20-F 1 d349372d20f.htm FORM 20-F Form 20-F
Table of Contents

As filed with the Securities and Exchange Commission on April 27, 2017

 

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 20-F

 

 

(Mark One)

 

  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
  ACT OF 1934

 

       For the fiscal year ended December 31, 2016

OR

 

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
  ACT OF 1934

OR

 

  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

For the transition period from             to             

Commission file number 1-14418

SK Telecom Co., Ltd.

(Exact name of Registrant as specified in its charter)

 

 

SK Telecom Co., Ltd.

(Translation of Registrant’s name into English)

The Republic of Korea

(Jurisdiction of incorporation or organization)

SK T-Tower

65, Eulji-ro, Jung-gu, Seoul, Korea

(Address of principal executive offices)

Ms. Min Joo Kim

65, Eulji-ro, Jung-gu, Seoul, Korea

Telephone No.: 82-2-6100-2114

Facsimile No.: 82-2-6100-7830

(Name, telephone, email and/or facsimile number and address of company contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of Each Class

 

Name of Each Exchange on Which Registered

American Depositary Shares, each representing
one-ninth of one share of Common Stock

  New York Stock Exchange

Common Stock, par value ₩500 per share

  New York Stock Exchange*

* Not for trading, but only in connection with the registration of the American Depositary Shares.

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

70,609,160 shares of common stock, par value 500 per share (not including 10,136,551 shares of common stock held by the company as treasury shares)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes      No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definitions of “accelerated filer,” “large accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ☑            Accelerated filer  ☐             Non-accelerated filer  ☐             Emerging growth company  ☐

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP  ☐    International Financial Reporting Standards as issued by the International Accounting Standards Board  ☑    Other  ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark which financial statement item the registrant has elected to follow. Item 17      Item 18  

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

 

 

 

 


Table of Contents

TABLE OF CONTENTS

 

CERTAIN DEFINED TERMS AND CONVENTIONS USED IN THIS ANNUAL REPORT

     1  

FORWARD-LOOKING STATEMENTS

     1  

Part I

     3  

Item 1.

 

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     3  

Item 1.A.

 

Directors and Senior Management

     3  

Item 1.B.

 

Advisers

     3  

Item 1.C.

 

Auditors

     3  

Item 2.

 

OFFER STATISTICS AND EXPECTED TIMETABLE

     3  

Item 3.

 

KEY INFORMATION

     3  

Item 3.A.

 

Selected Financial Data

     3  

Item 3.B.

 

Capitalization and Indebtedness

     6  

Item 3.C.

 

Reasons for the Offer and Use of Proceeds

     6  

Item 3.D.

 

Risk Factors

     7  

Item 4.

 

INFORMATION ON THE COMPANY

     22  

Item 4.A.

 

History and Development of the Company

     22  

Item 4.B.

 

Business Overview

     24  

Item 4.C.

 

Organizational Structure

     46  

Item 4.D.

 

Property, Plants and Equipment

     47  

Item 4.E.

 

UNRESOLVED STAFF COMMENTS

     47  

Item 5.

 

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     47  

Item 5.A.

 

Operating Results

     47  

Item 5.B.

 

Liquidity and Capital Resources

     60  

Item 5.C.

 

Research and Development, Patents and Licenses, etc.

     67  

Item 5.D.

 

Trend Information

     68  

Item 5.E.

 

Off-Balance Sheet Arrangements

     68  

Item 5.F.

 

Tabular Disclosure of Contractual Obligations

     68  

Item 5.G.

 

Safe Harbor

     68  

Item 6.

 

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     68  

Item 6.A.

 

Directors and Senior Management

     68  

Item 6.B.

 

Compensation

     70  

Item 6.C.

 

Board Practices

     70  

Item 6.D.

 

Employees

     71  

Item 6.E.

 

Share Ownership

     72  

Item 7.

 

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     72  

Item 7.A.

 

Major Shareholders

     72  

Item 7.B.

 

Related Party Transactions

     74  

Item 7.C.

 

Interests of Experts and Counsel

     74  

Item 8.

 

FINANCIAL INFORMATION

     74  

Item 8.A.

