Audit Report: Hyundai Commercial 3Q2011

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  • 1. Hyundai Commercial, Inc. andSubsidiariesInterim Consolidated Financial StatementsSeptember 30, 2011
  • 2. Hyundai Commercial, Inc. and SubsidiariesIndexSeptember 30, 2011Report on Review of Interim Financial Statements ..........................................................................1-2Interim Consolidated Financial StatementsInterim Consolidated Statements of Financial Position .........................................................................3-5Interim Consolidated Statements of Comprehensive Income................................................................6-7Interim Consolidated Statements of Changes in Shareholders’ Equity ................................................ 8-9Interim Consolidated Statements of Cash Flows ....................................................................................10Notes to the Interim Consolidated Financial Statements...................................................................11-63
  • 3. Report on Review of Interim Financial StatementsTo the Shareholders and Board of Directors ofHyundai Commercial, Inc.Reviewed Financial StatementsWe have reviewed the accompanying interim consolidated financial statements of HyundaiCommercial, Inc. (the Company) and subsidiaries. These financial statements consist of theconsolidated statement of financial position of the Company and subsidiaries as of September30, 2011, and the related consolidated statements of comprehensive income for the three-month and the nine-month periods ended September 30, 2011, and statements of changes inequity and cash flows for the nine-month period ended September 30, 2011, and a summaryof significant accounting policies and other explanatory notes, expressed in Korean won.Managements Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these interimconsolidated financial statements in accordance with the International Financial ReportingStandards as adopted by the Republic of Korea (Korean IFRS) 1034, Interim FinancialReporting, and for such internal control as management determines is necessary to enablethe preparation of interim consolidated financial statements that are free from materialmisstatement, whether due to fraud or error.Auditors ResponsibilityOur responsibility is to issue a report on these interim consolidated financial statements basedon our review.We conducted our review in accordance with the quarterly and semi-annual review standardsestablished by the Securities and Futures Commission of the Republic of Korea. A review ofinterim financial information consists of making inquiries, primarily of persons responsible forfinancial and accounting matters, and applying analytical and other review procedures. Areview is substantially less in scope than an audit conducted in accordance with auditingstandards generally accepted in the Republic of Korea and consequently does not enable usto obtain assurance that we would become aware of all significant matters that might beidentified in an audit. Accordingly, we do not express an audit opinion. 1
  • 4. ConclusionBased on our review, nothing has come to our attention that causes us to believe theaccompanying interim consolidated financial statements do not present fairly, in all materialrespects, in accordance with the Korean IFRS 1034, Interim Financial Reporting.Emphasis of MatterWithout qualifying our opinion, as mentioned in Note 2, we draw attention to the fact thatthese interim consolidated financial statements are prepared in accordance with Korean IFRSand the interpretations which are effective as of this report date. Therefore, there may bechanges in the Korean IFRS and related interpretations adopted in the preparation of theseconsolidated financial statements when Company prepares its first full Korean IFRS financialstatements.OthersThe consolidated statement of financial position as of December 31, 2010, and the relatedconsolidated statements of comprehensive income for the three-month and the nine-monthperiods ended September 30, 2010, and statements of changes in equity and cash flows forthe nine-month period ended September 30, 2010, presented herein for comparativepurposes, were not reviewed.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, KoreaNovember 25, 2011 This report is effective as of November 25, 2011, the review report date. Certain subsequent events or circumstances, which may occur between the review report date and the time of reading this report, could have a material impact on the accompanying interim consolidated financial statements and notes thereto. Accordingly, the readers of the review report should understand that there is a possibility that the above review report may have to be revised to reflect the impact of such subsequent events or circumstances, if any. 2
  • 5. Hyundai Commercial, Inc. and SubsidiariesInterim Consolidated Statements of Financial PositionSeptember 30, 2011 and December 31, 2010(In Korean won) September 30, December 31, 2011 2010 (Non-reviewed) Assets Cash and deposits Cash and cash equivalents (Note 24) 218,105,096,125 99,938,403,013 Deposits (Note 4) 11,500,000 11,500,000 218,116,596,125 99,949,903,013 Securities (Note 5) Available-for-sale securities 19,200,000,000 17,657,945,000 Equity method investment 145,266,553,556 133,160,973,077 164,466,553,556 150,818,918,077 Loans receivable (Notes 6 and 7) Factoring 1,625,298,851 1,185,464,975 Allowance for doubtful accounts (18,665,309) (15,550,313) Loans 2,315,431,842,907 1,789,237,279,462 Allowance for doubtful accounts (18,909,932,635) (12,780,139,160) 2,298,128,543,814 1,777,627,054,964 Installment financial assets (Notes 6 and 7) Auto installment financing receivables 427,813,157,856 487,175,195,698 Allowance for doubtful accounts (3,182,159,852) (3,055,399,069) Durable goods installment financing receivables 74,628,123,313 81,485,373,499 Allowance for doubtful accounts (516,413,946) (553,627,898) 498,742,707,371 565,051,542,230 Lease receivables (Notes 6, 7 and 9) 72,741,134,268 40,950,640,964 Property and equipment (Note 10) Vehicles 129,646,100 119,066,527 Fixtures and furniture 1,984,541,538 1,986,277,290 Others 410,999,664 410,999,664 2,525,187,302 2,516,343,481 3
  • 6. Hyundai Commercial, Inc. and SubsidiariesInterim Consolidated Statements of Financial PositionSeptember 30, 2011 and December 31, 2010(In Korean won) September 30, December 31, 2011 2010 (Non-reviewed) Other assets Intangible assets (Note 11) ₩ 2,516,565,361 ₩ 2,481,402,934 Non-trade receivables 33,810,976,180 39,739,949,691 Allowance for doubtful accounts (273,635,309) (279,400,536) Accrued revenues 16,189,936,027 13,110,214,431 Allowance for doubtful accounts (119,163,614) (93,573,786) Advance payments 778,132,273 770,372,440 Prepaid expenses 2,817,674,227 8,350,859,781 Leasehold deposits 9,035,008,747 7,233,368,763 Derivative assets (Note 17) 801,711,375 6,151,267,007 Others 4,206,566,420 5,319,566,420 69,763,771,687 82,784,027,145 Total assets ₩3,324,484,494,123 ₩2,719,698,429,874Liabilities and Shareholders’ EquityBorrowings Borrowings (Note 12) ₩ 791,324,613,619 ₩ 774,749,000,000 Debentures (Note 13) 1,859,042,348,791 1,504,362,479,869 Securitized debts (Note 14) 359,288,034,223 199,530,274,091 3,009,654,996,633 2,478,641,753,960Other liabilities Non-trade payables 8,976,922,344 4,345,884,784 Accrued expenses 20,095,614,922 22,977,718,513 Unearned revenue 4,687,160,341 2,897,710,421 Advances 151,325,169 216,279,513 Withholdings 3,544,125,001 2,809,860,961 Accrued income taxes 9,523,430,123 10,125,301,190 Defined benefit liability (Note 15) 3,209,275,173 1,681,174,959 Leasehold deposits received 13,133,759,946 2,824,085,004 Deferred income tax liabilities (Note 16) 13,541,654,518 8,472,287,159 Derivative liabilities (Note 17) 2,424,486,286 4,088,617,272 79,287,753,823 60,438,919,776 Total liabilities 3,088,942,750,456 2,539,080,673,736 4
  • 7. Hyundai Commercial, Inc. and SubsidiariesInterim Consolidated Statements of Financial PositionSeptember 30, 2011 and December 31, 2010(In Korean won) September 30, December 31, 2011 2010 (Non-reviewed)Shareholders equity Common stock (Notes 1 and 18) ₩100,000,000,000 ₩100,000,000,000 Accumulated other comprehensive income and expenses (Note 23) Loss on valuation of derivatives (2,087,104,429) (1,662,559,500) Gain on valuation of available-for-sale 7,077,033,132 2,180,056,816 securities Accumulated comprehensive income of equity (2,235,205,518) (1,379,778,772) method investee 2,754,723,185 (862,281,456) Retained earnings (Note 18) 132,767,200,482 81,470,127,594 Non-controlling interests 19,820,000 9,910,000 Total shareholders equity 235,541,743,667 180,617,756,138 Total liabilities and shareholders equity ₩3,324,484,494,123 ₩2,719,698,429,874 The accompanying notes are an integral part of these interim consolidated financial statements. 5
  • 8. Hyundai Commercial, Inc. and Subsidiaries Interim Consolidated Statements of Comprehensive Income Three-Month and Nine-Month Periods ended September 30, 2011 and 2010(In Korean won) Three months Nine months 2011 2010 2011 2010 (Non-reviewed) (Non-reviewed)Operating revenue Interest income ₩1,463,352,131 ₩ 488,395,025 ₩3,850,521,688 ₩1,563,100,490 Income on loans 63,099,307,058 42,813,465,180 176,904,907,139 108,672,193,977 Income on installment financial 14,604,672,104 16,948,539,741 46,079,748,476 49,050,140,997 receivables Income on leases 1,268,004,041 888,353,190 3,603,492,901 2,912,357,288 Gain on disposal of loans 698,180,192 42,335,462 1,815,211,113 467,311,435 Gain on foreign currency transactions Gain on foreign currency - 3,348,000,000 - transactions - Gain on foreign exchange - 6,327,500,000 - 3,765,500,000 translation - 6,327,500,000 3,348,000,000 3,765,500,000 Dividend income - - 300,000,000 - Other operating income Gain on valuation of derivatives 5,577,000,000 - 3,391,000,000 - Gain on disposal of securities 1,638,531,160 - 1,638,531,160 - Others 329,443,519 271,323,025 1,083,927,325 832,185,855 7,544,974,679 271,323,025 6,113,458,485 832,185,855 Total operating revenue 88,678,490,205 67,779,911,623 242,015,339,802 167,262,790,042Operating expenses Interest expenses 38,051,809,194 29,243,387,478 108,972,256,146 78,928,781,740 Bad debts expense (Note 7) 4,476,291,109 1,954,455,925 15,436,407,844 4,736,666,586 Loss on disposal of loans 428,685,968 1,178,070,180 715,160,437 1,833,478,780 Loss on foreign transactions Loss on foreign currency - - 1,962 - transactions Loss on foreign exchange 5,577,000,000 - 3,391,000,000 - translation 5,577,000,000 - 3,391,001,962 - General and administrative expenses 13,271,443,099 12,346,812,307 40,336,862,691 32,962,325,276 (Note 21) Other operating expenses Loss on valuation of derivatives - 6,327,500,000 - 3,765,500,000 Loss on derivatives transactions - - 3,348,000,000 - Others 984,033,880 147,796,878 2,533,236,714 1,069,465,243 984,033,880 6,475,296,878 5,881,236,714 4,834,965,243 Total operating expenses 62,789,263,250 51,198,022,768 174,732,925,794 123,296,217,625 Operating income 25,889,226,955 16,581,888,855 67,282,414,008 43,966,572,417 6
  • 9. Hyundai Commercial, Inc. and Subsidiaries Interim Consolidated Statements of Comprehensive Income Three-Month and Nine-Month Periods ended September 30, 2011 and 2010 (In Korean won) Three months Nine months 2011 2010 2011 2010 (Non-reviewed) (Non-reviewed)Non-operating income Gain on equity method valuation ₩ 4,542,225,051 ₩ 8,868,228,688 ₩13,202,281,435 ₩16,479,176,413 (Note 5)Non-operating expenses Donations - - - 1,197,915 Income before income taxes 30,431,452,006 25,450,117,543 80,484,695,443 60,444,550,915Income tax expense (Note 16) 6,212,784,801 4,950,947,410 19,187,622,555 13,412,241,785 Net income ₩24,218,667,205 ₩20,499,170,133 ₩61,297,072,888 ₩47,032,309,130Net income attributable to: Owners of the parent 24,218,667,205 20,499,170,133 61,297,072,888 47,032,309,130 Non-controlling interests - - - - 24,218,667,205 20,499,170,133 61,297,072,888 47,032,309,130Other comprehensive income,net of income taxes (Note 23) Gain (Loss) on valuation of (1,194,466,843) 874,942,583 (424,544,929) 951,057,432 derivatives Gain(Loss) on valuation of available-for-sale financial 1,060,345,650 302,917,227 4,896,976,316 174,217,227 securities Other comprehensive income of (531,244,953) (1,804,778,728) (855,426,746) (1,945,726,807) equity method investee (665,366,146) (626,918,918) 3,617,004,641 (820,452,148)Total comprehensive income ₩23,553,301,059 ₩19,872,251,215 ₩64,914,077,529 ₩46,211,856,982Total comprehensive income attributable to: Owners of the parent 23,553,301,059 19,872,251,215 64,914,077,529 46,211,856,982 Non-controlling interests - - - - 23,553,301,059 19,872,251,215 64,914,077,529 46,211,856,982Earnings per share attributable tothe ordinary equity holders of theParent Company (Note 22) Basic earnings per ₩ 1,211 ₩ 1,025 ₩ 3,065 ₩ 2,352 share (Note 22) The accompanying notes are an integral part of these interim consolidated financial statements. 7
