trade - 240,668 - 240,668 240,414 - 240,414 payables Accrued - 139,937 - 139,937 110,225 - 110,225 expenses Withholdings - 14,130 - 14,130 10,791 - 10,791 Leasehold deposits - 762,124 - 762,124 746,531 - 746,531 received 2 18,544,261 230,903 18,775,166 18,151,647 96,568 18,248,215 9. Finance Lease Receivables a. Total lease investments and present value of minimum lease receipts Details of total lease investments and present value of minimum lease receipts as of June 30, 2011 and December 31, 2010, are as follows: 39
  • 42. Hyundai Capital Services, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements June 30, 2011 and 2010, and December 31, 2010 (in millions of Korean won) 2011 2010 Present value of Present value of Type Total lease Total lease minimum lease minimum lease investments investments receipts receipts Less than 1 year 895,912 544,436 765,722 457,513 1 to 5 years 1,504,034 583,785 1,272,610 504,344 Over 5 years 40 1 - - 2,399,986 1,128,222 2,038,332 961,857 b. Unearned interest income Details of unearned interest income as of June 30, 2011 and December 31, 2010, are as follows: (in millions of Korean won) 2011 2010 Net lease investments Net lease investments Minimum Unearned Minimum Unearned Total lease Unguaranteed Total lease Unguaranteed lease interest lease interestinvestments residual value investments receipts residual value receipts Total income Total income (present (present (present (present value) value) value) value) 2,399,986 1,128,222 988,626 2,116,848 283,138 2,038,332 961,857 834,893 1,796,750 241,582 c. The amounts of doubtful finance lease receivables and related allowance as of June 30, 2011 and December 31, 2010, are as follows: (in millions of Korean won) Type 2011 2010 Finance lease receivables 4,773 3,889 Allowance (4,773) (3,889) 10. Leased Assets All operating leased assets consist of vehicles as of June 30, 2011 and December 31, 2010, and the details are as follows: (in millions of Korean won) 2011 2010 Acquisition Accumulated Carrying Acquisition Accumulated Carrying cost depreciation amount cost depreciation amount Operating leased assets 1,792,032 (620,159) 1,171,873 1,991,961 (709,116) 1,282,845 Cancelled 4,176 (42) 4,134 3,234 (42) 3,192 leased assets 1,796,208 (620,201) 1,176,007 1,995,195 (709,158) 1,286,037 40
  • 43. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 Future minimum lease receipts under operating lease as of June 30, 2011 and December 31, 2010, are as follows: (in millions of Korean won) Type 2011 2010 Less than 1 year 414,370 423,307 1 to 5 years 380,050 414,181 Over 5 years 2 - 794,422 837,48811. Property and Equipment a. Details of property and equipment Property and equipment as of June 30, 2011 and December 31, 2010, consist of: (in millions of Korean won) 2011 2010 Type Acquisition Accumulated Acquisition Accumulated Book value Book value cost depreciation cost depreciation Land 103,697 - 103,697 101,844 - 101,844 Buildings 117,548 (21,303) 96,245 112,305 (19,762) 92,543 Structures 2,466 (251) 2,215 2,466 (220) 2,246 Vehicles 1,699 (909) 790 1,608 (770) 838 Fixture and 132,918 (90,719) 42,199 116,971 (81,650) 35,321 furniture Others 1,951 - 1,951 1,200 - 1,200 Construction in 4,263 - 4,263 8,377 - 8,377 progress 364,542 (113,182) 251,360 344,771 (102,402) 242,369 The value of land based on the published prices announced by the Korean government as of June 30, 2011, is 94,262 million (2010: 91,633 million). b. Changes in property and equipment Changes in property and equipment for the six-month periods ended June 30, 2011 and 2010, are as follows: 41
  • 44. Hyundai Capital Services, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements June 30, 2011 and 2010, and December 31, 2010(in millions of Korean won) 2011 Beginning Ending Type Acquisition Replacement Disposal Depreciation balance balanceLand 101,844 1,853 - - - 103,697Buildings 92,543 5,243 - - (1,541) 96,245Structures 2,246 - - - (31) 2,215Vehicles 838 166 - (30) (184) 790Fixture and 35,321 15,956 19 (14) (9,083) 42,199 furnitureOthers 1,200 496 259 - (4) 1,951Construction in 8,377 2,604 (6,718) - - 4,263 progress 242,369 26,318 (6,440) (44) (10,843) 251,360(in millions of Korean won) 2010 Beginning Ending Type Acquisition Replacement Disposal Depreciation balance balanceLand 98,778 - - - - 98,778Buildings 92,374 1,408 - - (1,384) 92,398Structures 2,134 - - - (29) 2,105Vehicles 960 46 - - (172) 834Fixture and 32,281 3,453 - - (8,095) 27,639 furnitureOthers 1,087 - - - - 1,087Construction in 11,070 5,234 (7,250) - - 9,054 progress 238,684 10,141 (7,250) - (9,680) 231,895 As of June 30, 2011, the Company carries comprehensive asset insurance for its buildings for up to ₩211,916 million (2010: ₩209,783 million). Comprehensive movable property insurance for fixture and furniture covers up to ₩21,000 million (2010: ₩18,812 million). Other leased office buildings and vehicles are covered with liability and general insurance. 42
  • 45. Hyundai Capital Services, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements June 30, 2011 and 2010, and December 31, 2010 12. Intangible Assets a. Details of Intangible assets Intangible assets as of June 30, 2011 and December 31, 2010, consist of:(in millions of Korean won) 2011 2010 Type Acquisition Accumulated Book Acquisition Accumulated Book cost depreciation value cost depreciation valueDevelopment costs 63,114 (39,131) 23,983 56,142 (36,138) 20,004Rights of trademark 69 (32) 37 69 (25) 44Other intangible 52,852 (15,874) 36,978 47,545 (14,981) 32,564 assets 116,035 (55,037) 60,998 103,756 (51,144) 52,612 b. Changes in intangible assets Changes in intangible assets for the six-month periods ended June 30, 2011 and 2010, are as follows: (in millions of Korean won) 2011 1 Type Beginning balance Increase Disposal Amortization Ending balance Development costs 20,004 7,021 (50) (2,992) 23,983 Rights of trademark 44 - - (7) 37 Other intangible assets 32,564 5,328 (21) (893) 36,978 52,612 12,349 (71) (3,892) 60,998 1 Inclusive of transfer from construction in progress (in millions of Korean won) 2010 1 Type Beginning balance Increase Disposal Amortization Ending balance Development costs 7,691 6,879 - (2,851) 11,719 Rights of trademark 57 - - (7) 50 Other intangible assets 31,186 952 (29) (1,004) 31,105 38,934 7,831 (29) (3,862) 42,874 43