 

Consolidated Statements and Other Financial Information

     74  

Item 8.B.

 

Significant Changes

     77  

Item 9.

 

THE OFFER AND LISTING

     77  

Item 9.A.

 

Offering and Listing Details

     77  

Item 9.B.

 

Plan of Distribution

     77  

Item 9.C.

 

Markets

     77  

Item 9.D.

 

Selling Shareholders

     85  

Item 9.E.

 

Dilution

     85  

Item 9.F.

 

Expenses of the Issue

     85  

Item 10.

 

ADDITIONAL INFORMATION

     85  

Item 10.A.

 

Share Capital

     85  

 

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Table of Contents

Item 10.B.

 

Material Contracts

     98  

Item 10.C.

 

Exchange Controls

     98  

Item 10.D.

 

Taxation

     102  

Item 10.E.

 

Dividends and Paying Agents

     106  

Item 10.F.

 

Statements by Experts

     106  

Item 10.G.

 

Documents on Display

     106  

Item 10.H.

 

Subsidiary Information

     106  

Item 11.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      107  

Item 12.

 

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     108  

Item 12.A.

 

Debt Securities

     108  

Item 12.B.

 

Warrants and Rights

     108  

Item 12.C.

 

Other Securities

     108  

Item 12.D.

 

American Depositary Shares

     108  

Part II

     109  

Item 13.

 

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     109  

Item 14.

  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS      109  

Item 15.

 

CONTROLS AND PROCEDURES

     109  

Item 16.

 

RESERVED

     110  

Item 16.A.

 

AUDIT COMMITTEE FINANCIAL EXPERT

     110  

Item 16.B.

 

CODE OF ETHICS

     110  

Item 16.C.

 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

     110  

Item 16.D.

  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES      111  

Item 16.E.

  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      111  

Item 16.F.

 

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

     111  

Item 16.G.

 

CORPORATE GOVERNANCE

     111  

Item 16.H.

 

MINE SAFETY DISCLOSURE

     113  

Part III

     113  

Item 17.

 

FINANCIAL STATEMENTS

     113  

Item 18.

 

FINANCIAL STATEMENTS

     113  

Item 19.

 

EXHIBITS

     113  

EX-1.1

    

EX-8.1

    

EX-12.1

    

EX-12.2

    

EX-13.1

    

EX-13.2

    

 

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CERTAIN DEFINED TERMS AND CONVENTIONS USED IN THIS ANNUAL REPORT

All references to “Korea” contained in this annual report shall mean The Republic of Korea. All references to the “Government” shall mean the government of The Republic of Korea. All references to “we,” “us,” or “our” shall mean SK Telecom Co., Ltd. and, unless the context otherwise requires, its consolidated subsidiaries. References to “SK Telecom” shall mean SK Telecom Co., Ltd., but shall not include its consolidated subsidiaries. All references to “U.S.” shall mean the United States of America.

All references to “MHz” contained in this annual report shall mean megahertz, a unit of frequency denoting one million cycles per second. All references to “GHz” shall mean gigahertz, a unit of frequency denoting one billion cycles per second. All references to “Mbps” shall mean one million bits per second and all references to “Gbps” shall mean one billion bits per second. All references to “GB” shall mean gigabytes, which is one billion bytes. Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding.

All references to “Won,” or “₩” in this annual report are to the currency of Korea, all references to “Dollars” or “US$” are to the currency of the United States of America, all references to “CHF” or “Franc” are to the currency of Switzerland, all references to “euro” or “€” are to the currency of the European Union and all references to “Australian Dollars” or “AUD” are to the currency of the Commonwealth of Australia.

Pursuant to amendments to the Government Organization Act and the Act on the Establishment and Operation of Korea Communications Commission, both effective as of March 23, 2013, the Ministry of Science, ICT and Future Planning (the “MSIP”) was established. The MSIP is charged with regulating information and telecommunications, which function was formerly performed by the Korea Communications Commission (the “KCC”) under the previous Government. The KCC, which had taken over the regulatory functions relating to information and telecommunications policies and radio and broadcasting management from the Ministry of Information and Communication (the “MIC”) in 2008, is currently charged with regulating the public interest aspects of and fairness in broadcasting. In this annual report, we refer to the MIC and the KCC as the relevant governmental authorities in connection with any approval granted or action taken by the MIC or the KCC, as applicable, prior to such amendments and to the MSIP or other relevant governmental authority in connection with any approval granted or to be granted or action taken or to be taken by the MSIP or such other relevant governmental authority subsequent to such amendments.