  • 10. Hyundai Commercial, Inc. and Subsidiaries Interim Consolidated Statements of Changes in Shareholders’ Equity Nine-Month Periods ended September 30, 2011 and 2010 Accumulated Total(In Korean won) other attributable to Non- comprehensive Capital income and Retained owners of the controlling Capital stock surplus expenses earnings parent interests Total equityBalances as of January 1, 2010 100,000,000,000 (663,810,140) (1,931,396,310) 25,005,933,366 122,410,726,916 - 122,410,726,916Total comprehensive incomeNet income - - - 47,032,309,130 47,032,309,130 - 47,032,309,130Other comprehensive income Gain on valuation of derivatives - - 951,057,432 - 951,057,432 - 951,057,432 Gain on valuation of available-for- - - 174,217,227 - 174,217,227 - 174,217,227 sale securities Other comprehensive income of - - (1,945,726,807) - (1,945,726,807) - (1,945,726,807) equity method investeeTotal comprehensive income - - (820,452,148) 47,032,309,130 46,211,856,982 - 46,211,856,982Transactions with ownersDiscount on stock issuance - 663,810,140 - (663,810,140) - - -Establishment of special purpose - - - - - 9,910,000 9,910,000 entityOther - - - (13,520,488) (13,520,488) - (13,520,488)Total transactions with owners - 663,810,140 - (677,330,628) (13,520,488) 9,910,000 (3,610,488)Balances as of September 30, 2010 (Non-reviewed) 100,000,000,000 - (2,751,848,458) 71,360,911,868 168,609,063,410 9,910,000 168,618,973,410 8
  • 11. Hyundai Commercial, Inc. and Subsidiaries Interim Consolidated Statements of Changes in Shareholders’ Equity Nine-Month Periods ended September 30, 2011 and 2010 Accumulated(In Korean won) other Total attributable Non- comprehensive Capital income and Retained to owners of the controlling Capital stock surplus expenses earnings parent interests Total equityBalances as of January 1, 2011 100,000,000,000 - (862,281,456) 81,470,127,594 180,607,846,138 9,910,000 180,617,756,138Total comprehensive incomeNet income - - - 61,297,072,888 61,297,072,888 - 61,297,072,888Other comprehensive income Loss on valuation of derivatives - - (424,544,929) - (424,544,929) - (424,544,929) Gain on valuation of available-for- - - 4,896,976,316 - 4,896,976,316 - 4,896,976,316 sale securities Other comprehensive income of - - (855,426,746) - (855,426,746) - (855,426,746) equity method investeeTotal comprehensive income - - 3,617,004,641 61,297,072,888 64,914,077,529 - 64,914,077,529Transactions with ownersEstablishment of special purpose - - - - - 9,910,000 9,910,000 entityDividends - - - (10,000,000,000) (10,000,000,000) - (10,000,000,000)Total transactions with owners - - - (10,000,000,000) (10,000,000,000) 9,910,000 (9,990,090,000)Balances as of September 30, 2011 100,000,000,000 - 2,754,723,185 132,767,200,482 235,521,923,667 19,820,000 235,541,743,667 The accompanying notes are an integral part of these interim consolidated financial statements. 9
  • 12. Hyundai Commercial, Inc. and Subsidiaries Interim Consolidated Statements of Cash Flows Nine-Month Periods ended September 30, 2011 and 2010 (In Korean won) 2011 2010 (Non-reviewed)Cash flows from operating activitiesCash generated from operations (Note 24) (289,762,803,517) (577,953,544,447)Interest received 3,714,417,543 1,198,424,342Interest paid (106,489,312,810) (74,722,178,964)Dividends received 300,000,000 -Income taxes paid (15,721,051,020) (4,519,840,107)Net cash used in operations (407,958,749,804) (655,997,139,176)Cash flows from investing activitiesDisposal of available-for-sale securities 6,293,531,160 345,000,000Acquisition of available-for-sale securities - (10,126,880,600)Dividends from equity method investment - 5,778,254,300Disposal of vehicles 27,020,000 -Acquisition of vehicles (79,715,188) -Acquisition of fixtures and furniture (949,359,799) (681,383,816)Acquisition of intangible assets (138,324,876) (967,600,200)Decrease in leasehold deposits - 29,532,250Increase in leasehold deposits (2,036,847,000) (288,400,000)Disposal of other investment assets - 25,000,000Net cash provided by(used in) investing activities 3,116,304,297 (5,886,478,066)Cash flows from financing activitiesProceeds from borrowings 649,994,814,251 1,271,400,000,000Repayments of borrowings (633,419,200,632) (1,204,650,000,000)Issuance of debentures 600,707,289,400 649,970,000,000Repayments of debentures (243,740,000,000) (243,787,502,430)Issuance of securitized debts 199,456,325,600 249,316,692,300Repayments of securitized debts (40,000,000,000) (20,000,000,000)Cash inflows of transactions with subsidiaries 9,910,000 9,910,000Payments of dividends (10,000,000,000) -Net cash provided by financing activities 523,009,138,619 702,259,099,870Net increase in cash and cash equivalents 118,166,693,112 40,375,482,628Cash and cash equivalents Beginning of period 99,938,403,013 26,810,646,159 End of period 218,105,096,125 67,186,128,787 The accompanying notes are an integral part of these interim consolidated financial statements. 10
  • 13. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 20101. General Information Hyundai Commercial, Inc. (the Company) was established on March 27, 2007, by taking over all the assets, liabilities, rights and obligations related with the loans of the industrial product division of Hyundai Capital Services, Inc. and its installment financing and lease financing division. It is engaged in installment financing, and leasing of facilities. The Company’s operations are headquartered in Yeouido, Seoul. Its shareholders are as follows: Shareholders Ownership Hyundai Motor Company 50.00% Myung-yi Chung 33.33% Tae-young Chung 16.67% Total 100.00%2. Summary of Significant Accounting Policies The consolidated financial statements have been prepared and presented which included the accounts of Hyundai Commercial, Inc., as the parent company according to the Korean IFRS 1027, and Commercial Auto First trust and SPC and another subsidiary(collectively the “Group”), while Hyundai Card Co., Ltd. is accounted for under the equity method. Subsidiaries as of September 30, 2011 and December 31, 2010, are as follows. The Company has the substantial power over the subsidiaries established as special purpose entities for asset securitization even though its ownership interests over the subsidiaries do not exceed 50%. 2011 2010 Special Commercial Auto First Trust and SPC Commercial Auto First Trust and SPC Purpose Commercial Auto Second Trust and SPC Entities The Company’s interim consolidated financial statements are prepared in the Korean language (Hangul) in conformity with International Financial Reporting Standards as adopted by the Republic of Korea (“Korean IFRS”). The Company’s Korean IFRS transition date is January 1, 2010, and the adoption date is January 1, 2011. The interim consolidated financial statements are stated at historical cost unless otherwise stated in the notes. The reconciliations and descriptions of the effect of the transition from the consolidated financial statements of the Company prepared in accordance with accounting principles generally accepted in the Republic of Korea (“K-GAAP”) before the adoption date to Korean IFRS on the Company’s equity as of January 1, 2010, September 30, 2010, and December 31, 2010, its comprehensive income and cash flows for the nine-month period ended September 30, 2010 and year ended December 31, 2010, are provided in Note 3. 11
  • 14. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 The interim consolidated financial statements for the nine-month periods ended September 30, 2011 and 2010, have been prepared in accordance with Korean IFRS 1034. Because these interim consolidated financial statements are a part of financial statements prepared by Korean IFRS as of December 31, 2011, these are subject to Korean IFRS 1101, ‘First-time Adoption of Korean IFRS’. These interim consolidated financial statements have been prepared in accordance with the Korean IFRS standards and interpretations issued and effective at the reporting date. The Korean IFRS standards and interpretations that will be applicable at December 31, 2011, including those that will be applicable on an optional basis, are not known with certainty at the time of preparing these interim consolidated financial statements. The legislative and amended standards and interpretations the Group has not adopted earlier, which have been promulgated but are not yet effective for the fiscal year starting from January 1, 2011, are as follows. - Amendments to Korean IFRS 1101, ‘Deletion of Hyperinflation and the particular date’ (announced in December, 2010) The date of prospective application, the exceptions to retrospective application in derecognition of financial assets, has been changed from the particular date(January 1, 2004) to Korean IFRS transition date according to the amendment above. Therefore, derecognition transactions that occurred before the transition date are not restated in accordance with Korean IFRS. The modification is required to be adopted from July 1, 2011. - Amendments to Korean IFRS 1012, ‘Income Taxes’ If there is no disproof, investment property measured at fair value when measuring deferred income tax assets and liabilities should be measured in consideration of recovered tax effects by selling. This will be effective on January 1, 2011. - Amendments to Korean IFRS 1107, ‘Financial Instruments: Disclosures’ The financial assets transferred to counterparts but still remained in the financial statements are required to be disclosed in terms of the nature of the assets, the book value, the risks and rewards. If an entity is exposed to the particular risks and rewards on the derecognized financial assets, additional disclosures are required to the understand effects of the risks. The amendments are applicable from July 1, 2011. The following is a summary of significant accounting policies followed by the Group in the preparation of its consolidated financial statements. These policies have been consistently applied to all the periods presented, unless otherwise stated. 12
  • 15. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 20102.1 Consolidation a. Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Company has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are deconsolidated from the date that control ceases. The Group uses the acquisition method to account for business combinations. The consideration transferred is measured as the fair values of the assets transferred, equity interests issued and liabilities incurred or assumed at the acquisition date. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by- acquisition basis, the Group recognizes any non-controlling interest in the acquiree at the non- controlling interest’s proportionate share of the acquiree’s net assets. The excess of the consideration transferred and the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognized directly in the statement of comprehensive income. Intercompany transactions, balances and unrealized gains on transactions between Group companies are eliminated. b. Special purpose entities The Group established several SPEs for the purpose of asset-backed securitization, but owns none of the shares directly or indirectly. The Group consolidates the SPEs when the risks, rewards and substance of the relationship indicated that the Group consolidates the SPEs. SPEs controlled by the Group are created with conditions that impose strict limits on the decision-making power over the operations therefore the Group obtains all benefits from the SPEs’ operation and net assets, and that the Group may be exposed to risks incident to the activities of the SPEs or the Group retains the majority of the residual or ownership risks related to the SPEs’ assets. c. Transactions with non-controlling interests The Group treats transactions with non-controlling interests as transactions with equity owners of the Group. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. 13
  • 16. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 d. Associates Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognized at cost. The Group’s investment in associates includes goodwill identified on acquisition, net of any accumulated impairment loss. The Group’s share of its associates’ post-acquisition profits or losses is recognized in the income statement, and its share of post-acquisition movements in other comprehensive income is recognized in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.2.2 Foreign currency translation a. Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in Korean won, which is the Group’s functional currency. b. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, except when deferred in other comprehensive income as qualifying cash flow hedges.2.3 Critical accounting estimates and assumptions Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The resulting accounting estimates will, by definition, seldom equal the related 14