  • 46. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 201013. Borrowings Borrowings as of June 30, 2011 and December 31, 2010, consist of:(in millions of Korean won) Annual Types Lender 2011 2010 interest rate (%)Borrowings in won SK Securities Commercial paper 3.22 ~ 4.97 660,000 1,420,000 and 6 others Kookmin Bank General loans 4.18 ~ 7.74 1,270,000 1,170,000 and 11 others 1,930,000 2,590,000Borrowings in foreign currency General loans - - - 56,945 1,930,000 2,646,945 As of December 31, 2010, above borrowings included securitized borrowings of ₩ 10,000 million issued based on loan receivables and installment financial assets. There are no securitized borrowings as of June 30, 2011.14. Debentures Debentures issued by the Group and outstanding as of June 30, 2011 and December 31, 2010, are as follows:(in millions of Korean won) Annual 2011 2010 Type interest rates (%) Par value Issue price Par value Issue priceShort-term debenture Debenture 3.22 ~ 5.19 454,306 454,306 659,397 659,397 Less: Discount on (57) (253) debentures 454,249 659,144Current portion of debenture Debenture 0.33 ~ 8.75 4,321,020 4,321,020 3,384,553 3,384,553 Less: Discount on (4,029) (6,163) debentures 4,316,991 3,378,390Long-term debenture Debenture 0.33 ~ 7.47 10,715,017 10,715,017 10,381,923 10,381,923 Less: Discount on (29,035) (22,716) debentures 10,685,982 10,359,207 15,490,343 15,457,222 14,425,873 14,396,741 44
  • 47. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 As of June 30, 2011, above debentures include securitized borrowings of ₩ 2,401,666 million, (2010: ₩ 2,936,654 million) issued based on loan receivables and installment financial assets.15. Defined Benefit Liability a. The amounts of defined benefit plans recognized in the statements of financial position as of June 30, 2011 and December 31, 2010, are as follows: (in millions of Korean won) Type 2011 2010 Present value of funded obligations 42,730 38,732 Fair value of plan assets (29,525) (27,045) Defined benefit liability 13,205 11,687 b. Changes in present value of defined benefit obligations for the six-month periods ended June 30, 2011 and 2010: (in millions of Korean won) Type 2011 2010 Beginning balance 38,732 37,337 Current service cost 4,697 4,130 Interest cost 885 1,003 Actuarial losses 1,127 - Transfer of severance benefits from 1,405 1,109 related parties Transfer of severance benefits to related (1,193) (1,067) parties Benefits paid (2,923) (3,598) Ending balance 42,730 38,914 45
  • 48. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 c. Changes in the fair value of plan assets for the six-month periods ended June 30, 2011 and 2010: (in millions of Korean won) Type 2011 2010 Beginning balance 27,045 28,019 Contributions by plan participants 3,500 - Expected return on plan assets 525 663 Actuarial (losses)/gains 71 (216) Transfer of severance benefits from 845 288 related parties Transfer of severance benefits to (1,019) (644) related parties Benefits paid (1,442) (1,612) Ending balance 29,525 26,498 d. Details of the amounts recognized in the income statement for the six-month periods ended June 30, 2011 and 2010: (in millions of Korean won) Type 2011 2010 Current service cost 4,697 4,130 Interest cost 885 1,003 Expected return on plan assets (525) (663) Actuarial losses 1,056 216 6,113 4,686 e. Actual return on plan assets for the six-month periods ended June 30, 2011 and 2010: (in millions of Korean won) Type 2011 2010 Actual return on plan assets 596 447 46
  • 49. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 f. Details of plan assets as of June 30, 2011 and December 31, 2010: (in millions of Korean won) 2011 2010 Type Amount Ratio(%) Amount Ratio(%) Cash 63 0.21 96 0.36 Deposits 11,175 37.85 12,053 44.56 Interest rate guaranteed 18,287 61.94 14,896 55.08 asset for 1-year 29,525 100.00 27,045 100.00 g. Actuarial assumptions Actuarial assumptions required to recognize defined benefit liability as of June 30, 2011 and December 31, 2010, are as follows: Type 2011 2010 Discount rate 4.85% 4.90% Expected return on plan assets 3.97% 4.20% Future salary increases 5.64% 5.39% Assumptions regarding future mortality experience are set based on actuarial advice published by Korea Insurance Development Institute.16. Income Tax a. Income tax expense for the six-month periods ended June 30, 2011 and 2010, consists of: (in millions of Korean won) Type 2011 2010 1 Current tax 35,714 79,777 Changes in deferred tax assets(liabilities) 80,880 (1,330) Deferred tax credited directly to equity (8,091) 12,501 Income tax 108,503 90,948 1 Income tax for the six-month period ended June 30, 2011, includes changes in tax reconciliation of the previous year. 47