Subscriber information for the wireless and fixed-line telecommunications industry set forth in this annual report are derived from information published by the MSIP unless expressly stated otherwise.

The consolidated financial statements included in this annual report are prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (the “IASB”). As such, we make an explicit and unreserved statement of compliance with IFRS, as issued by the IASB, with respect to our consolidated financial statements as of December 31, 2016 and 2015, and for the years ended December 31, 2016, 2015, and 2014 included in this annual report.

In accordance with rule amendments adopted by the U.S. Securities and Exchange Commission (the “SEC”), which became effective on March 4, 2008, we are not required to provide a reconciliation to generally accepted accounting principles in the United States, or U.S. GAAP.

Unless expressly stated otherwise, all financial data included in this annual report are presented on a consolidated basis.

FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements,” as defined in Section 27A of the U.S. Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are based on our current expectations, assumptions, estimates and projections about our company and our industry. The forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,”

 

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“believe,” “considering,” “depends,” “estimate,” “expect,” “intend,” “plan,” “planning,” “planned,” “project” and similar expressions, or that certain events, actions or results “may,” “might,” “should” or “could” occur, be taken or be achieved.

Forward-looking statements in this annual report include, but are not limited to, statements about the following:

 

   

our ability to anticipate and respond to various competitive factors affecting the telecommunications industry, including new services that may be introduced, changes in consumer preferences, economic conditions and discount pricing strategies by competitors;

 

   

our implementation of long-term evolution (“LTE”) technology, long-term evolution advanced (“LTE-A”) technology and the next-generation wireless technology, which we call “5G” technology;

 

   

our plans for capital expenditures in 2017 for a range of projects, including investments to improve and expand our LTE network and LTE-A services, investments to improve and expand our Wi-Fi network, investments to develop our platform services business portfolio and funding for mid- to long-term research and development projects, as well as other initiatives, primarily related to the development of new growth businesses, as well as initiatives related to our ongoing businesses in the ordinary course;

 

   

our efforts to make significant investments to build, develop and broaden our businesses, including developing our next-generation growth businesses in Internet of Things (“IoT”) solutions, media and e-commerce and other innovative products and services offered through our platform services;

 

   

our ability to comply with governmental rules and regulations, including the regulations of the Government related to telecommunications providers, the Mobile Device Distribution Improvement Act (“MDDIA”), rules related to our status as a “market-dominating business entity” under the Korean Monopoly Regulation and Fair Trade Act (the “Fair Trade Act”) and the effectiveness of steps we have taken to comply with such regulations;

 

   

our ability to effectively manage our bandwidth and to timely and efficiently implement new bandwidth-efficient technologies and our intention to participate in, and acquire additional bandwidth pursuant to, frequency bandwidth auctions held by the MSIP;

 

   

our expectations and estimates related to interconnection fees, rates charged by our competitors, regulatory fees, operating costs and expenditures, working capital requirements, principal repayment obligations with respect to long-term borrowings, bonds and obligations under capital leases, and research and development expenditures and other financial estimates;

 

   

the success of our various joint ventures and investments, including SK Hynix, Inc. (known as Hynix Semiconductor Inc. at the time of such acquisition, “SK Hynix”), a memory-chip maker;

 

   

our ability to successfully attract and retain subscribers; and

 

   

the growth of the telecommunications industry in Korea and other markets in which we do business and the effect that economic, political or social conditions have on our number of subscribers and results of operations.

We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be incorrect. Risks and uncertainties associated with our business include, but are not limited to, risks related to changes in the regulatory environment, technology changes, potential litigation and governmental actions, changes in the competitive environment, political changes, foreign exchange currency risks, foreign ownership limitations, credit risks and other risks and uncertainties that are more fully described under the heading “Item 3. Key Information — Risk Factors” and elsewhere in this annual report. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances.