  • 17. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below. a. Allowance for doubtful accounts The Group presents the allowance for doubtful accounts calculated based on the best estimates that are necessary to reflect the impairment incurred at each reporting date. Allowance for doubtful accounts is recognized as individual and collective units considering the financial circumstances of customers, net realizable value, credit quality, size of portfolio, concentrativeness, economic factors and others. According to the change in these factors, the allowance for doubtful accounts will be changed in a future period. b. Fair value of financial instruments Fair value of financial assets and liabilities is based on quoted market prices, exchange-broker prices of financial instruments traded in an active market. If there is no quoted price for a financial instrument, the Group establishes fair value by using valuation techniques and advanced self- valuation techniques. Valuation techniques include the Discount Cash Flow method using variables observable in the market, comparative method with similar instruments that have observable market transactions, and option pricing model. For more complicated financial instruments, the Group uses advanced self- valuation techniques. Parts of or all the variables used in this valuation technique may not be observable in market, or may be derived from quoted prices and market ratio, or may be measured based on specific assumption. At initial recognition, if the difference between the fair value of valuation technique and transaction price occurs, then the transaction price as the best estimate of fair value is recognized as fair value. This fair value difference presents in profit immediately on any available observable market data according to individual factors and changes of environment.2.4 Revenue recognition The Group recognizes capital lent to customers as loans receivable, when installment payments or deferred payments on services and goods are made. While installment financial capital paid by the Group to manufacturers or sellers on behalf of customers is recognized as installment financial assets. Financial lease receivables classified as financial leases are recognized as lease receivables. The expected future cash flows from loans receivable, installment financial assets and lease receivables (“Financial receivables”) described above are amortized under the effective interest method over the period of the financial receivables being used by customers. 15
  • 18. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 20102.5 Statements of cash flows The Group prepares statements of cash flows using indirect method.2.6 Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of nine months or less and bank overdrafts.2.7 Financial assets a. Classification The Group classifies its financial assets as financial assets at fair value through profit or loss, loans and receivables and available-for-sale financial assets. Management determines the classification of its financial assets at initial recognition. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. b. Recognition and measurement Regular purchases and sales of financial assets are recognized on the trade-date (the date on which the Group commits to purchase or sell the asset). Investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Available-for-sale financial assets are subsequently carried at fair value. Loans and receivables are subsequently carried at amortized cost using the effective interest method. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognized in equity are transferred to the income statement as gain or loss on disposal of securities. Interest on available-for-sale securities calculated using the effective interest method is recognized in the income statement as part of interest income. Dividends on available-for sale equity instruments are recognized in the income statement as dividend income when the Group’s right to receive payments is established. c. Derecognition of financial assets A financial asset is derecognized only if the contractual rights on cash flow of the financial asset terminate or all the risks and rewards of ownership of the financial asset are substantially transferred. 16
  • 19. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 The Group can transfer an asset in statement of financial position but retains parts of or all the risks and rewards of ownership of the transferred asset substantially. To the extent that a transfer of a financial asset retains rights and obligations, the Group accounts both asset and liability at the same time. After the Group transfers a financial asset and still retains control, it shall continue to recognize the asset to the extent of its continuing involvement in the asset. d. Impairment of financial assets (1) Assets carried at amortized cost The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset is impaired. Impairment losses are incurred only if there is objective evidence of impairment and that loss event has an impact on the estimated future cash flows of the financial asset. The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the reversal of the previously recognized impairment loss is recognized in the income statement. (2) Available-for-sale financial assets The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. For equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is also evidence that the assets are impaired. If any such evidence exists for available-for-sale financial assets, the difference between carrying amount and current fair value is recognized in profit or loss. Impairment losses recognized in profit or loss for an investment in an equity instrument classified as available for sale are not be reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed.2.8 Deferral of loan origination fee and loan origination cost Loan origination fee, which is a processing fee in relation to the loan origination process such as upfront fee, is deferred and deducted from the loan account, adjusted over the life of the loan based on the effective interest rate method. Loan origination cost, which relates to activities performed by the lender such as soliciting potential borrowers, is deferred and added to the loan account, adjusted over the life of the loan based on the effective interest rate method when the future economic benefit in connection with the cost incurred can be identified on a per loan basis. 17
  • 20. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 20102.9 Allowances for financial receivables a. Calculation of allowances for doubtful accounts The Group recognizes the impairment of receivables as an allowance for doubtful accounts. It is based on the impairment estimates made through impairment assessment of receivables carried at amortized cost. Allowance for doubtful accounts consists of impairments related to individually material financial receivables and allowances of collective assessment for impairment incurred in homogeneous assets. Individually material receivables undertake the individual assessment of the difference between the assets’ carrying amount and the present value of estimated future cash flows. Unimpaired assets from individual assessments and individually immaterial assets undertake the collective assessment classified by asset groups that have analogous risk attributes. The Group uses statistical model in the collective assessment based on the expected probability of default, periodic collect amounts, loss-given default based on the past losses, loss emergency period, and management’s decision about the current economy and credit circumstances. The material factors used in statistical model for the collective assessment are evaluated to compare with actual data regularly. The amount of impairment loss is reflected in allowance for doubtful accounts as profit or loss. And the interest for impaired assets is recognized through the amortization of present value discounts. b. Write-off policy The Group writes off the doubtful receivables when the assets are deemed unrecoverable. This decision considers the information about significant changes of financial position such that a borrower or an obligor is in default, or the amount recoverable from security is not enough. The decision to write off a standard small loan is generally made based on the delinquent status of loan.2.10 Leases a. Classification The Group classifies leases based on the extent to which risks and rewards incidental to ownership of a leased asset lie with the lesser or the lessee. The lease arrangement classified as a financial lease is where: ①the lease transfers ownership of the asset to the lessee by the end of the lease term, ②the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised, ③the lease term is for the major part of the economic life of the asset even if title is not transferred, ④at the inception of the lease the present value of the minimum lease payments 18
  • 21. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 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.2.11 Property and equipment Property and equipment are stated at historical cost less accumulated depreciation and accumulated impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Depreciation method and estimated useful lives used by the Group are as follows: Depreciation Method Useful life Vehicles Straight-line 4 years Fixtures and furniture Straight-line 4 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized within other operating income (expenses) in the income statement.2.12 Intangible assets Intangible assets are stated at cost, which includes acquisition cost and directly related costs required to prepare the asset for its intended use. Intangible assets are stated net of accumulated 19
  • 22. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 amortization calculated based on using the following amortization method and estimated useful lives: Amortization Method Useful life Software Straight-line 4 years Other intangible assets Straight-line 5 years2.13 Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets that are subject to amortization suffered impairment are reviewed for possible reversal of the impairment at each reporting date.2.14 Pension obligations The Group operates a defined benefit plan. The liability recognized in the statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets, together with adjustments for unrecognized past-service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension obligation. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized in profits or losses in the period in which they arise.2.15 Provisions and contingent liabilities When there is a probability that an outflow of economic benefits will occur due to a present obligation resulting from a present legal or as a result of past events, and whose amount is reasonably estimable, a corresponding amount of provision is recognized in the financial statements. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. 20
  • 23. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 Provisions are the best estimate of the expenditure required to settle the present obligation that consider the risks and uncertainties inevitably surround many events and circumstances at the reporting date. Where the effect of the time value of money is material, the amount of a provision is the present value of the expenditures expected to be required to settle the obligation. A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future events, or a present obligation that arises from past events but is not certain to occur, or cannot be reliably estimated, a disclosure regarding the contingent liability is made in the notes to the financial statements.2.16 Derivative financial instruments The Group has applied hedging policies using derivatives to deal with the risk of changes in foreign currency exchange rates and interest rates arising from liabilities. The Group has contracted currency swap and interest swap derivative financial instruments to deal with the risk of changes in foreign currency exchange rates arising from foreign currency liabilities and the risk of changes in interest rates arising from floating-rate liabilities. Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group applies cash flow hedge, which are hedges of a particular risk associated with a recognized asset or liability or a highly probable forecast transaction. The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions to apply hedging accounting. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in profits or losses. The cumulative gain or loss that was reported in equity is recognized when the hedged items affect profits and losses. When applying hedging accounting, the relative profits or losses are reclassified to interest expenses and gain or loss on foreign exchange translation. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the forecast transaction is ultimately recognized in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to profit or loss. 21