  • 50. Hyundai Capital Services, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements June 30, 2011 and 2010, and December 31, 2010 b. Deferred tax credited directly to equity (in millions of Korean won) Type 2011 2010 Gain on valuation of available-for-sale 114 (285) financial securities Accumulated comprehensive income of (62) (84) equity method investees Loss on valuation of derivatives (8,143) 12,870 (8,091) 12,501 c. Reconciliation between income before income tax and income tax expense (in millions of Korean won) Type 2011 2010 Profit before tax 462,552 366,599 Current tax (24.2%) 111,911 88,717 Adjustments: Income not subject to tax (51) (4) Expenses not deductible for tax 82 110 purposes Others (SPC consolidation, others) (3,439) 2,125 Income tax 108,503 90,948 Effective tax rate 23.46% 24.80% (Income tax over net income before tax) d. Changes in temporary differences and deferred assets (liabilities) (in millions of Korean won) 2011 Temporary differences Deferred assets (liabilities) Type Beginning Changes Ending Beginning EndingAllowances for doubtful accounts (35,003) (173,184) (208,187) (8,471) (50,381)Derivatives (264,264) 131,964 (132,300) (59,619) (28,801)Deferred fees (192,524) 46,571 (145,953) (45,647) (32,110)Initial direct costs for (84,109) (6,331) (90,440) (19,057) (19,897) lease assetsGain on foreign 227,514 (140,369) 87,145 55,058 18,832 exchanges translationNon-trade payables 132,116 (115,891) 16,225 31,770 3,926Unearned revenue 43,532 (43,532) - 10,658 -Present value discounts (66,457) 66,337 (120) (16,081) (26)Others 63,997 (39,771) 24,226 15,272 5,985Consolidation effects 125,064 (47,778) 77,286 33,500 18,975 (50,134) (321,984) (372,118) (2,617) (83,497) 48
  • 51. Hyundai Capital Services, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements June 30, 2011 and 2010, and December 31, 2010(in millions of Korean won) 2010 Temporary differences Deferred assets (liabilities) Type Beginning Changes Ending Beginning EndingAllowances for doubtful accounts (79,850) 15,247 (64,603) (19,324) (15,634)Derivatives (988,057) 254,531 (733,526) (230,538) (171,403)Deferred fees (105,075) (5,710) (110,785) (25,071) (26,363)Initial direct costs for (65,368) (11,417) (76,785) (14,932) (17,515) lease assetsGain on foreign 863,000 (235,155) 627,845 200,985 146,298 exchanges translationNon-trade payables 79,135 (61,567) 17,568 19,151 4,251Unearned revenue 52,001 (72,250) (20,249) 12,362 (4,819)Present value discounts (65,053) 64,928 (125) (15,495) (29)Others 13,468 4,850 18,318 2,368 3,625Consolidation effects 124,541 29,444 153,985 30,760 43,185 (171,258) (17,099) (188,357) (39,734) (38,404) e. Realization of the deferred tax assets and basic judgment 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 June 30, 2011, the Group recognizes deferred income tax assets excluding certain temporary differences which may not be realized. The amount above may change if the estimation of future taxable income changes. 17. Provisions for Unused Loan Commitments The Group has loan commitments. Changes in provisions for unused loan commitments for the six- month periods ended June 30, 2011 and 2010, are as follows: (in millions of Korean won) Type 2011 2010 Beginning balance 46,624 26,416 Additional (Reversal) (33,513) 6,172 Ending balance 13,111 32,588 49
  • 52. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 201018. Derivative Financial Instruments and Hedge Accounting a. Trading derivatives Trading derivatives as of June 30, 2011 and December 31, 2010, are as follows:(in millions of Korean won) 2011 2010 Notional Notional Type principal Assets Liabilities principal Assets Liabilities 1 1 amounts amountsForward foreign 465 37 2 578 72 - exchange 1 Notional principal amounts are the amounts of foreign currency contracts for the Korean won against foreign currency transaction, and the amount of foreign currency purchase contracts for the foreign currency against the foreign currency transaction translated in the exchange rate as of June 30, 2010 and December 31, 2010. The Group recognized loss on trading derivatives of 37 million during the six-month period ended June 30, 2011. b. Derivatives designated as cash flow hedges Derivatives designated as cash flow hedges as of June 30, 2011 and December 31, 2010, are as follows:(in millions of Korean won) 2011 2010 Type Notional Notional principal Assets Liabilities principal Assets Liabilities amounts amountsInterest rate swaps 140,000 132 333 280,000 9 2,073Currency swaps 7,019,343 426,447 230,570 6,616,568 521,449 94,495 7,159,343 426,579 230,903 6,896,568 521,458 96,568 There is no ineffective portion recognized related to cash flow hedge for the six-months periods ended June 30, 2011 and 2010.19. Shareholders’ Equity a. Capital stock The Company is authorized to issue 500,000,000 shares. As of June 30, 2011, the Company has 99,307,435 shares issued and outstanding with a par value of 5,000 per share. 50
  • 53. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 b. 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. c. Discretionary reserve The Company appropriates a reserve in accordance with Electronic Financial Transactions Act and a reserve for business rationalization in accordance with Restriction of Special Taxation Act. d. Legal reserve and discretionary reserve Legal reserve and discretionary reserve as of June 30, 2011 and December 31, 2010 are as follows: (in millions of Korean won) Type 2011 2010 Legal reserve Revenue reserve 79,700 48,914 Reserve for electronic financial 100 100 Discretionary transactions reserve Reserve for business rationalization 74 74 174 174 Unappropriated retained earnings (Expected reserve for bad loans 2011: 203,339million 1,569,916 1,350,925 2010: 208,187million) 1,649,790 1,400,013 e. Reserve for bad loans If allowances for doubtful accounts do not meet the minimum amount calculated in accordance with allowance reserve standards of Regulation on Supervision under the Specialized Credit Financial Business Law Article 11, the Group appropriates a reserve for bad loans in an amount more than the difference between the allowance and the requirement. (1) Appropriated and expected reserves for bad loans as of June 30, 2011 and year ended December 31, 2010, are as follows: (in millions of Korean won) Type 2011 2010 Appropriated reserve for bad loans - - Expected reserve for bad loans 203,339 208,187 203,339 208,187 51