 

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PART I

 

Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Item 1.A. Directors and Senior Management

Not applicable.

 

Item 1.B. Advisers

Not applicable.

 

Item 1.C. Auditors

Not applicable.

 

Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

Item 3. KEY INFORMATION

 

Item 3.A. Selected Financial Data

You should read the selected consolidated financial and operating data below in conjunction with the consolidated financial statements and the related notes included elsewhere in this annual report. The selected consolidated financial data set forth below as of and for the years ended December 31, 2016, 2015, 2014, 2013 and 2012 have been derived from our audited consolidated financial statements and related notes thereto, which have been prepared in accordance with IFRS as issued by the IASB.

In addition to preparing consolidated financial statements in accordance with IFRS as issued by the IASB included in this annual report, we also prepare financial statements in accordance with Korean International Financial Reporting Standards (“K-IFRS”) as adopted by the Korean Accounting Standards Board (the “KASB”), which we are required to file with the Financial Services Commission of Korea (the “FSC”) and the Korea Exchange Inc. (the “Korea Exchange”) under the Financial Investment Services and Capital Markets Act (the “FSCMA”). English translations of such financial statements are furnished to the SEC on Form 6-K. Beginning with our financial statements prepared in accordance with K-IFRS as of and for the year ended December 31, 2012, we are required to adopt certain amendments to K-IFRS No. 1001, Presentation of Financial Statements, as adopted by the KASB in 2012. The amendments require operating profit, which is calculated as operating revenue less operating expense, to be separately presented on the consolidated statement of income. Operating expense represents expenses incurred in our main operating activities and includes cost of products that have been resold and selling, general and administrative expenses.

In our consolidated statements of income prepared in accordance with IFRS as issued by the IASB included in this annual report, such changes in presentation were not adopted. As a result, the presentation of operating profit in our consolidated statements of income prepared in accordance with IFRS as issued by the IASB included in this annual report differs from the presentation of operating profit in the consolidated statements of income prepared in accordance with K-IFRS for the corresponding periods. For additional information, see “Item 5.A. Operating Results — Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS.”

 

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    Year Ended December 31,  
    2016     2015     2014     2013     2012  
    (In billions of Won, except per share and number of shares data)  

STATEMENT OF INCOME DATA

         

Operating Revenue and Other Income

  17,158.3     17,167.6     17,220.3     16,677.0     16,343.3  

Revenue

    17,091.8       17,136.7       17,163.8       16,602.1       16,141.4  

Other income

    66.5       30.9       56.5       74.9       201.9  

Operating Expense

    15,854.9       15,672.2       15,612.4       15,098.6       14,605.6  

Operating Profit

    1,303.4       1,495.4       1,607.8       1,578.4       1,737.6  

Profit before Income Tax

    2,096.1       2,035.4       2,253.8       1,827.1       1,519.4  

Profit from Continuing Operations

    1,660.1       1,515.9       1,799.3       1,426.3       1,231.2  

Profit (Loss) from Discontinued Operation, net of income taxes

                      183.2       (115.5

Profit for the Year

    1,660.1       1,515.9       1,799.3       1,609.5       1,115.7  

Basic Earnings per Share(1)

    23,497       20,988       25,154       23,211       16,525  

Diluted Earnings per Share(2)

    23,497       20,988       25,154       23,211       16,141  

Basic Earnings per Share from Continuing Operations(1)

    23,497       20,988       25,154       20,708       18,015  

Diluted Earnings per Share from Continuing Operations(2)

    23,497       20,988       25,154       20,708       17,583  

Dividends Declared per Share (Won)

    10,000       10,000       9,400       9,400       9,400  

Dividends Declared per Share (US$)(3)

    8.3       8.6       8.6       8.9       8.8  

Weighted Average Number of Shares

    70,609,160       71,551,966       70,936,336       70,247,592       69,694,999  
    As of December 31,  
    2016     2015     2014     2013     2012  
    (In billions of Won)  

STATEMENT OF FINANCIAL POSITION DATA

         

Working Capital (Deficit)(4)