  • 24. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 20102.17 Current and deferred income tax Interim period income tax expense is calculated by applying to an interim period’s pre-tax income the tax rate that would be applicable to expected total annual earnings. Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax assets and liabilities are not accounted for if they arise from the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates and laws that have been enacted or substantially enacted by the date of the statement of financial position and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.2.18 Earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the period excluding ordinary shares purchased by the Company and held as treasury shares. Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. Only dilutive potential ordinary shares are dilutive, they are added to the number of ordinary shares outstanding in the calculation of diluted earnings per share.3. Transition to Korean IFRS The interim consolidated financial statements as of September 30, 2011, are prepared according to Korean IFRS at the adoption date of January 1, 2011. The statements of financial position as of 22
  • 25. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 December 31, 2010 and as of September 30, 2010, which were prepared previously under K- GAAP are restated in accordance with Korean IFRS 1101, “First-time adoption of Korean IFRS”, for the comparative purposes, at the transition date of January 1, 2010. a. Exemptions of Korean IFRS 1101 elected by the Group The Group has elected to apply the following optional exemptions from full retrospective application. (1) Business combination The Group has not retrospectively applied Korean IFRS 1103 (Business combination) to the business combinations that took place prior to the transition date. (2) Deemed cost of property and equipment The Group has elected to use the carrying amount of property and equipment under K-GAAP as deemed cost at the date of transition to Korean IFRS. b. Explanation on the reconciliation of K-GAAP and Korean IFRS Major reconciliations of the transition between K-GAAP and Korean IFRS are as follows: (1) Impairment of financial assets (allowance for financial assets) Under K-GAAP, allowances for financial receivables are calculated based on the long-term average expected loss. In case the allowance calculated based on the expected loss is smaller than the allowance calculated in accordance to the guidelines provided in the Act on the Specialized Credit Financial Business, the Group recognizes an allowance in accordance to the guidelines provided in the Act on the Specialized Credit Financial Business. Under Korean IFRS, impairment losses are recognized where there is evidence that impairment occurred. Allowance for financial receivables is measured individually for assets that are individually significant and on a collective basis for portfolios with similar risk characteristics. (2) Accrued revenue for overdue receivables Under K-GAAP, accrued revenue for receivables which are overdue is not recognized. Under Korean IFRS, accrued revenue for past due and impaired receivables is recognized. (3) Measurement of financial assets carried at amortized cost Under K-GAAP, non-marketable loan and receivables are measured at nominal value if the difference between nominal value and discounted value is not substantial. Under Korean IFRS, loan and receivables are initially measured at fair value and subsequently carried at amortized cost using the effective interest method. 23
  • 26. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 (4) Depreciation method for property and equipment Under K-GAAP, depreciation method used for certain property and equipment was the declining- balance method. Under Korean IFRS, the Group uses the straight-line method to reflect properly the matching of the future economic benefits. (5) Retirement benefit obligations Under K-GAAP, the Group recognizes the amount which would be payable assuming all eligible employees and directors were to terminate their employment as of the statement of financial position date as accrued severance benefits represent. Under Korean IFRS, the Group recognizes the estimated amount using the projected unit credit method which is on an actuarial basis as the defined benefit obligation. (6) Recognition of unused compensated absences According to K-GAAP, unused compensated absences given to employees are recognized as liabilities at the end of the reporting period only when the right to be paid has been established. Under Korean IFRS, the Group recognizes liabilities when an employee has provided service in exchange for compensated absences. (7) Consolidation Under K-GAAP, Commercial Auto First SPC, trust and other subsidiaries were previously excluded from consolidation in accordance with Article 1.3, Clause 1 of Enforcement Decree of the Act on External Audit of Stock Companies. Under Korean IFRS, they are consolidated (Note 2). (8) Income tax effects The Group recognized changes in deferred tax representing the impact of deferred taxes on the adjustments for the transition to Korean IFRS. 24
  • 27. Hyundai Commercial, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements September 30, 2011 and 2010, and December 31, 2010 c. Effects on assets, liabilities, equity, comprehensive income and net income (1) Reconciliation of assets, liabilities and equity as of January 1, 2010(in thousands of Korean won) Assets Liabilities EquityK-GAAP 1,628,843,966 1,519,996,760 108,847,206Conversion effects to Korean IFRS Allowance for doubtful accounts 7,431,968 - 7,431,968 Accrued revenues 1,132,941 - 1,132,941 Measurement of amortized cost (1,378,454) - (1,378,454) Depreciation 2,001,667 - 2,001,667 Retirement benefit obligations - 5,711 (5,711) Recognition of unused compensated - 229,507 (229,507) absences Conversion adjustments of the associates 8,260,061 (92,431) 8,352,492 Others 366,621 33,745 332,876 Deferred income taxes (337,432) 3,737,319 (4,074,751) Total effect of transition 17,477,372 3,913,851 13,563,521Korean IFRS 1,646,321,338 1,523,910,611 122,410,727 (2) Reconciliation of assets, liabilities and equity as of September 30, 2010(in thousands of Korean won) Assets Liabilities EquityK-GAAP 2,175,508,752 2,017,890,077 157,618,675Conversion effects to Korean IFRS Allowance for doubtful accounts 9,599,653 - 9,599,653 Accrued revenues 1,864,208 - 1,864,208 Measurement of amortized cost (3,559,980) - (3,559,980) Depreciation 1,409,455 - 1,409,455 Retirement benefit obligations - (101,796) 101,796 Recognition of unused compensated - 363,347 (363,347) absences Conversion adjustments of the associates 11,213,262 (442,244) 11,655,506 Others 108,002 17,066 90,936 Scope of consolidation 212,631,483 219,234,433 (6,602,950) Deferred income taxes - 3,194,978 (3,194,978) Total effect of transition 233,266,083 222,265,784 11,000,299Korean IFRS 2,408,774,835 2,240,155,861 168,618,974 25
  • 28. Hyundai Commercial, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements September 30, 2011 and 2010, and December 31, 2010 (3) Reconciliation of total comprehensive income and net income for the three-month and the nine- month periods ended September 30, 2010(in thousands of Korean won) Three months Nine months Total Total comprehensive Net Income comprehensive Net Income income incomeK-GAAP 15,363,080 17,204,341 48,771,469 50,714,481Conversion effects to Korean IFRS Allowance for doubtful 2,332,855 2,332,855 2,167,685 2,167,685 accounts Accrued revenues 584,823 584,823 731,267 731,267 Measurement of amortized (291,212) (291,212) (2,181,526) (2,181,526) cost Depreciation (168,105) (168,105) (592,213) (592,213) Retirement benefit obligations 32,239 32,239 99,013 99,013 Recognition of unused (36,898) (36,898) (133,840) (133,840) compensated absences Conversion adjustments of 2,060,478 1,768,600 2,924,152 2,773,223 the associates Others 930,680 8,213 1,084,116 112,484 Scope of consolidation 2,540,557 2,540,557 (5,150,359) (5,150,359) Deferred income taxes (3,476,244) (3,476,244) (1,507,907) (1,507,907) Total effect of transition 4,509,173 3,294,828 (2,559,612) (3,682,173)Korean IFRS 19,872,253 20,499,169 46,211,857 47,032,308 26
  • 29. Hyundai Commercial, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements September 30, 2011 and 2010, and December 31, 2010 (4) Reconciliation of assets, liabilities, equity, total comprehensive income and net income as of and for the year ended December 31, 2010 (in thousands of Korean won) Total Assets Liabilities Total equity comprehensive Net Income incomeK-GAAP 2,534,174,650 2,359,395,222 174,779,428 65,932,223 64,833,503Conversion effects to Korean IFRS Allowance for doubtful 9,071,121 - 9,071,121 1,639,153 1,639,153 accounts Accrued revenues 495,782 - 495,782 (637,159) (637,159) Measurement of (4,130,557) - (4,130,557) (2,752,102) (2,752,102) amortized cost Depreciation 1,275,895 - 1,275,895 (725,772) (725,772) Retirement benefit - 378,378 (378,378) (372,667) (372,667) obligations Recognition of unused - 258,690 (258,690) (29,184) (29,184) compensated absences Conversion adjustments 6,603,813 (29,025) 6,632,838 (1,930,262) (1,900,657) of the associates Others - (135,307) 135,307 132,857 132,857 Scope of consolidation 172,207,726 177,075,156 (4,867,430) (4,877,341) (4,877,341) Deferred income taxes - 2,137,560 (2,137,560) 1,958,632 1,958,632 Total effect of transition 185,523,780 179,685,452 5,838,328 (7,593,845) (7,564,240)Korean IFRS 2,719,698,430 2,539,080,674 180,617,756 58,338,378 57,269,263 d. Adjustments of cash flows in 2010 According to Korean IFRS, cash flows of the related income (expenses) and assets (liabilities) are adjusted to separately disclose the cash flows from interest received, interest paid and cash payments of income taxes that were not presented separately under K-GAAP. There are no other significant differences between cash flows under Korean IFRS and K-GAAP. e. Adjustments of operating income and expenses The Group reclassified certain non-operating income and expenses under K-GAAP to other operating income and expenses according to Korean IFRS. 27
  • 30. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 Adjustments for the three-month and the nine-month periods ended September 30, 2011 and 2010, are as follows: (in thousands of Korean won) 2011 2010 Three Nine Three Nine Type months months months months Other operating income 94,422 337,071 50,659 191,684 Other operating expenses 1,187,056 1,317,200 508,871 558,4454. Restricted Financial Instruments Restricted financial instruments as of September 30, 2011 and December 31, 2010, are as follows: (in thousands of Korean won) Amount Type Entities 2011 2010 Restriction Kookmin Bank Maintaining deposits Deposits and 3 others 11,500 11,500 for opening accounts5. Securities Securities as of September 30, 2011 and December 31, 2010, are as follows: (in thousands of Korean won) Type 2011 2010 Available-for-sale securities Marketable equity securities 19,200,000 11,518,000 Equity securities Unlisted equity securities - 6,139,945 Sub-total 19,200,000 17,657,945 Equity method investment 145,266,554 133,160,973 164,466,554 150,818,918 28
  • 31. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 Available-for-sale securities Available-for-sale securities as of September 30, 2011 and December 31, 2010, are as follows: (in thousands of Korean won) Book value Number of Ownership Acquisition 2011 2010 shares (%) costMarketable equity securities JNK Heaters Co., Ltd. 1,000,000 12.5 10,126,881 19,200,000 11,518,000Unlisted equity securities West End Corporate Restructuring - - - - 6,139,945 Corp. 10,126,881 19,200,000 17,657,945 Equity method investment Equity method investment as of September 30, 2011 and December 31, 2010, is as follows: (in thousands of Korean won) 2011 Number of Ownership Acquisition Net asset Book value shares (%) cost valueHyundai Card Co., Ltd. 1 8,889,622 5.54 113,820,162 108,338,706 145,266,554 (in thousands of Korean won) 2010 Number of Ownership Acquisition Net asset Book value shares (%) cost valueHyundai Card Co., Ltd. 1 8,889,622 5.54 113,820,162 96,233,125 133,160,973 1 The Company’s shareholdings in Hyundai Card Co., Ltd. are less than 20%. However, the Company is able to participate in the management and significantly influence the financial and operating processes. Thus, the equity method is applied. Valuations of equity method investment for the nine-month periods ended September 30, 2011 and 2010, is as follows: 29