  • 54. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 (2) Reversal of reserve for bad loans and net income in consideration of effect of changes in reserve for bad loan for the six-month period ended June 30, 2011, are as follows: (in millions of Korean won) Type Amount Net income 354,049 1 Reversal of reserve for bad loans 4,848 Net income in consideration of changes in reserve 2 358,897 for bad loans Net income per share in consideration of changes in reserve for bad loans (In won) 3,614 1 Reversal of reserve for bad loans amounts are subtracted from balance of reserve for bad loans in 2011 to balance in 2011. 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 reversal of reserve for bad loans before income tax and net income.20. Net Interest Income Net interest income for the six-month periods ended June 30, 2011 and 2010, are as follows: (in millions of Korean won) Type 2011 2010 Interest income Cash and deposits 18,848 12,279 Loans receivable 746,382 636,055 Installment financial assets 220,978 250,813 Lease receivables 77,926 61,063 Other 254 682 1,064,388 960,892 Interest expenses Borrowings 51,680 54,315 Debentures 399,567 363,736 Other 26,661 20,981 477,908 439,032 586,480 521,860 52
  • 55. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 201021. Net Commission Income Net commission income for the six-month periods ended June 30, 2011 and 2010, are as follows: (in millions of Korean won) Type 2011 2010 Commission income Loans receivable 26,955 21,068 Installment financial assets 3,311 3,599 Lease receivables 56,563 37,076 86,829 61,743 Commission expenses Lease expenses 27,916 19,354 Other 7,360 8,041 35,276 27,395 51,553 34,34822. General and Administrative Expenses General and administrative expenses for the three-month and the six-month periods ended June 30, 2011 and 2010, are as follows: (in millions of Korean won) 2011 2010 Type Three months Six months Three months Six months Payroll 25,888 52,097 25,540 45,636 Severance benefits 3,597 6,119 2,360 4,728 Fringe benefits 7,790 16,524 7,762 16,040 Depreciation 5,604 10,843 4,882 9,680 Advertising 9,068 18,150 24,051 32,789 Travel and transportation 1,055 2,026 1,096 1,794 Communication 3,180 6,461 3,125 6,043 Water, lighting and heating 2,110 4,390 1,826 4,287 Commission 4,866 8,576 4,497 7,650 Sales commission 14,088 38,841 19,628 33,695 Amortization 2,035 3,892 2,025 3,862 Outsourcing service charges 16,585 32,499 15,728 30,819 Rent 9,630 17,927 8,372 16,172 Other expenses 22,495 42,832 18,529 29,019 127,991 261,177 139,421 242,214 53
  • 56. Hyundai Capital Services, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements June 30, 2011 and 2010, and December 31, 2010 23. Earnings Per Share a. Basic earnings per share Basic earnings per share attributable to common stock for the three-month and the six-month periods ended June 30, 2011 and 2010, follows: 2011 2010 Type Three months Six months Three months Six months(1) Net income attributable 208,924,894,050 354,048,916,718 120,845,015,793 275,651,441,186 to common stock (In won)(2) Weighted average of number of outstanding 99,307,435 99,307,435 99,307,435 99,307,435 common shares(3) Basic earnings per share (In won) (1)÷(2) 2,104 3,565 1,217 2,776 b. Diluted earnings per share As there was no discontinued operation during the six-month periods ended June 30, 2011 and 2010, basic earnings per share is the same as basic earnings per share from continuing operations. There are no potential common stocks as of June 30, 2011 and 2010. Therefore, the diluted earnings per share is the same as basic earnings per share for six-month periods ended June 30, 2011 and 2010. 24. Other Comprehensive Income Other comprehensive income for the six-month periods ended June 30, 2011 and 2010, consists of: (in millions of Korean won) 2011 Changes Reclassifi- Income Beginning Ending Type cation of Other tax balance balance profit or changes effects loss Gain on valuation of 512 (661) 140 114 105 available-for-sale financial assets Accumulated 24 - 47 (62) 9 comprehensive expense of equity method investees Loss on valuation of (67,924) 5,919 29,833 (8,143) (40,315) derivatives Loss on exchange 17 - (176) - (159) differences of foreign operations (67,371) 5,258 29,844 (8,091) (40,360) 54
  • 57. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 (in millions of Korean won) 2010 Changes Reclassifi- Income Beginning Ending Type cation of Other tax balance balance profit or changes effects loss Gain(Loss) on valuation of available-for-sale (1,835) - 1,309 (285) (811) financial assets Accumulated comprehensive (69) - 19 (84) (134) expense of equity method investees Loss on valuation of (3,566) (2,183) (59,892) 12,870 (52,771) derivatives Loss on exchange differences of foreign - - 22 - 22 operations (5,470) (2,183) (58,542) 12,501 (53,694)25. Cash Flow Statement a. Cash and cash equivalents Cash and cash equivalents in cash flow statements consisting of cash in hand, deposits and short- term money-market instruments as of June 30, 2011 and December 31, 2010, follows: (in millions of Korean won) Type 2011 2010 Cash 4 4 Ordinary deposits 169,369 182,321 Current deposits 2,606 3,241 Short-term financial instruments 1,210,800 1,039,300 1,382,779 1,224,866 55