  (447.5   (96.3   (337.2   (945.8   (880.5

Property and Equipment, Net

    10,374.2       10,371.3       10,567.7       10,196.6       9,712.7  

Total Assets

    31,297.7       28,581.4       27,941.2       26,576.5       25,595.6  

Non-current Liabilities(5)

    8,737.1       7,950.8       7,272.7       6,340.7       6,565.9  

Share Capital

    44.6       44.6       44.6       44.6       44.6  

Total Equity

    16,116.4       15,374.1       15,248.3       14,166.6       12,854.8  
    Year Ended December 31,  
    2016     2015     2014     2013     2012  
    (In billions of Won, except percentage data)  

OTHER FINANCIAL DATA

         

Capital Expenditures(6)

  2,490.5     2,478.8     3,008.0     2,879.1     3,394.3  

R&D Expense(7)

    351.1       322.7       397.8       363.7       346.3  

Depreciation and Amortization Expense

    2,941.9       2,845.3       2,714.7       2,661.6       2,421.1  

Net Cash Provided by Operating Activities

    4,243.2       3,778.1       3,677.4       3,558.6       3,999.7  

Net Cash Used in Investing Activities

    (2,462.2     (2,880.5     (3,683.2     (2,506.5     (5,309.6

Net Cash Provided by (Used in) Financing Activities

    (1,044.8     (964.6     (559.4     (573.2     585.3  

Margins (% of total sales):

         

Operating Margin(8)

    7.6     8.7     9.3     9.5     10.6

Net Margin(8)

    9.7     8.8     10.4     9.7     6.8

 

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    As of or for the Year Ended December 31,  
    2016     2015     2014     2013     2012  

SELECTED OPERATING DATA

         

Population of Korea (in millions)(9)

    51.7       51.5       51.3       51.1       50.9  

Our Wireless Penetration(10)

    57.2     55.6     55.1     53.5     52.9

Number of Employees(11)

    25,844       25,992       25,689       23,789       22,148  

Our Wireless Subscribers (in thousands)(12)

    29,595       28,626       28,279       27,352       26,961  

Our LTE Subscribers (in thousands)(13)

    21,078       18,980       16,737       13,487       7,530  

Our LTE Penetration(14)

    71.2     66.3     59.2     49.3     27.9

Average Monthly Data Usage per Subscriber(15)

    5.2GB       3.9GB       3.0GB       2.0GB       1.8GB  

Average Monthly Churn Rate(16)

    1.5     1.5     2.0     2.3     2.6

Cell Sites

               54,986                  55,085                  50,158                  44,764                  35,584  

 

 

(1)   Basic earnings per share is calculated by dividing profit attributable to owners of SK Telecom by the weighted average number of common shares outstanding during the period. Basic earnings per share from continuing operations is calculated by dividing profit from continuing operations attributable to owners of SK Telecom by the weighted average number of common shares outstanding during the period.

 

(2)   Diluted earnings per share is calculated by dividing profit attributable to owners of SK Telecom adjusted for dilution by the potential dilutive weighted average number of common shares outstanding during the period, taking into account the conversion of outstanding convertible bonds. Diluted earnings per share from continuing operations is calculated by dividing profit from continuing operations attributable to owners of SK Telecom adjusted for dilution by the potential dilutive weighted average number of common shares outstanding during the period, taking into account the conversion of outstanding convertible bonds.

 

(3)   The Dollar amounts shown for the years ended December 31, 2016, 2015, 2014, 2013 and 2012 were translated at the rate of Won 1,203.7 to US$1.00, Won 1,169.3 to US$1.00, Won 1,090.9 to US$1.00, Won 1,055.3 to US$1.00 and Won 1,063.2 to US$1.00, respectively, the noon buying rates in effect at the end of the respective years.

 

(4)   Working capital means current assets minus current liabilities.

 

(5)   Our monetary assets and liabilities denominated in foreign currencies are valued at the exchange rates prevailing at the end of each reporting period. See note 3(19) of the notes to our consolidated financial statements.

 

(6)   Consists of cash outflows for the acquisition of property and equipment.