  • 32. Hyundai Commercial, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements September 30, 2011 and 2010, and December 31, 2010 (in thousands of Korean won) 2011 Changes in accumulated Beginning Gain (loss) Ending Dividends other Others Balance on valuation Balance comprehensive incomeHyundai Card 133,160,973 13,202,282 - (1,096,701) - 145,266,554 Co., Ltd. (in thousands of Korean won) 2010 Changes in Changes accumulated Beginning Gain (loss) in Ending Dividends other Balance on valuation retained Balance comprehensive earnings incomeHyundai Card 127,357,477 16,479,176 (5,778,254) (2,494,522) (13,520) 135,550,357 Co., Ltd. The difference between the acquired amounts of equity method investment and its corresponding net asset value as of September 30, 2011 and December 31, 2010, follows: (in thousands of Korean won) 2011 2010 Hyundai Card Co., Ltd. 36,926,750 36,926,750 Summary of financial information of investee for the nine-month periods ended September 30, 2011 and for the year ended December 31, 2010, follows: (in thousands of Korean won) 2011 Operating Assets Liabilities Net income revenue Hyundai Card Co., Ltd. 10,325,096,646 8,369,470,458 1,817,218,582 238,312,480 (in thousands of Korean won) 2010 Operating Assets Liabilities Net income revenue Hyundai Card Co., Ltd. 10,416,574,470 8,679,464,372 2,316,447,184 284,376,845 30
  • 33. Hyundai Commercial, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements September 30, 2011 and 2010, and December 31, 2010 6. Financial Receivables Financial receivables as of September 30, 2011 and December 31, 2010, are as follows: (in thousands of Korean won) 2011 Deferred loan origination fees and Present Allowance Principal costs value for doubtful Book value (Initial direct costs discounts accounts for lease assets)Loan receivables Factoring 1,625,299 - - (18,665) 1,606,634 receivables Loans 2,301,226,570 14,366,058 (160,785) (18,909,933) 2,296,521,910 2,302,851,869 14,366,058 (160,785) (18,928,598) 2,298,128,544Installment financial assets Auto 429,211,658 (1,398,501) - (3,182,159) 424,630,998 Durable goods 75,439,087 (810,964) - (516,414) 74,111,709 504,650,745 (2,209,465) - (3,698,573) 498,742,707Lease receivables Finance lease 73,292,995 (19,719) - (532,142) 72,741,134 receivables 2,880,795,609 12,136,874 (160,785) (23,159,313) 2,869,612,385 (in thousands of Korean won) 2010 Deferred loan origination fees and Present Allowance Principal costs value for doubtful Book value (Initial direct costs discounts accounts for lease assets)Loan receivables Factoring 1,185,465 - - (15,550) 1,169,915 Loans 1,782,518,786 6,898,083 (179,590) (12,780,139) 1,776,457,140 1,783,704,251 6,898,083 (179,590) (12,795,689) 1,777,627,055Installment financial assets Auto 493,287,083 (6,111,888) - (3,055,399) 484,119,796 Durable goods 81,961,709 (476,335) - (553,628) 80,931,746 575,248,792 (6,588,223) - (3,609,027) 565,051,542Lease receivables Finance lease 41,206,800 (41,546) - (214,613) 40,950,641 receivables 2,400,159,843 268,314 (179,590) (16,619,329) 2,383,629,238 31
  • 34. Hyundai Commercial, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements September 30, 2011 and 2010, and December 31, 2010 7. Allowance for Doubtful Accounts Changes in allowance for doubtful accounts for the nine-month periods ended September 30, 2011 and 2010, are as follows:(in thousands of Korean won) 2011 Loan Installment Lease Type Other assets Total receivables financial assets receivablesBeginning balance 12,795,689 3,609,027 214,613 372,974 16,992,303Amounts written off (1,651,217) (136,040) - - (1,787,257)Recoveries of amounts (6,037,785) (1,031,878) 90,152 - (6,979,511) previously written offUnwinding of discount (102,787) (6,936) (108) - (109,831)Additional(reversed) 13,924,698 1,264,400 227,485 19,825 15,436,408 allowanceEnding balance 18,928,598 3,698,573 532,142 392,799 23,552,112(in thousands of Korean won) 2010 Loan Installment Lease Type Other assets Total receivables financial assets receivablesBeginning balance 10,110,193 3,420,293 233,056 387,760 14,151,302Amounts written off (563,514) (57,734) - - (621,248)Recoveries of amounts (963,372) (290,359) 266,654 - (987,077) previously written offUnwinding of discount (50,287) (8,907) (13,369) - (72,563)Additional(reversed) 3,158,764 1,342,189 133,744 101,970 4,736,667 allowanceEnding balance 11,691,784 4,405,482 620,085 489,730 17,207,081 32
  • 35. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 20108. Financial Instruments The fair values of financial instruments as of September 30, 2011 and December 31, 2010, are as follows: (in thousands of Korean won) 2011 2010 Type Book Fair Book Fair value value value valueFinancial assets Cash and deposits 218,116,596 218,116,596 99,949,903 99,949,903 Available-for-sale 19,200,000 19,200,000 17,657,945 17,657,945 securities Loans receivable 2,298,128,544 2,298,641,895 1,777,627,055 1,713,240,877 Installment financial 498,742,707 499,036,938 565,051,542 576,954,790 assets Derivative assets 801,711 801,711 6,151,267 6,151,267 Non-trade 33,537,341 33,537,341 39,460,549 39,460,549receivables Accrued revenues 16,070,772 16,070,772 13,016,641 13,016,641 Leasehold deposits 9,035,009 8,876,874 7,233,369 7,632,659 3,093,632,680 3,094,282,127 2,526,148,271 2,474,064,631Financial liabilities Borrowings 791,324,614 793,383,501 774,749,000 774,193,924 Debentures 1,859,042,349 1,893,535,914 1,504,362,480 1,543,521,096 Securitized debts 359,288,034 364,002,331 199,530,274 202,500,316 Derivative liabilities 2,424,486 2,424,486 4,088,617 4,088,617 Non-trade payables 8,976,922 8,976,922 4,345,885 4,345,885 Accrued expenses 20,095,615 20,095,615 22,977,719 22,977,719 1 Withholdings 3,119,293 3,119,293 2,583,344 2,583,344 Leasehold deposits 13,133,760 13,133,760 2,824,085 2,854,340 received 3,057,405,073 3,098,742,743 2,515,461,404 2,557,065,241 1 Excluding taxes. 33
  • 36. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 The fair value hierarchy of financial assets and liabilities carried at fair value as of September 30, 2011 and December 31, 2010, are as follows:(in thousands of Korean won) 2011 1 Book Fair Fair value hierarchy Type value value level 1 level 2 level 3Financial assets at fair value Available-for-sale 19,200,000 19,200,000 19,200,000 - - securities Derivative assets 801,711 801,711 - 801,711 - 20,001,711 20,001,711 19,200,000 801,711 -Financial liabilities at fair value Derivative liabilities 2,424,486 2,424,486 - 2,424,486 - 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 thousands of Korean won) 2010 Book Fair Fair value hierarchy(*) Type value value level 1 level 2 level 3Financial assets at fair value Available-for-sale 17,657,945 17,657,945 - - 17,657,945 securities Derivative assets 6,151,267 6,151,267 - 6,151,267 - 23,809,212 23,809,212 - 6,151,267 17,657,945Financial liabilities at fair value Derivative liabilities 4,088,617 4,088,617 - 4,088,617 - 34
  • 37. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 The changes in financial instruments of level 3 for the nine-month periods ended September 30, 2011 and 2010, are as follows: (in thousands of Korean won) Available-for-sale securities Type 2011 2010 Beginning balance 17,657,945 5,450,000 Acquisition - 10,126,881 Gains on valuation (1,484,945) 1,219,304 (Other comprehensive income) Disposal (4,655,000) (345,000) 1 Reclassification (11,518,000) - Ending balance - 16,451,185 1 The fair value hierarchy of the available-for-sale securities has been reclassified from level 3 to level 1 as JNK Heaters Co., Ltd. was listed during the current period. The book value of financial instruments by categories as of September 30, 2011 and December 31, 2010, are as follows:(in thousands of Korean won) 2011 Hedging Loans and Available-for-sale Type derivative Total receivables financial assets instrumentsFinancial assets Cash and deposits 218,116,596 - - 218,116,596 Available-for- sale - 19,200,000 - 19,200,000 securities Loans receivable 2,298,128,544 - - 2,298,128,544 Installment 498,742,707 - - 498,742,707 financial assets Derivative assets - - 801,711 801,711 Non-trade 33,537,341 - - 33,537,341 receivables Accrued revenues 16,070,772 - - 16,070,772 Leasehold 9,035,009 - - 9,035,009 deposits 3,073,630,969 19,200,000 801,711 3,093,632,680 35
  • 38. Hyundai Commercial, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements September 30, 2011 and 2010, and December 31, 2010 (in thousands of Korean won) 2010 Hedging Loans and Available-for-sale Type derivative Total receivables financial assets instruments Financial assets Cash and deposits 99,949,903 - - 99,949,903 Available-for- sale - 17,657,945 - 17,657,945 securities Loans receivable 1,777,627,055 - - 1,777,627,055 Installment 565,051,542 - - 565,051,542 financial assets Derivative assets - - 6,151,267 6,151,267 Non-trade 39,460,549 - - 39,460,549 receivables Accrued revenues 13,016,641 - - 13,016,641 Leasehold 7,233,369 - - 7,233,369 deposits 2,502,339,059 17,657,945 6,151,267 2,526,148,271 (in thousands of Korean won) 2011 2010 Financial Hedging Financial Hedging Type liabilities at derivative Total liabilities at derivative Total amortized cost instruments amortized cost instrumentsFinancial liabilities Borrowings 791,324,614 - 791,324,614 774,749,000 - 774,749,000 Debentures 1,859,042,349 - 1,859,042,349 1,504,362,480 - 1,504,362,480 Securitized debts 359,288,034 359,288,034 199,530,274 199,530,274 Derivative - 2,424,486 2,424,486 - 4,088,617 4,088,617 liabilities Non-trade 8,976,922 - 8,976,922 4,345,885 - 4,345,885 payables Accrued expenses 20,095,615 - 20,095,615 22,977,719 - 22,977,719 Withholdings 3,119,293 - 3,119,293 2,583,344 - 2,583,344 Leasehold deposits 13,133,760 - 13,133,760 2,824,085 - 2,824,085 received 3,054,980,587 2,424,486 3,057,405,073 2,511,372,787 4,088,617 2,515,461,404 36
  • 39. Hyundai Commercial, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements September 30, 2011 and 2010, and December 31, 2010 9. Finance Lease Receivables Details of total lease investments and present value of minimum lease receipts as of September 30, 2011 and December 31, 2010, are as follows: (in thousands of Korean won) 2011 2010 Present value of Present value of Type Total lease Total lease minimum lease minimum lease investments investments receipts receiptsLess than 1 year 33,827,360 29,183,599 21,101,532 18,109,1081 to 5 years 47,358,632 44,089,677 24,931,950 23,056,146 81,185,992 73,273,276 46,033,482 41,165,254 Details of unearned interest income as of September 30, 2011 and December 31, 2010, are as follows:(in thousands of Korean won) 2011 Net lease investments Total lease Unearned Minimum lease Unguaranteed interest investments receipts (present residual value Total income value) (present value) 81,185,992 73,273,276 - 73,273,276 7,912,716 2010 Net lease investments Total lease Unearned Minimum lease Unguaranteed interest investments receipts (present residual value Total income value) (present value) 46,033,482 41,165,254 - 41,165,254 4,868,228 10. Property and Equipment Property and equipment as of September 30, 2011 and December 31, 2010, consist of: (in thousands of Korean won) 2011 2010 Type Acquisition Accumulated Acquisition Accumulated Book value Book value cost depreciation cost depreciation Vehicles 238,639 (108,993) 129,646 219,387 (100,321) 119,066 Fixture and 6,457,221 (4,472,680) 1,984,541 5,567,947 (3,581,670) 1,986,277 furniture Others 411,000 - 411,000 411,000 - 411,000 7,106,860 (4,581,673) 2,525,187 6,198,334 (3,681,991) 2,516,343 37