  • 58. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 b. Cash generated from operations Cash generated from operations for the six-month periods ended June 30, 2011 and 2010, are as follows:(in millions of Korean won) Type 2011 2010Net income 354,049 275,651Adjustments Net interest expenses 458,819 426,290 Income tax 108,503 90,948 Gain on disposal of available-for-sale financial (2,084) (908) assets Gain on loan receivables (21,784) (31,641) Gain on installment financing (48,436) (50,928) Gain on leased assets (609) (385) Gain on foreign exchange translations (244,804) (134,851) Dividends (3,251) (3,680) Gain on valuation of derivatives (73,016) (240,487) Other operating income (33,519) (18) Gain on equity method valuation (4,749) (6,506) Lease expenses 187,616 252,731 Bad debts expense 139,425 34,374 Loss on foreign exchange translations 73,024 239,378 Severance benefits 6,113 4,686 Depreciation 10,843 9,680 Amortization of intangible assets 3,892 3,862 Loss on valuation of derivatives 244,820 134,468 Other operating expenses 16 6,173 Loss on equity method valuation - 243 800,819 733,429Changes in operating assets and liabilities Decrease (Increase) in available-for-sale financial 1,543 (345) assets (Increase) in loan receivables (811,970) (532,173) Decrease in installment financing receivables 129,938 185,133 (Increase) in finance lease receivables (437,699) (383,676) Decrease in canceled leased receivables 3,710 2,562 (Increase) in operating leased assets (76,644) (201,845) Decrease in canceled leased assets 111,970 72,478 Decrease in deferred loan origination fees and costs 52,277 74,602 Increase in present value discounts (22,398) (24,501) Increase in allowance for bad debts 58,860 63,722 Decrease(increase) in non-trade receivables (34) 12,405 Decrease in accrued revenues 4,306 1,292 (Increase) in advance payments (590) (14,890) 56
  • 59. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 (Increase) in prepaid expenses (7,442) (6,419) Decrease in derivative assets 21,192 45,547 Increase in non-trade payables 7,288 11,061 (Decrease) in accrued expenses (277) (1,023) Increase(decrease) in unearned revenue (3,976) 4,082 Increase in withholdings 4,943 4,721 Increase in leasehold deposits received 11,463 55,905 Payment of severance benefits (2,923) (3,598) Decrease(increase) in plan assets (1,884) 1,969 Transfer of severance benefits from related parties 1,405 1,110 Transfer of severance benefits to related parties (1,193) (1,067) (Decrease) in derivative liabilities (14,789) (25,015) (972,924) (657,963) 181,944 351,117 c. Investing and financing activities not affecting cash flows Significant investing and financing activities not affecting cash flows for the six-month periods ended June 30, 2011 and 2010, are as follows: (in millions of Korean won) Type 2011 2010 Transferred from construction in progress to intangible assets 6,440 7,250 Transferred from construction in progress to 19 - fixture and furniture Transferred from construction in progress to 259 - other tangible assets Transferred to legal reserve 30,785 20,358 57
  • 60. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 201026. Commitments and Contingencies a. Credit Line Agreement Details of credit line agreements of the Group as of June 30, 2011, and December 31, 2010, are as follows: (in millions of Korean won) Type Financial institutions 2011 2010 Limit of overdraft Shinhan Bank and 3 other banks 51,500 51,500 Limit of daily loan SC Jeil Bank and 2 other banks 45,000 49,400 Limit of purchasing Woori Bank and 2 other banks 300,000 310,000 commercial paper Limit of credit line (SPC) Korea Development Bank 10,000 61,200 406,500 472,100 b. Credit Facility Agreement The Group has revolving credit facility agreements with several financial institutions as of June 30, 2011 and December 31, 2010. Details of credit facility agreements are as follows: (in millions of Korean won) Financial institutions 2011 2010 1 Euro currency for Euro currency for GE Capital Corporation a USD 1 billion a USD 1 billion Mizuho Corporate Bank, Seoul Branch 65,000 65,000 JPMorgan, Seoul Branch 80,000 34,000 2 Citibank, Seoul 50,000 50,000 Standard Chartered, Seoul Branch 50,000 50,000 Societe Generale, Seoul Branch 55,000 - Bank of China, Seoul Branch 30,000 - DBS Bank, Seoul Branch 50,000 - 1 GE Capital Corporation (the “GECC”) and Hyundai Motor Company entered into a support agreement which includes the provision of debt-to-equity swap for the unredeemed amount and the put/call option of the converted stocks. Comprehensive limit including overdraft of ₩ 10 billion. 2 There has been no usage of the above credit facility agreements as of June 30, 2011 and December 31, 2010. 58
  • 61. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 c. Guarantees Details of guarantees involving third parties as of June 30, 2011, and December 31, 2010, are as follows: (in millions of Korean won) Guarantor Details 2011 2010 Hyundai Motor Joint liabilities on finance lease 1 1,278 3,092 Company receivables Joint liabilities on machinery Hyundai Wia installment financing receivables 1 5,228 14,730 Seoul Guarantee Guarantee for debt collection deposit, 197,367 204,560 Insurance Co., Ltd. others 1 The amounts represent the guaranteed balances as of June 30, 2011 and December 31, 2010, as defined under the joint liability agreement. The Group carries residual value guarantee insurance with Hyundai Marine & Fire Insurance Co., Ltd. against loss in case unredeemed mortgage loans exceed recoverable amount from the collateral of the loans. The receivables balance carried insurance and residual value guaranteed by insurance as of June 30, 2011 and December 31, 2010, are as follows: (in millions of Korean won) Type 2011 2010 Receivables balance 941,925 1,102,921 The amount of residual value guaranteed by 300,609 369,321 insurance d. Pending significant litigations Details of pending significant litigations involving the Group as of June 30, 2011, are as follows: (in millions of Korean won) Type Number of litigations Amount of litigations Plaintiff 3 1,140 Defendant - - In addition, the Group has filed lawsuits against a number of debtors to collect receivables. As of report date, the outcome of these cases cannot be reasonably determined and no adjustments are reflected on the financial statements of the Group as of June 30, 2011. 59