 

(7)   Consists of research and development costs that are expensed and costs that are amortized during the respective period as well as donations to Korean research institutions and educational organizations in 2012 of Won 4.0 billion.

 

(8)   Operating revenue and other income and operating profit used in the calculation of these ratios exclude the operating revenue and other income and operating profit from discontinued operations.

 

(9)   Population numbers reflect the number of registered residents as published by the Ministry of the Interior of Korea.

 

(10)   Our wireless penetration is determined by dividing our wireless subscribers by total estimated population, as of the end of the period.

 

(11)   Includes regular employees and temporary employees. See “Item 6.D. Employees.”

 

(12)   Wireless subscribers include those subscribers who are temporarily deactivated, including (i) subscribers who voluntarily deactivate temporarily for a period of up to three months no more than twice a year and (ii) subscribers with delinquent accounts who may be involuntarily deactivated up to two months before permanent deactivation, which we determine based on various factors, including prior payment history. The number of subscribers as of December 31, 2016, 2015, 2014 and 2013 include 3.2 million subscribers, 2.7 million subscribers, 2.1 million subscribers and 1.1 million subscribers, respectively, of mobile virtual network operators (“MVNO”) that lease our wireless networks.

 

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(13)   The number of LTE subscribers as of December 31, 2016 and 2015 include 0.3 million subscribers and 0.1 million subscribers, respectively, of MVNOs that lease our LTE network.

 

(14)   Our LTE wireless penetration is determined by dividing our LTE subscribers by our total wireless subscribers, as of the end of the period.

 

(15)   Average monthly data usage per LTE subscriber is determined by dividing the total GBs of data usage for the last month of the period by the average number of LTE subscribers for such month.

 

(16)   The average monthly churn rate for a period is the number calculated by dividing the sum of voluntary and involuntary deactivations during the period by the simple average of the number of subscribers at the beginning and end of the period, then dividing that number by the number of months in the period. Churn includes subscribers who upgrade to a next-generation service, such as LTE, by terminating their service and opening a new subscriber account.

Exchange Rates

The following table sets forth, for the periods and dates indicated, certain information concerning the noon buying rate for translations of Won amounts into Dollars. We make no representation that the Won or Dollar amounts we refer to in this annual report could have been or could be converted into Dollars or Won, as the case may be, at any particular rate or at all.

 

Year Ended December 31,

   At End of
Period
     Average
Rate(1)
     High      Low  
     (Won per US$1.00)  

2012

     1,063.2        1,126.2        1,185.0        1,063.2  

2013

     1,055.3        1,094.7        1,161.3        1,050.1  

2014

     1,090.9        1,052.3        1,117.7        1,008.9  

2015

     1,169.3        1,131.0        1,196.4        1,063.0  

2016

     1,203.7        1,159.3        1,242.6        1,090.0  

 

     Past Six Months  
     High      Low  
     (Won per US$1.00)  

October 2016

     1,146.5        1,104.8  

November 2016

     1,181.6        1,131.4  

December 2016

     1,212.2        1,161.7  

January 2017

     1,207.2        1,151.5  

February 2017

     1,154.5        1,129.2  

March 2017

     1,158.1        1,108.3  

April 2017 (through April 21)

     1,147.8        1,117.7  

 

Source: Federal Reserve Bank of New York.

 

(1) The average rates for the annual periods were calculated based on daily noon buying rates for cable transfers in New York City certified for customs purposes by the Federal Reserve Bank of New York.

On April 21, 2017, the noon buying rate was Won 1,134.2 to US$1.00.

 

Item 3.B. Capitalization and Indebtedness

Not applicable.

 

Item 3.C. Reasons for the Offer and Use of Proceeds

Not applicable.

 

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Item 3.D. Risk Factors

Risks Relating to Our Business

Competition may reduce our market share and harm our results of operations and financial condition.

We face substantial competition across all our businesses, including our wireless telecommunications business. We expect competition to intensify as a result of the development of new technologies, products and services. We expect that such trends will continue to put downward pressure on the prevailing rates we can charge our subscribers.