  • 40. Hyundai Commercial, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements September 30, 2011 and 2010, and December 31, 2010 Changes in property and equipment for the nine-month periods ended September 30, 2011 and 2010, are as follows:(in thousands of Korean won) 2011 Type Beginning balance Acquisition Disposal Depreciation Ending balanceVehicles 119,066 79,715 (22,673) (46,462) 129,646Fixture and 1,986,277 949,360 (48,895) (902,201) 1,984,541 furnitureOthers 411,000 - - - 411,000 2,516,343 1,029,075 (71,568) (948,663) 2,525,187(in thousands of Korean won) 2010 Type Beginning balance Acquisition Disposal Depreciation Ending balanceVehicles 173,913 - - (41,135) 132,778Fixture and 2,188,895 681,384 - (897,898) 1,972,381 furnitureOthers 411,000 - - - 411,000 2,773,808 681,384 - (939,033) 2,516,159 As of September 30, 2011, the Company carries comprehensive property insurance with Hyundai Marine and Fire Insurance for its other tangible assets and electronic equipment for up to ₩ 2,196,426 thousand, vehicles insurance for its vehicles, and group accident insurance, travel insurance and business damage insurance for its employees. And the Company carries comprehensive property insurance with Hyundai Marine and Fire Insurance for its machine tool installment financial assets and lease assets for up to ₩ 211,209,784 thousand. 11. Intangible Assets Intangible assets as of September 30, 2011 and December 31, 2010, consist of: (in thousands of Korean won) 2011 2010 Type Acquisition Accumulated Book Acquisition Accumulated Book cost depreciation value cost depreciation value Software 5,014,047 (4,116,035) 950,922 4,960,422 (3,328,226) 1,632,196 Other intangible 1,878,733 (313,090) 1,565,643 915,728 (66,521) 849,207 assets 6,945,690 (4,429,125) 2,516,565 5,876,150 (3,394,747) 2,481,403 38
  • 41. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 Changes in intangible assets for the nine-month periods ended September 30, 2011 and 2010, are as follows:(in thousands of Korean won) 2011 1 Type Beginning balance Increase Amortization Ending balance Software 1,632,196 106,535 (787,809) 950,922 Other intangible assets 849,207 963,005 (246,569) 1,565,643 2,481,403 1,069,540 (1,034,378) 2,516,565 1 Inclusive of transfer from advance payments.(in thousands of Korean won) 2010 1 Type Beginning balance Increase Amortization Ending balance Software 2,408,636 352,283 (876,254) 1,884,665 Other intangible assets 13,019 615,316 (15,292) 613,043 2,421,655 967,599 (891,546) 2,497,70812. Borrowings Borrowings as of September 30, 2011 and December 31, 2010, consist of:(in thousands of Korean won) Annual Types Lender 2011 2010 interest rate (%)Borrowings in won SK Securities Commercial paper 3.57 ~ 4.32 230,000,000 323,000,000 and 4 others Shinhan Bank General loans 3.71 ~ 6.35 561,324,614 451,749,000 and 9 others 791,324,614 774,749,00013. Debentures Debentures issued by the Group and outstanding as of September 30, 2011 and December 31, 2010, are as follows: 39
  • 42. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010(in thousands of Korean won) Annual 2011 2010 Type interest rates (%) Par value Issue price Par value Issue priceCurrent portion of debenture Debenture 4.23 ~ 7.50 495,000,000 495,000,000 310,334,000 310,334,000 Less: Discount on (228,807) (288,552) debentures 494,771,193 310,045,448Non-current portion of debenture Debenture 4.10 ~ 8.00 1,366,154,500 1,366,154,500 1,196,143,500 1,196,143,500 Less: Discount on (1,883,344) (1,826,468) debentures 1,364,271,156 1,194,317,032 1,861,154,500 1,859,042,349 1,506,477,500 1,504,362,48014. Securitized debts The amounts of securitized debts which are secured by loans and installment financial assets in accordance with Asset Backed Securitization Act, as of September 30, 2011 and December 31, 2010, are as follows:(in thousands of Korean won) Annual 2011 2010 Type interest rates (%) Par value Issue price Par value Issue priceCurrent portion of securitized debts Debenture 4.12 ~ 4.19 30,000,000 30,000,000 - - Less: Discount on (48,686) - securitized debts 29,951,314 -Non-current portion of securitized debts Debenture 4.23 ~ 5.43 330,000,000 330,000,000 200,000,000 200,000,000 Less: Discount on (663,280) (469,726) securitized debts 329,336,720 199,530,274 360,000,000 359,288,034 200,000,000 199,530,27415. Defined Benefit Liability The amounts of defined benefit plans recognized in the statements of financial position as of September 30, 2011 and December 31, 2010, are as follows: 40
  • 43. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 (in thousands of Korean won) Type 2011 2010 Present value of funded obligations 6,826,744 5,493,658 Fair value of plan assets (3,617,469) (3,812,483) Defined benefit liability 3,209,275 1,681,175 Changes in present value of defined benefit obligations for the nine-month periods ended September 30, 2011 and 2010: (in thousands of Korean won) Type 2011 2010 Beginning balance 5,493,658 4,414,782 Current service cost 1,296,066 966,955 Interest cost 201,235 177,661 Actuarial losses 217,476 - Transfer of severance benefits from 412,549 434,606 related parties Transfer of severance benefits to related - (254,171) parties Benefits paid (794,240) (371,750) Ending balance 6,826,744 5,368,083 Changes in the fair value of plan assets for the nine-month periods ended September 30, 2011 and 2010: (in thousands of Korean won) Type 2011 2010 Beginning balance 3,812,483 2,678,455 Expected return on plan assets 112,058 94,740 Actuarial (losses)/gains 5,174 10,889 Transfer of severance benefits from 365,608 327,257 related parties Transfer of severance benefits to - (139,945) related parties Contributions by plan participants - 1,000,000 Benefits paid (677,854) (267,742) Ending balance 3,617,469 3,703,654 41
  • 44. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 Details of the amounts recognized in the income statement for the nine-month periods ended September 30, 2011 and 2010: (in thousands of Korean won) Type 2011 2010 Current service cost 1,296,066 966,955 Interest cost 201,235 177,661 Expected return on plan assets (112,058) (94,740) Actuarial losses 212,302 (10,889) 1,597,545 1,038,987 Actual return on plan assets for the nine-month periods ended September 30, 2011 and 2010: (in thousands of Korean won) Type 2011 2010 Actual return on plan assets 117,232 105,629 Details of plan assets as of September 30, 2011 and December 31, 2010: (in thousands of Korean won) 2011 2010 Type Amount Ratio(%) Amount Ratio(%) Cash 17 0.01 47,125 1.24 Deposits 2,219,772 61.36 2,146,754 56.31 Interest rate guaranteed 1,397,680 38.63 1,618,604 42.45 asset for 1-year 3,617,469 100.00 3,812,483 100.00 Actuarial assumptions Actuarial assumptions required to recognize defined benefit liability as of September 30, 2011 and December 31, 2010, are as follows: Type 2011 2010 Discount rate 4.89% 4.90% Expected return on plan assets 3.82% 4.20% Future salary increases 5.69% 5.43% Assumptions regarding future mortality experience are set based on actuarial advice published by Korea Insurance Development Institute. 42
  • 45. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 201016. Income Tax Income tax expense for the nine-month periods ended September 30, 2011 and 2010, consists of: (in thousands of Korean won) Type 2011 2010 Current tax 1 15,119,182 8,677,278 Changes in deferred tax assets(liabilities) 5,069,367 4,510,036 Deferred tax credited directly to equity (1,000,926) 224,928 Income tax 19,187,623 13,412,242 1 Income tax for the nine-month period ended September 30, 2011, includes changes in tax reconciliation of the previous year. Deferred tax credited directly to equity (in thousands of Korean won) Type 2011 2010 Loss on valuation of derivatives 57,879 (55,621) Gain(Loss) on valuation of available-for- (1,300,079) (268,247) sale financial securities Accumulated comprehensive income of 241,274 548,796 equity method investee (1,000,926) 224,928 Reconciliation between income before income tax and income tax expense (in thousands of Korean won) Type 2011 2010 Profit before tax 80,483,598 60,444,551 Current tax (24.2%) 19,450,630 14,601,181 Adjustments: Income not subject to tax (25,959) - Expenses not deductible for tax - 71,206 purposes Others (237,048) (1,260,145) Income tax 19,187,623 13,412,242 Effective tax rate 23.8% 22.2% (Income tax over net income before tax) 43
  • 46. Hyundai Commercial, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements September 30, 2011 and 2010, and December 31, 2010 Changes in temporary differences and deferred assets (liabilities) (in thousands of Korean won) 2011 Temporary differences Deferred assets (liabilities) Type Beginning Changes Ending Beginning EndingDeferred loan origination (32,402,378) 2,332,662 (30,069,716) (6,963,514) (6,615,337) fees and costsAllowances for doubtful (9,058,852) (10,387) (9,069,239) (2,192,242) (1,995,233) accountsEquity method (19,472,745) (11,973,647) (31,446,392) (3,845,072) (6,918,205) investmentDerivatives (2,062,650) 3,685,425 1,622,775 (499,162) 357,010Gain on foreign 4,256,000 (3,203,000) 1,053,000 1,029,952 231,660 currency translationGoodwill 8,913,333 (5,730,000) 3,183,333 2,157,027 700,333Accrued expenses 5,284,115 (378,042) 4,906,073 1,278,756 1,079,336Available-for-sale (2,876,064) (6,197,055) (9,073,119) (696,007) (1,996,086) securitiesSPC consolidation 6,537,815 (402,004) 6,135,811 1,532,690 1,349,878 effectsOthers (1,090,929) 2,295,428 1,204,499 (274,715) 264,990 (41,972,355) (19,580,620) (61,552,975) (8,472,287) (13,541,654)(in thousands of Korean won) 2010 Temporary differences Deferred assets (liabilities) Type Beginning Changes Ending Beginning EndingDeferred loan origination (20,525,769) (7,945,914) (28,471,683) (4,944,290) (6,734,222) fees and costsAllowances for doubtful (7,158,030) (2,412,690) (9,570,720) (1,732,243) (2,316,114) accountsEquity method 3,016,018 (13,922,880) (10,906,862) 999,684 (2,399,510) investmentDerivatives (4,806,544) 1,306,162 (3,500,382) (1,163,184) (847,092)Gain on foreign currency 8,316,000 (1,536,000) 6,780,000 2,012,472 1,640,760 translationAccrued expenses 8,583,263 (1,686,836) 6,896,427 2,077,150 1,668,935SPC consolidation - 8,308,313 8,308,313 - 1,827,829 effectsOthers (4,148,615) (435,102) (4,583,717) (986,909) (1,087,942) (16,723,677) (18,324,947) (35,048,624) (3,737,320) (8,247,356) 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. 44
  • 47. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 201017. Derivative Financial Instruments and Hedge Accounting Derivatives designated as cash flow hedges as of September 30, 2011 and December 31, 2010, are as follows:(in thousands of Korean won) 2011 2010 Type Notional Notional principal Assets Liabilities principal Assets Liabilities amounts amountsInterest rate swaps 100,000,000 111,516 - 40,000,000 - 596,237Currency swaps 64,872,500 690,195 2,424,486 108,195,500 6,151,267 3,492,380 164,872,500 801,711 2,424,486 148,195,500 6,151,267 4,088,617 The amount recognized as other comprehensive income, representing the effective portion related to cash flow hedge, is (-)1,859,171 thousand as of September 30, 2011, and the reclassified amount from other comprehensive income to profit or loss is 1,376,747 thousand. There is no ineffective portion recognized related to cash flow hedge for the nine-months periods ended September 30, 2011 and 2010.18. Shareholders’ Equity Capital stock The Company is authorized to issue 80,000,000 shares. As of September 30, 2011, the Company has 20,000,000 shares issued and outstanding with a par value of 5,000 per share. Legal reserve The Korean Commercial Law requires the Company to appropriate, as a legal reserve, an amount equal to a minimum of 10% of annual cash dividends declared, until the reserve equals 50% of its issued capital stock. This reserve is not available for the payment of cash dividends, but may be transferred to capital stock or used to reduce accumulated deficit, if any. Discretionary reserve The Company appropriates a reserve in accordance with Electronic Financial Transactions Act. Legal reserve and discretionary reserve Legal reserve and discretionary reserve as of September 30, 2011 and December 31, 2010, are as follows: 45
  • 48. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 (in thousands of Korean won) Type 2011 2010 Legal reserve Revenue reserve 1,000,000 - Discretionary Reserve for electronic financial 100,000 - reserve transactions 1,100,000 - Unappropriated retained earnings (Expected reserve for bad loans 131,667,200 81,470,128 2011: 3,286,975 thousand 2010: 2,407,178 thousand) 132,767,200 81,470,128 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. The reserve for bad loans is attributed to discretionary reserve for retained earnings. If the existing reserve for bad loans exceeds the reserve for bad to be reserved, the excess amounts are able to write-back. And if unappropriated deficit is existing, the reserve for bad loans is able to be reserved after unappropriated deficit is appropriated. (1) Appropriated and expected reserves for bad loans as of September 30, 2011 and year ended December 31, 2010, are as follows: (in thousands of Korean won) Type 2011 2010 Appropriated reserve for bad loans - - Expected reserve for bad loans 3,286,975 2,407,178 3,286,975 2,407,178 (2) Transfer to reserve for bad loans and net income in consideration of effect of changes in reserve for bad loan for the three-month and nine-month periods ended September 30, 2011, are as follows: (in thousands of Korean won) Amount Type Three Months Nine Months Net income 24,218,667 61,297,073 1 Transfer to reserve for bad loans (470,842) (879,797) Net income in consideration of changes in reserve for 2 23,747,825 60,417,276 bad loans Net income per share in consideration of changes in 1,188 3,021 reserve for bad loans (In won) 46