  • 62. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 201027. Related Party Transactions a. Relationships between parents and subsidiaries 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. b. Transaction between related parties Significant transactions, which occurred in the normal course of business with related companies for the six-month periods ended June 30, 2011 and 2010, are as follows: (in millions of Korean won) 2011 2010 Purchases Disposal Purchases Disposal Parent Company Hyundai Motor Company 503,170 - 474,155 - Others Kia Motors Corp. 118,152 - 149,750 - Hyundai Card Co., Ltd. 61,859 - 30,020 - Hyundai Commercial 10,729 - 3,333 - Other related parties 666 35,720 2,735 30,374 191,406 35,720 185,838 30,374 694,576 35,720 659,993 30,374 Revenues and expenses arising from transactions with related parties for the three-month and the six-month periods ended June 30, 2011 and 2010, and receivables and payables as of June 30, 2011 and December 31, 2010, are as follows: (in millions of Korean won) 2011 2010 Receivables Payables Receivables Payables Parent Company Hyundai Motor Company 4,881 5,816 5,188 9,662 Others Kia Motors Corp. 309 8,252 422 10,643 Hyundai Card Co., Ltd. 1,815 151,280 1,681 106,061 Hyundai Commercial 161 4,293 24 2,346 Other related parties 3,534 - 2,939 10 5,819 163,825 5,066 119,060 10,700 169,641 10,254 128,722 60
  • 63. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 (in millions of Korean won) 2011 Revenues Expenses three months six months three months six monthsParent Company Hyundai Motor Company 4,964 10,168 291 1,155Others Kia Motors Corp. - - 1,151 1,284 Hyundai Card Co., Ltd. 5,775 12,005 3,946 6,358 Hyundai Commercial 263 490 164 273 Other related parties 1,453 2,387 9,309 17,572 7,491 14,882 14,570 25,487 12,455 25,050 14,861 26,642 (in millions of Korean won) 2010 Revenues Expenses three months six months three months Six monthsParent Company Hyundai Motor Company 7,230 15,786 217 1,513Others Kia Motors Corp. 1,048 3,323 167 224 Hyundai Card Co., Ltd. 2,882 9,153 3,188 9,282 Hyundai Commercial 157 318 83 461 Other related parties 835 1,598 11,739 20,639 4,922 14,392 15,177 30,606 12,152 30,178 15,394 32,119 The Group has been provided with a credit facility by GECC (Note 26). c. Key management compensation Compensation for key management for the six-month periods ended June 30, 2011 and 2010, consists of: (in millions of Korean won) Type 2011 2010 Short-term employee benefits 3,824 1,794 Severance benefits 1,206 495 The key management above consists of directors (including nonpermanent directors), who have significant authority and responsibilities for planning, operating and controlling the Group. 61
  • 64. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 201028. 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.28.1 Credit risk a. Exposure to credit risk Exposures to credit risk as of June 30, 2011 and December 31, 2010, are as follows: (in millions of Korean won) Type 2011 2010 Cash and deposits 1,382,798 1,224,887 Available-for-sale securities 3,944 3,372 Loans receivable 10,853,019 10,218,438 Installment financial assets 4,927,198 5,056,782 Non-trade receivables 39,890 39,869 Accrued revenue 107,864 111,806 1 Advance payments 36,783 34,092 Leasehold deposits 34,474 31,955 Derivative assets 426,616 521,530 Unused loan commitments 1,052,779 1,071,419 20,963,355 20,092,588 1 Some parts of advance payments for customers b. Credit quality of financial assets Credit quality of financial assets exposed to credit risk as of June 30, 2011 and December 31, 2010, follows: 62
  • 65. Hyundai Capital Services, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements June 30, 2011 and 2010, and December 31, 2010(in millions of Korean won) 2011 2010 Type Normal Past due Impaired Normal Past due ImpairedCash and deposits 1,382,798 - - 1,224,887 - -Available-for- sale 3,944 - - 3,372 - - securitiesFinancial receivables Loans receivable 10,056,565 713,746 82,708 9,638,971 499,519 79,948 Installment 4,711,431 211,741 4,026 4,881,495 168,567 6,720 financial assets Lease 2,024,066 68,109 5,815 1,724,271 51,037 3,130 receivables 16,792,062 993,596 92,549 16,244,737 719,123 89,798Non-trade 39,890 - - 39,869 - - receivablesAccrued revenue 107,864 - - 111,806 - -Advance 36,783 - - 34,092 - - paymentsLeasehold 34,474 - - 31,955 - - depositsDerivative assets 426,616 - - 521,530 - -Unused loan 1,052,779 - - 1,071,419 - - commitments 19,877,210 993,596 92,549 19,283,667 719,123 89,798 (1) Financial receivables neither past due nor impaired Credit quality according to internal credit rating of financial receivables which are neither past due nor impaired as of June 30, 2011 and December 31, 2010, are as follows: (in millions of Korean won) 2011 2010 Type Gross amount Allowance Book value Gross amount Allowance Book valueFirst-rate 2,489,791 (1,521) 2,488,270 1,398,614 (598) 1,398,016Second-rate 5,046,286 (9,442) 5,036,844 4,973,898 (7,823) 4,966,075Third-rate 5,808,910 (36,174) 5,772,736 6,200,694 (32,099) 6,168,595Fourth-rate 927,422 (16,307) 911,115 1,002,305 (16,129) 986,176Fifth-rate 1,038,643 (36,730) 1,001,913 986,277 (32,422) 953,835Sixth-rate 522,031 (55,014) 467,017 485,733 (51,885) 433,848No rating 1,135,921 (21,754) 1,114,167 1,360,428 (22,236) 1,338,192 16,969,004 (176,942) 16,792,062 16,407,949 (163,212) 16,244,737 The Group classifies financial receivables into six internal credit rating based on the rating criteria and the characteristic of receivables. Some financial receivables have no rating due to lack of analytical data or are being managed separately. 63