Historically, there has been considerable consolidation in the telecommunications industry, resulting in the current competitive landscape comprising three mobile and fixed network operators in the Korean market, us, KT Corporation (“KT”) and LG Uplus Corp. (“LG U+”). Our competitors have substantial financial, technical, marketing and other resources to respond to our business offerings.

The collective market share of our competitors amounts to approximately 50.9%, in terms of number of wireless subscribers, as of December 31, 2016. We also compete for subscriber activations with MVNOs, including MVNOs that lease our networks. MVNOs generally provide rate plans that are relatively cheaper than similar rate plans of the wireless network providers from which they lease their networks, including us. In addition, other companies may enter the telecommunications service market by acquiring the required licenses from the MSIP. For example, in October 2015, Sejong Telecom, K Mobile and Quantum Mobile applied for licenses to become Korea’s fourth mobile network operator. Although the MSIP rejected the applications of all three companies in January 2016, the MSIP may continue its efforts to find an eligible applicant to be Korea’s fourth mobile network operator in the future.

We believe the increase in market share of MVNOs and the entrance of a new mobile network operator in the wireless telecommunications market may further increase competition in the telecommunications sector, as well as cause downward price pressure on the fees we charge for our services, which, in turn, may have a material adverse effect on our results of operations, financial position and cash flows.

Our fixed-line telephone service competes with KT and LG U+, as well as other providers of voice over Internet protocol (“VoIP”) services. As of December 31, 2016, our market share of the fixed-line telephone and VoIP service market was 15.2% (including the services provided by SK Broadband and SK Telink Co., Ltd. (“SK Telink”) in terms of number of subscribers compared to KT with 57.8% and LG U+ with 17.4%. In addition, our broadband Internet access and Internet protocol TV (“IPTV”) services provided through SK Broadband competes with other providers of such services, including KT, LG U+ and cable companies. As of December 31, 2016, our market share of the broadband Internet market was 25.3% in terms of number of subscribers compared to KT with 41.4% and LG U+ with 17.6%. As of December 31, 2016, our market share of the pay TV market (which includes IPTV, cable TV and satellite TV) was 13.1% compared to KT with 23.2% and LG U+ with 8.4% and the collective market share of other pay TV providers with 55.3%.

Continued competition from other wireless and fixed-line service providers has also resulted in, and may continue to result in, a substantial level of deactivations among our subscribers. Subscriber deactivations, or churn, may significantly harm our business and results of operations. In 2016, the monthly churn rate in our wireless telecommunications business ranged from 1.4% to 1.5%, with an average monthly churn rate of 1.5%, which remained unchanged from 2015. Intensification of competition in the future may cause our churn rates to increase, which in turn may cause us to increase our marketing expenses as a percentage of sales to attract and retain subscribers.

With respect to the e-commerce business operated by SK Planet Co., Ltd. (“SK Planet”), 11st, our marketplace business, faces intense competition from various e-commerce providers, including online open marketplaces such as Gmarket, Auction and Interpark and online social commerce operators such as Coupang, Ticket Monster and Wemakeprice. We also face competition from traditional retailers with online and mobile shopping portals such as SSG.com and Lotte.com, home shopping providers with online and mobile shopping portals such as CJ Mall by CJ O Shopping, GS Shop by GS Homeshopping and Hyundai Hmall by Hyundai Homeshopping, and various online marketplaces for specific consumer segments or product groups. The industry in which 11st competes is evolving rapidly and is intensely competitive, and we face a broad array of competitors domestically and increasingly, internationally.

 

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Our ability to compete successfully in all of the businesses that we operate will depend on our ability to anticipate and respond to various competitive factors affecting the respective industries, including new services that may be introduced, changes in consumer preferences, economic conditions and discount pricing strategies by competitors.

Inability to successfully implement or adapt our network and technology to meet the continuing technological advancements affecting the wireless telecommunications industry will likely have a material adverse effect on our financial condition, results of operation, cash flows and business.

The telecommunications industry has been characterized by continual improvement and advances in technology, and this trend is expected to continue. We and our competitors have continually implemented technology upgrades from our basic code division multiple access (“CDMA”) network to our wideband code division multiple access (“WCDMA”) network, and subsequently to LTE technology. We commenced commercial LTE services in July 2011 at the same time with LG U+, while KT commenced its commercial LTE services in January 2012. In June 2013, we commenced providing commercial LTE-A services using carrier aggregation technology which combines spectrum frequencies to improve data transmission speeds, and in June 2014, we launched wideband LTE-A services of up to 225 Mbps and expanded coverage nationwide in 2014.