  • 49. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 1 Transfer to reserve for bad loans are subtracted from balance of reserve for bad loans in 2011 to balance in 2010. 2 Net income in consideration of changes in reserve for bad loans is not accordance with K-IFRS, and the amount is the sum of the transfer to reserve for bad loans before income tax and net income.19. Net Interest Income Net interest income for the nine-month periods ended September 30, 2011 and 2010, are as follows: (in thousands of Korean won) Type 2011 2010 Interest income Cash and deposits 3,644,697 1,215,163 Loans receivable 167,653,679 102,914,368 Installment financial assets 44,749,777 47,688,786 Lease receivables 3,410,253 2,872,617 Other 205,825 347,938 219,664,231 155,038,872 Interest expenses Borrowings 28,337,003 21,547,440 Debentures 67,253,045 52,850,460 Securitized debts 13,069,891 4,481,270 1 Other 312,317 49,612 108,972,256 78,928,782 110,691,975 76,110,090 1 Amortization of present value discount account according to the effective interest method. 47
  • 50. Hyundai Commercial, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements September 30, 2011 and 2010, and December 31, 2010 20. Net Commission Income Net commission income for the nine-month periods ended September 30, 2011 and 2010, are as follows: (in thousands of Korean won) Type 2011 2010 Commission income Loans receivable 9,251,228 5,757,826 Installment financial assets 1,329,971 1,361,355 Lease receivables 193,240 39,740 10,774,439 7,158,921 Commission expenses - - 10,774,439 7,158,921 21. General and Administrative Expenses General and administrative expenses for the three-month and the nine-month periods ended September 30, 2011 and 2010, are as follows:(in thousands of Korean won) 2011 2010 Type Three months Nine months Three months Nine monthsPayroll 4,922,014 13,617,550 4,438,707 10,305,267Severance benefits 594,967 1,597,555 343,256 1,073,883Fringe benefits 1,231,654 3,594,521 1,035,902 2,921,170Outsourcing service charges 797,106 2,306,684 539,488 1,434,594Sales promotions 2,149,058 7,875,414 2,690,407 7,047,466Commission 520,369 1,729,053 273,229 1,144,978Outsourcing service commission 444,236 1,402,242 484,507 2,170,009Depreciation 276,598 948,663 329,465 939,033Amortization 323,335 1,034,378 314,075 891,547Taxes and dues 412,467 1,291,738 238,402 506,562Electronic expenses 451,273 1,089,285 303,370 917,209Rent 212,141 641,799 293,668 769,924Maintenance expenses on 243,442 704,033 195,967 547,907 buildingTravel and transportation 106,202 417,455 108,637 407,170Education 97,814 484,136 152,201 349,983Communication 147,554 394,455 92,892 279,533Other expenses 341,213 1,207,902 512,639 1,256,090 13,271,443 40,336,863 12,346,812 32,962,325 48
  • 51. Hyundai Commercial, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements September 30, 2011 and 2010, and December 31, 2010 22. Earnings Per Share Basic earnings per share attributable to common stock for the three-month and the nine-month periods ended September 30, 2011 and 2010, follows: 2011 2010 Type Three months Nine months Three months Nine months(1) Net income attributable 24,218,667,205 61,297,072,888 20,499,170,133 47,032,309,130 to common stock (In won)(2) Weighted average of number of outstanding 20,000,000 20,000,000 20,000,000 20,000,000 common shares(3) Basic earnings per 1,211 3,065 1,025 2,352 share (In won) (1)÷(2) As there was no discontinued operation during the nine-month periods ended September 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 September 30, 2011 and 2010. Therefore, the diluted earnings per share is the same as basic earnings per share for nine-month periods ended September 30, 2011 and 2010. 23. Other Comprehensive Income Other comprehensive income for the nine-month periods ended September 30, 2011 and 2010, consists of: (in thousands of Korean won) 2011 Changes Beginning Reclassifi- Income tax Ending Type Other balance cation of effects balance changes profit or loss Loss on valuation of (1,662,559) 1,376,747 (1,859,171) 57,879 (2,087,104) derivatives Gain on valuation of available-for-sale 2,180,057 (1,638,531) 7,835,586 (1,300,079) 7,077,033 financial assets Accumulated comprehensive expense of equity (1,379,779) - (1,096,701) 241,274 (2,235,206) method investee (862,281) (261,784) 4,879,714 (1,000,926) 2,754,723 49
  • 52. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 (in thousands of Korean won) 2010 Changes Beginning Reclassifi- Income Ending Type Other balance cation of tax effects balance changes profit or lossLoss on valuation of (2,660,167) 2,410,956 (2,181,118) (55,621) (2,485,950) derivativesGain on valuation of available-for-sale 351,000 - 1,219,304 (268,247) 1,302,057 financial assetsAccumulated comprehensive expense of equity 377,771 - (2,494,522) 548,796 (1,567,955) method investee (1,931,396) 2,410,956 (3,456,336) 224,928 (2,751,848)24. Cash Flow Statement Cash and cash equivalents in cash flow statements as of September 30, 2011 and December 31, 2010, consist of follows: (in thousands of Korean won) Type 2011 2010 Cash 2,000 2,010 Ordinary deposits 9,329,006 3,922,889 Current deposits 10 10 Short-term financial instruments 208,774,080 96,013,494 218,105,096 99,938,403 50
  • 53. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 Cash generated from operations for the nine-month periods ended September 30, 2011 and 2010, are as follows:(in thousands of Korean won) 2011 2010Net income 61,297,073 47,032,309Adjustments Net interest expenses 105,121,734 77,365,681 Dividends (300,000) - Income tax 19,187,623 13,412,242 Gain on loans receivable 31,413,605 24,459,575 Gain on installment financing (2,528,657) (3,303,940) Gain on leased assets (109,176) (159,896) Gain on foreign currency translation - (3,765,500) Gain on disposal of property and equipment (4,346) - Gain on valuation of derivatives (3,391,000) - Gain on disposal of securities (1,638,531) - Gain on equity method valuation (13,202,282) (16,479,176) Bad debts expense 15,436,408 4,736,667 Severance benefits 1,597,545 1,038,987 Depreciation 948,663 939,033 Amortization of intangible assets 1,034,378 891,546 Loss on foreign exchange translations 3,391,000 - Loss on disposal of property and equipment 48,895 - Impairment loss on investment assets 1,113,000 486,789 Loss on disposal of investment assets - 550 Loss on valuation of derivatives - 3,765,500 158,118,859 103,388,058Changes in operating assets and liabilities (Increase) in loans receivable (526,496,920) (630,637,051) Decrease(increase) in installment financing 69,730,527 (67,718,220) receivables Decrease (increase) in finance lease receivables (32,115,586) 5,357,258 (Increase) in deferred loan origination fees and (40,826,798) (23,158,783) costs Increase(decrease) in present value discounts (1,492,701) 103,023 (Decrease) in allowance for bad debts (520,558) (987,078) Decrease(increase) in non-trade receivables 5,928,974 (12,376,576) (Increase) in accrued revenues (2,708,410) (3,879,222) Decrease(increase) in advance payments (938,975) 122,201 Decrease in prepaid expenses 5,533,186 2,635,692 Increase in non-trade payables 4,631,038 2,320,793 (Decrease) in accrued expenses (3,835,716) (1,379,679) Increase in unearned revenue 1,789,450 615,189 Increase(decrease) in advance receipts (64,954) 157,998 51
  • 54. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 Increase in withholdings 734,264 1,359,285 Payment of severance benefits (794,240) (371,750) Decrease(increase) in plan assets 312,246 (919,570) Transfer of severance benefits from related parties 412,549 434,606 Transfer of severance benefits to related parties - (254,171) Increase in leasehold deposits received 11,543,889 202,143 (509,178,735) (728,373,912) (289,762,803) (577,953,545) Significant investing and financing activities not affecting cash flows for the nine-month periods ended September 30, 2011 and 2010, are as follows: (in thousands of Korean won) Type 2011 2010 Transferred from advance payments to other 931,215 - intangible assets Discount on stock issuance - 663,810 Transferred to legal reserve 1,000,000 - Transferred to discretionary reserve 100,000 -25. Commitments and Contingencies Details of credit line agreements of the Company as of September 30, 2011, and December 31, 2010, are as follows: (in thousands of Korean won) Type Financial institutions 2011 2010 Woori Bank and 3 other Limit of overdraft KRW 130 billion KRW 50 billion banks Limit of L/C Shinhan Bank USD 8 million USD 8 million The amounts of pending significant litigations involving the Company as of September 30, 2011, total 1,289,042 thousand. As of report date, the outcome of these cases cannot be reasonably determined and no adjustments are reflected on the consolidated financial statements of the Group as of September 30, 2011. The Company enters into a financial support agreement with Shinhan Bank for acquisitions of mold equipments for Hyundai and Kia Motor Company’s component partner companies. The Company guarantees the loans of the component partner companies. The amount of payment guarantees as of September 30, 2011, is 15,939,278 thousand (2010: 27,061,444 thousand). 52
  • 55. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 Details of guarantees involving third parties as of September 30, 2011, and December 31, 2010, are as follows: (in thousands of Korean won) Guarantor Details Amount Guarantees on machinery installment Hyundai Wia 67,811,845 financing receivables Hyundai Motor Guarantees on finance lease receivables 10,161,266 Company26. Related Party Transactions The parent company is Hyundai Motor Company. Related parties include associates, joint ventures, post-employment benefit plans, members of key management personnel and entities which the Group controls directly or indirectly, has joint control or significant influence over them. Significant transactions, which occurred in the normal course of business with related companies for the nine-month periods ended September 30, 2011 and 2010, are as follows: (in thousands of Korean won) 2011 2010 Purchases Sale Purchases Sale Parent Company Hyundai Motor Company 232,568 - 1,754,196 - Others Kia Motors Corp. - - 292,391 - Hyundai Wia Corp. 43,142,490 - 60,000 - Hyundai Capital Services Inc. - 24,005,621 - 9,931,606 Hyundai Autoever Corp. 621,571 - 185,717 - 43,764,061 24,005,621 538,108 9,931,606 43,996,629 24,005,621 2,292,304 9,931,606 53
  • 56. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 Revenues and expenses arising from transactions with related parties for the three-month and the nine-month periods ended September 30, 2011 and 2010, and receivables and payables as of September 30, 2011 and December 31, 2010, are as follows: (in thousands of Korean won) 2011 2010 Receivables Payables Receivables Payables Parent Company Hyundai Motor Company 248,159 296,115 282,173 179,930 Others Kia Motors Corp. 3,252 - 3,440 - Hyundai Capital Services Inc. 2,446,162 37,572 2,458,803 9,868 HMC Investment Securities - - - 10,000,000 Hyundai Card Co., Ltd. 3,504,061 1,301,723 3,478,586 741,324 Samwoo Co., Ltd. 21,462,441 118,675 1,797,127 118,675 Haevichi Hotel and Resort - - 12,188 - Mseat Inc. 15,000,000 - 5,000,000 - Wia Magna Powertrain - - 2,000,000 - Employees 1,322,652 - 1,409,292 - 43,738,568 1,457,970 16,159,436 10,869,867 43,986,727 1,754,085 16,441,609 11,049,797(in thousands of Korean won) 2011 Revenues Expenses Nine Nine Three months months Three months months Parent Company Hyundai Motor Company 782,869 ₩ 2,385,388 ₩ 2,260 ₩ 8,441 Others Kia Motors Corp. 16,802 29,439 - - Hyundai Capital Services 1,143,742 2,579,672 696,031 1,525,890 Inc. Hyundai Autoever Corp. - - 529,211 1,507,786 HMC Investment Securities - 21,931 - 82,000 Hyundai Card Co., Ltd. 337,206 573,074 165,311 478,391 Innocean Worldwide Corp. - - 9,900 56,016 Samwoo 321,264 513,455 - - Haevichi Hotel and Resort - - - - Mseat Inc. 309,740 521,305 - - Wia Magna Powertrain 25,237 84,654 - - Employees 7,136 22,731 40 95 2,161,127 4,346,261 1,400,493 3,650,178 2,943,996 6,731,649 1,402,753 3,658,619 54