  • 66. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 (2) Financial receivables past due but not impaired Financial receivables past due but not impaired as of June 30, 2011 and December 31, 2010, are as follows:(in millions of Korean won) 2011 Less than Between Between Types Total 1 month 1 ~ 2 months 2~3 monthsLoans receivable 615,440 84,712 47,467 747,619Installment financial assets 200,310 11,326 3,938 215,574Lease receivables 64,026 4,312 1,468 69,806 879,776 100,350 52,873 1,032,999 Allowance (19,164) (7,174) (13,065) (39,403) Carrying amount 860,612 93,176 39,808 993,596 (in millions of Korean won) 2010 Less than Between Between Types Total 1 month 1 ~ 2 months 2~3 monthsLoans receivable 426,165 62,167 35,782 524,114Installment financial assets 158,040 10,620 3,179 171,839Lease receivables 47,422 2,978 1,877 52,277 631,627 75,765 40,838 748,230 Allowance (14,104) (5,427) (9,576) (29,107) Carrying amount 617,523 70,338 31,262 719,123 64
  • 67. Hyundai Capital Services, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements June 30, 2011 and 2010, and December 31, 2010 (3) Impaired financial receivables (in millions of Korean won) 2011 2010 Type Gross amount Allowance Book value Gross amount Allowance Book valueLoans receivable 160,117 (77,409) 82,708 138,877 (58,929) 79,948Installment 10,911 (6,885) 4,026 12,623 (5,903) 6,720 financial assetsLease receivables 13,280 (7,465) 5,815 11,355 (8,225) 3,130 184,308 (91,759) 92,549 162,855 (73,057) 89,798 (4) Credit quality of other assets Credit quality according to external credit rating of other assets except for financial receivables which are neither past due nor impaired as of June 30, 2011 and December 31, 2010, are as follows: (in millions of Korean won) 1 Cash and deposits 2011 2010 AAA 775,632 767,370 AA+ 30,799 11,384 AA 280,000 140,000 AA- 60,000 95,000 A+ 205,328 190,257 A 30,534 462 A- - 20,000 No rating 505 414 1,382,798 1,224,887 1 The average external credit rating of three domestic credit rating agencies is used. (in millions of Korean won) 2 Derivative assets 2011 2010 AA 13,995 19,326 AA- 85,956 93,379 A+ 220,316 267,891 A 93,895 123,027 BBB+ 12,454 17,907 426,616 521,530 2 Derivative assets are classified based on S&P credit rating. Credit quality of other assets except for financial receivables according to borrowers’ past due information as of June 30, 2011 and December 31, 2010, are as follows: 65
  • 68. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 (in millions of Korean won) Accrued revenue 2011 2010 3 Group 1 98,606 102,482 4 Group 2 9,258 9,324 107,864 111,806 3 Group 1: The borrowers have not experienced impairments in the past. 4 Group 2: The borrowers have experienced impairments in the past. (in millions of Korean won) Unused loan commitments 2011 2010 Group 1 1,052,776 1,071,419 Group 2 3 - 1,052,779 1,071,419 c. Assets pledges as collateral The assets pledged as collateral for financial receivables as of June 30, 2011 and December 31, 2010, are as follows: (in millions of Korean won) 2011 Unimpaired Type Impaired Total Delinquent Non-delinquent Total financial receivables 92,549 993,596 16,792,062 17,878,207 Collateralized assets Collateralized 39,208 443,972 4,623,554 5,106,734 vehicles Collateralized real 747 6,341 129,634 136,722 estate 39,955 450,313 4,753,188 5,243,456 (in millions of Korean won) 2010 Unimpaired Type Impaired Total Delinquent Non-delinquent Total financial receivables 89,798 719,123 16,244,737 17,053,658 Collateralized assets Collateralized 25,585 335,539 4,577,950 4,939,074 vehicles Collateralized 328 2,739 127,709 130,776 real estate 25,913 338,278 4,705,659 5,069,850 66
  • 69. Hyundai Capital Services, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements June 30, 2011 and 2010, and December 31, 2010 d. Credit risk concentration Credit risk concentration of financial receivables by debtors as of June 30, 2011 and December 31, 2010, are as follows: (in millions of Korean won) 2011 2010 Type Including Including Ratio Allowance Book value Ratio Allowance Book value allowance allowanceIndividual 15,449,118 84.9% (277,342) 15,171,776 14,902,141 86.0% (236,824) 14,665,317Corporate Finance 41,784 0.2% (290) 41,494 38,098 0.2% (296) 37,802 Manufac- 838,215 4.6% (9,973) 828,242 737,970 4.3% (10,444) 727,526 turing Service 826,858 4.6% (8,226) 818,632 721,722 4.2% (6,854) 714,868 Public 8,304 0.1% (26) 8,278 6,270 0.1% (54) 6,216 Others 1,022,031 5.6% (12,246) 1,009,785 912,833 5.2% (10,904) 901,929 2,737,192 15.1% (30,761) 2,706,431 2,416,893 14.0% (28,552) 2,388,341 18,186,310 100.0% (308,103) 17,878,207 17,319,034 100.0% (265,376) 17,053,658 28.2 Liquidity risk Cash flows of financial liabilities based on remaining contractual maturities as of June 30, 2011 and December 31, 2010, are as follows: (in millions of Korean won) 2011 Immediate 1 Type Up to 1 year 1 to 5 years Over 5 years Total payment Borrowings - 1,507,950 490,452 - 1,998,402 Debentures - 5,397,129 10,338,734 1,560,765 17,296,628 Other liabilities 5,133 435,358 640,539 8 1,081,038 Net settlement derivative - 484 (13) - 471 liabilities Gross settlement derivative liabilities Cash inflow - (949,210) (2,535,126) (771,178) (4,255,514) Cash outflow 2 1,058,393 2,727,040 810,031 4,595,466 5,135 7,450,104 11,661,626 1,599,626 20,716,491 67
  • 70. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 (in millions of Korean won) 2010 Immediate 1 Type Up to 1 year 1 to 5 years Over 5 years Total paymentBorrowings - 2,154,878 557,869 - 2,712,747Debentures - 4,687,022 10,882,286 408,872 15,978,180Other liabilities 4,545 513,232 548,020 - 1,065,797Net settlement derivative - 2,564 (68) - 2,496 liabilitiesGross settlement derivative liabilities Cash inflow - (410,299) (1,565,978) - (1,976,277) Cash outflow - 440,274 1,644,488 - 2,084,762 4,545 7,387,671 12,066,617 408,872 19,867,705 The above amounts including the principal and future interest payments are contractual undiscounted cash flows and are not equal to the amounts of statement of financial position based on the discounted cash flows. The unused agreement of limited loan products amounts to maximum of 1,052,779 million as of June 30, 2011 (2010: 1,071,419 million). The unused loan agreement above might be paid immediately on customers’ request.28.3 Market risk a. Interest rate risk The Group manages the interest rate risk through Value at Risk(VaR), Earning 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 as of June 30, 2011 and December 31, 2010, follows: (in millions of Korean won) Type 2011 2010 Interest rate VaR 121,077 78,614 68
  • 71. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 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. Foreign exchange position exposures of the Group as of June 30, 2011 and December 31, 2010, are as follows: (in millions of Korean won) Currency 2011 2010 USD 3,926,619 3,802,170 EUR 1,023,774 991,452 MYR 708,899 497,145 JPY 467,492 514,125 CHF 840,600 426,304 Others 53,703 150,709 7,021,087 6,381,905 The Group’s exposure to foreign exchange risk is hedged by derivatives. Therefore, foreign exchange risk of the Group is not significant.28.4 Capital risk management The objective of the Group’s capital management is to maintain sound capital structure. The Group uses adjusted capital adequacy ratio under the regulation on Supervision of Specialized Credit Financial Business Law as a capital management indicator. This ratio is calculated as adjusted total asset divided by adjusted equity. 69
  • 72. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 Adjusted capital adequacy ratio of the Group as of June 30, 2011 and December 31, 2010, are as follows: (in millions of Korean won) Type 2011 2010 Adjusted total asset (1) 19,943,394 19,295,545 Adjusted equity (2) 2,515,509 2,227,114 Adjusted capital adequacy ratio (2)÷(1) 12.61% 11.54% The above adjusted capital adequacy ratio is calculated according to Supervision of Specialized Credit Financial Business Law.29. Segment Information Management has determined the operating segments based on the management’s reports in conformity with nature of goods and services. Operating segments are segregated into auto financing service and other service. Operating segments Description Auto financing service Assets, liabilities, incomes and expenses from auto installment segment financing and auto leasing Assets, liabilities, incomes and expenses from personal loan Other service segment and mortgage installment financing other than auto related products. Segments’ assets and profits or losses are measured by management accounting policies of the Group. Non-operating and nonrecurring incomes/expenses are not classified into segments, but only financial receivables are allocated into operating segments. 70
  • 73. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010 Segment information for the six-month periods ended June 30, 2011 and 2010, follows:(in millions of Korean won) 2011 Unallocated Financial Type Auto Others Total others statementsOperating revenue Interest income 752,929 309,749 1,062,678 Non-interest 476,270 49,836 526,106 income 1,229,199 359,585 1,588,784 372,854 1,961,638Operating expenses Interest expenses (334,405) (74,438) (408,843) Non-interest (648,440) (172,283) (820,723) expenses (982,845) (246,721) (1,229,566) (274,269) (1,503,835)Segment operating 246,354 112,864 359,218 98,585 457,803 profits(pre-tax) 2Segment assets Loans receivable 7,942,281 2,415,085 10,357,366 862,069 11,219,435 Installment 4,999,710 898,609 5,898,319 (857,565) 5,040,754 financial assets Lease 2,041,079 8,525 2,049,604 71,533 2,121,137 Receivables 14,983,070 3,322,219 18,305,289 76,037 18,381,326 1 Unallocated and reclassification •Income and expense unallocated – Income/expenses related to interest income on bank deposits, foreign exchange translation, derivatives and others. •Assets unallocated – Initial direct cost for finance lease receivables, cancelled lease receivables and others 2 Loan principal and present value discounts 71
  • 74. Hyundai Capital Services, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsJune 30, 2011 and 2010, and December 31, 2010(in millions of Korean won) 2010 Unallocated Financial Type Auto Others Total others statementsOperating revenue Interest income 697,138 252,451 949,589 Non-interest 432,750 45,129 477,879 income 1,129,888 297,580 1,427,468 367,356 1,794,824Operating expenses Interest expenses (353,595) (80,789) (434,384) Non-interest (534,701) (119,424) (654,125) expenses (888,296) (200,213) (1,088,509) (345,979) (1,434,488)Segment operating 241,592 97,367 338,959 21,377 360,336 profits(pre-tax) 2Segment assets Loans receivable 6,373,299 1,845,264 8,218,563 1,194,807 9,413,370 Installment 4,602,887 1,290,692 5,893,579 (1,198,554) 4,695,025 financial assets Lease 1,479,514 24,606 1,504,120 59,575 1,563,695 Receivables 12,455,700 3,160,562 15,616,262 55,828 15,672,090 72

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