  • 57. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010(in thousands of Korean won) 2010 Revenues Expenses Nine Nine Three months months Three months monthsParent Company Hyundai Motor Company 847,912 2,650,377 47 3,880Others Kia Motors Corp. 2,702 9,820 - - Hyundai Capital Services 502,388 1,046,722 1,786,209 2,417,649 Inc. Hyundai Autoever Corp. - - 430,780 1,266,371 HMC Investment Securities - 74,977 53,439 190,241 Hyundai Card Co., Ltd. 49,446 356,821 151,250 350,658 Innocean Worldwide Corp. - - 44,000 127,092 Haevichi Hotel and Resort - - 330 880 Employees 1,631 20,263 - - 556,167 1,508,603 2,466,008 4,352,891 1,404,079 4,158,980 2,466,055 4,356,771 The Company has been provided with guarantees by the related parties. Compensation for key management for the nine-month periods ended September 30, 2011 and 2010, consists of: (in thousands of Korean won) Type 2011 2010 Short-term employee benefits 970,859 1,064,326 Severance benefits 516,045 442,893 The key management above consists of directors (including non permanent directors), who have significant authority and responsibilities for planning, operating and controlling the Group.27. Financial Risk Management The Group is exposed to credit risk, liquidity risk and market 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. 55
  • 58. Hyundai Commercial, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements September 30, 2011 and 2010, and December 31, 2010 27.1 Credit risk Exposures to credit risk as of September 30, 2011 and December 31, 2010, are as follows: (in thousands of Korean won) Type 2011 2010 Cash and deposits 218,114,596 99,947,893 Loans receivable 2,298,128,544 1,777,627,055 Installment financial assets 498,742,707 565,051,542 Financial lease receivables 72,741,134 40,950,641 Non-trade receivables 33,537,341 39,460,549 Accrued revenue 16,070,772 13,016,641 Leasehold deposits 9,035,009 7,233,369 Derivative assets 801,711 6,151,267 Payment guarantee agreement 15,939,278 27,061,444 3,163,111,092 2,576,500,401 Credit quality of financial assets exposed to credit risk as of September 30, 2011 and December 31, 2010, follows: (in thousands of Korean won) 2011 2010 Type Normal Past due Impaired Normal Past due ImpairedCash and deposits 218,114,596 - - 99,947,893 - -Financial receivables Loans receivable 2,176,115,859 116,966,100 5,046,585 1,705,904,173 69,971,081 1,751,801 Installment 468,133,374 30,116,100 493,233 532,706,801 32,099,772 244,969 financial assets Lease 65,864,327 6,876,807 - 31,798,795 9,145,323 6,523 receivables 2,710,113,560 153,959,007 5,539,818 2,270,409,769 111,216,176 2,003,293Non-trade 33,537,341 - - 39,460,549 - - receivablesAccrued revenue 16,070,772 - - 13,016,641 - -Leasehold 9,035,009 - - 7,233,369 - - depositsDerivative assets 801,711 - - 6,151,267 - - 2,987,672,989 153,959,007 5,539,818 2,436,219,488 111,216,176 2,003,293 56
  • 59. Hyundai Commercial, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements September 30, 2011 and 2010, and December 31, 2010 Credit quality according to internal credit rating of financial receivables which are neither past due nor impaired as of September 30, 2011 and December 31, 2010, are as follows: (in thousands of Korean won) 2011 2010 Type Gross amount Allowance Book value Gross amount Allowance Book value First-rate 256,058,109 (175,709) 255,882,400 610,115,997 (265,721) 609,850,276 Second-rate 1,023,046,907 (1,371,515) 1,021,675,392 524,819,937 (729,173) 524,090,764 Third-rate 897,377,538 (5,685,774) 891,691,764 640,914,070 (3,791,269) 637,122,801 Fourth-rate 183,637,754 (2,253,273) 181,384,481 158,778,521 (1,978,523) 156,799,998 Fifth-rate 63,517,625 (1,794,001) 61,723,624 51,196,723 (1,477,666) 49,719,057 Sixth-rate 31,644,264 (2,047,866) 29,596,398 22,117,745 (1,473,724) 20,644,021 No rating 269,828,847 (1,669,346) 268,159,501 273,666,029 (1,483,177) 272,182,852 2,725,111,044 (14,997,484) 2,710,113,560 2,281,609,022 (11,199,253) 2,270,409,769 The Group classifies financial receivables into six internal credit rating based on the rating criteria and the characteristic of receivables. The internal credit rating is assessed based on the expected probability of default in the previous month. Meanwhile, some financial receivables are not given credit rating for reason of lacking in research data such as information on new loan accounts of the current month. Financial receivables past due but not impaired as of September 30, 2011 and December 31, 2010, are as follows: (in thousands of Korean won) 2011 Less than Between Between Over Types 1 Total 1 month 1 ~ 2 months 2~3 months 3 monthsLoans receivable 103,321,411 16,729,857 - - 120,051,268Installment financial assets 27,318,993 2,917,319 332,609 201,960 30,770,881Lease receivables 1,632,632 75,614 155,106 5,039,032 6,902,384 132,273,036 19,722,790 487,715 5,240,992 157,724,533 Allowance (2,768,466) (991,284) (2,311) (3,465) (3,765,526) Carrying amount 129,504,570 18,731,506 485,404 5,237,527 153,959,007 1 The Group does not include the receivables provided with guarantees from the related parties in the receivables which are past due for over 3 months (Note 25). 57
  • 60. Hyundai Commercial, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements September 30, 2011 and 2010, and December 31, 2010 (in thousands of Korean won) 2010 Less than Between Between Over Types 1 Total 1 month 1 ~ 2 months 2~3 months 3 monthsLoans receivable 62,812,645 9,455,118 - - 72,267,763Installment financial assets 26,546,419 4,568,769 927,797 826,468 32,869,453Lease receivables 1,359,514 349,231 309,449 7,173,387 9,191,581 90,718,578 14,373,118 1,237,246 7,999,855 114,328,797 Allowance (2,263,883) (830,854) (6,396) (11,488) (3,112,621) Carrying amount 88,454,695 13,542,264 1,230,850 7,988,367 111,216,176 Impaired financial receivables as of September 30, 2011 and December 31, 2010, are as follows: (in thousands of Korean won) 2011 2010 Type Gross amount Allowance Book value Gross amount Allowance Book value Loans receivable 8,944,550 (3,897,965) 5,046,585 3,675,662 (1,923,861) 1,751,801 Installment 679,999 (435,030) 244,969 991,571 (498,338) 493,233 financial assets Lease receivables - - - 10,255 (3,732) 6,523 9,936,121 (4,396,303) 5,539,818 4,365,916 (2,362,623) 2,003,293 Credit quality according to external credit rating of other assets except for financial receivables which are neither past due nor impaired as of September 30, 2011 and December 31, 2010, are as follows: (in thousands of Korean won) 1 Cash and deposits 2011 2010 AAA 83,114,596 49,947,893 AA+ 5,000,000 - AA 70,000,000 20,000,000 AA- 20,000,000 - A+ 20,000,000 10,000,000 A 20,000,000 10,000,000 No rating - 10,000,000 218,114,596 99,947,893 1 The average external credit rating of three domestic credit rating agencies is used. 58
  • 61. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 (in thousands of Korean won) 2 Derivative assets 2011 2010 AA - 6,151,267 AA- 76,478 - A+ 725,233 - 801,711 6,151,267 2 Derivative assets are classified based on S&P credit rating. The assets pledged as collaterals for financial receivables as of September 30, 2011 and December 31, 2010, are as follows: (in thousands of Korean won) 2011 Unimpaired Type Impaired Total Delinquent Non-delinquent Total financial 5,539,818 153,959,007 2,710,113,560 2,869,612,385 receivables Collateralized assets Collateralized 7,115,764 140,705,686 2,002,069,300 2,149,890,750 vehicles Collateralized real - - 94,121,831 94,121,831 estate Collateralized - - 65,500,000 65,500,000 others 7,115,764 140,705,686 2,161,691,131 2,309,512,581 (in thousands of Korean won) 2010 Unimpaired Type Impaired Total Delinquent Non-delinquent Total financial 2,003,293 111,216,176 2,270,409,769 2,383,629,238 receivables Collateralized assets Collateralized 2,997,154 94,484,215 1,741,813,504 1,839,294,873 vehicles Collateralized - - 15,442,164 15,442,164 real estate Others - - 65,500,000 65,500,000 2,997,154 94,484,215 1,822,755,668 1,920,237,037 59
  • 62. Hyundai Commercial, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements September 30, 2011 and 2010, and December 31, 2010 Credit risk concentration of financial receivables by debtors as of September 30, 2011 and December 31, 2010, are as follows: (in thousands of Korean won) 2011 2010 Type Including Including Ratio Allowance Book value Ratio Allowance Book value allowance allowanceFinance 33,707,712 1.17% (80,613) 33,627,099 38,147,620 1.59% (276,412) 37,871,208Manufacturing 133,211,627 4.60% (1,246,729) 131,964,898 113,422,784 4.73% (1,190,223) 112,232,561Service 2,547,394,644 88.06% (17,751,006) 2,529,643,638 2,035,575,575 84.81% (12,105,812) 2,023,469,763Others 178,457,716 6.17% (4,080,965) 174,376,751 213,102,587 8.87% (3,046,881) 210,055,706 2,892,771,699 100.0% (23,159,313) 2,869,612,386 2,400,248,566 100.0% (16,619,328) 2,383,629,238 27.2 Liquidity risk Cash flows of financial liabilities based on remaining contractual maturities as of September 30, 2011 and December 31, 2010, are as follows: (in thousands of Korean won) 2011 Immediate Up to 3 3 months to 1 Type 1 to 5 years Over 5 years Total payment months 1 year Borrowings - 207,396,236 257,469,646 363,646,214 - 828,512,096 Debentures - 81,767,344 453,741,170 1,322,639,583 41,170,000 1,899,318,097 Securitized - 4,428,867 43,204,097 360,646,648 - 408,279,612 debts Other liabilities 1,703,214 18,069,117 1,110,503 13,328,140 - 34,210,974 Payment guarantee 15,939,278 - - - - 15,939,278 agreements Derivative 2 liabilities Cash inflow - (306,086) (1,000,269) (42,627,916) - (43,934,271) Cash outflow - 542,264 1,626,791 44,368,554 - 46,537,609 17,642,492 311,897,742 756,151,938 2,062,001,223 41,170,000 3,188,863,395 1 The above amounts including the principal and future interest payments are contractual undiscounted cash flows and are not equal to the amounts in the statement of financial position based on the discounted cash flows. 2 Gross settlement derivatives and contractual undiscounted cash flows. 60
  • 63. Hyundai Commercial, Inc. and Subsidiaries Notes to the Interim Consolidated Financial Statements September 30, 2011 and 2010, and December 31, 2010 (in thousands of Korean won) 2010 Immediate Up to 3 3 months to 1 Type 1 to 5 years Over 5 years Total payment months 1 yearBorrowings - 395,342,116 256,239,605 134,049,847 - 785,631,568 Debentures - 101,244,390 190,626,623 1,214,931,753 40,216,000 1,547,018,766 Securitized - 2,560,500 7,681,500 226,693,000 - 236,935,000 debts Other 1,511,379 17,400,384 581,331 2,601,385 - 22,094,479 liabilities Payment guarantee 27,061,444 - - - - 27,061,444 agreement sDerivative 2 liabilities Cash inflow - (131,179) (2,024,005) (42,786,883) - (44,942,067) Cash - 243,500 3,441,727 45,995,345 - 49,680,572 outflow 28,572,823 516,659,711 456,546,781 1,581,484,447 40,216,000 2,623,479,762 The Group has to comply with certain conditions of securitized debts. If these conditions are not met, the Group should redeem the securitized debts before maturity. 27.3 Market risk a. Interest rate risk The Group manages the interest rate risk through Value at Risk(VaR), 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 September 30, 2011 and December 31, 2010, follows: (in thousands of Korean won) Type 2011 2010 Interest rate VaR 6,457,535 3,523,795 61
  • 64. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 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 September 30, 2011 and December 31, 2010, are as follows: (in thousands of Korean won) Currency 2011 2010 USD 64,872,500 108,195,500 The Group’s exposure to foreign exchange risk is hedged by derivatives. Therefore, foreign exchange risk of the Group is not significant. c. Price risk Marketable equity securities which are classified into available-for-sale securities are exposed to price risk. The effects of 10% price variation for comprehensive income and shareholders equity are as follows: (in thousands of Korean won) Type 2011 Comprehensive income 1,497,600 Shareholders equity 1,497,60027.4 Capital risk management The objective of the Group’s capital management is to maintain a 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. 62
  • 65. Hyundai Commercial, Inc. and SubsidiariesNotes to the Interim Consolidated Financial StatementsSeptember 30, 2011 and 2010, and December 31, 2010 Adjusted capital adequacy ratio of the Group as of September 30, 2011 and December 31, 2010, is as follows: (in thousands of Korean won) Type 2011 2010 Adjusted total assets (1) 3,103,092,423 2,619,760,027 Adjusted equity (2) 354,159,023 249,439,164 Adjusted capital adequacy ratio (2)÷(1) 11.41% 9.52% The above adjusted capital adequacy ratio is calculated according to Supervision of Specialized Credit Financial Business Law.28. Subsequent Events a. Capital increase The Company’s Board of Directors decided on November 7, 2011, to increase its capital by offering to third parties the following: Capital increase Description Type Preferred stock Shares to be issued 5,000,000 shares Par value per share 5,000 Price per share 20,000 b. Acquisition of Green Cross Life Insurance’s stock The Company’s Board of Directors decided on October 21, 2011, to acquire the shares of Green Cross Life Insurance Co., Ltd. from Green Cross Holdings Corp. Stock acquisition Description Number of shares to be 5,517,944 shares acquired Purchase price 71.7 billion Ownership after 28.1% acquisition 63