In December 2014, we commenced tri-band LTE-A services, which bundles three different bandwidths to allow faster network service at speeds of up to 300 Mbps in Seoul and other metropolitan areas. KT and LG U+ have also launched similar LTE-A services around the same time as us. Since then, we expanded coverage nationwide and as of December 31, 2015, the last date for which the MSIP has announced such information, the nationwide geographic coverage percentage of our tri-band LTE-A service was approximately 51.9%. The more successful operation of an LTE network or development of improved LTE technology by a competitor, including better market acceptance of a competitor’s LTE services, could materially and adversely affect our existing wireless telecommunications businesses as well as the returns on future investments we may make in our LTE network or our other businesses. Additionally, in order to promote the growth of our IoT solutions business, we deployed new networks nationwide, namely our high-speed LTE-M network in March 2016 and our low-cost Low Power Wide Area Network based on LoRa technology (our “LoRa network”) in July 2016. We believe that these new networks will support the active development and provision of diverse IoT solutions at a lower cost. For a more detailed description of our backbone networks, see “Item 4.B. Business Overview — Cellular Services — Digital Wireless Network.”

Our business could also be harmed if we fail to implement, or adapt to, future technological advancements in the telecommunications sector in a timely manner, such as the implementation of 5G technology. In addition to introducing new technologies and offerings, we must phase out outdated and unprofitable technologies and services. If we are unable to do so on a cost-effective basis, our results of operations could be adversely affected.

Implementation of LTE technology has required, and may continue to require, significant capital and other expenditures, which we may not recoup.

We have made, and intend to continue to make, capital investments to develop, launch and enhance our LTE service, including launching LTE-A services. In 2016, 2015 and 2014, we spent Won 1,104.0 billion, Won 1,022.7 billion and Won 1,357.2 billion, respectively, in capital expenditures to build and enhance our LTE network. We plan to make further capital investments related to our LTE and LTE-A services in the future. Our wireless technology-related investment plans are subject to change, and will depend, in part, on market demand for LTE and LTE-A services, the competitive landscape for provision of such services and the development of competing technologies. There may not be sufficient demand for services based on our latest wireless technologies, as a result of competition or otherwise, to permit us to recoup or profit from our wireless technology-related capital investments.

Our growth strategy calls for significant investments in new businesses and regions, including businesses and regions in which we have limited experience.

We seek growth through investments in new businesses. While we believe that entering into new businesses enables us to diversify our business portfolio, we may be exposed to additional risks. For example, in February

 

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2012, we acquired a 21.1% equity stake in SK Hynix, one of the world’s largest memory-chip makers by revenue, for an aggregate purchase price of approximately Won 3.4 trillion, and became its largest shareholder. From time to time, the memory semiconductor industry has experienced significant and sometimes prolonged downturns, which often occur in connection with a deterioration of global economic conditions, and is subject to intense competition. For example, SK Hynix and its subsidiaries, on a consolidated basis, incurred net losses of Won 158.8 billion and Won 56.0 billion in 2012 and 2011, respectively, primarily due to increased supply and weak demand for semiconductor products. Although the memory semiconductor industry has recovered since then and SK Hynix has been recording net profits since 2013, the industry is subject to cyclical fluctuations and we expect that there may be future downturns in the industry. Accordingly, SK Hynix’s operating results would be adversely affected if it fails to compete successfully or decrease manufacturing costs at an adequate level. Since our share of any net losses incurred by SK Hynix would be reflected in our income statement as share of losses related to investments in associates, any significant loss of SK Hynix could have a material adverse effect on our results of operations.

We believe that we must continue to make significant investments to build, develop and broaden our existing businesses. Entering into new businesses and regions in which we have limited experience may require us to make substantial investments, and despite such investments, we may still be unsuccessful in these efforts to expand and diversify. We might not be able to recoup or profit from our investments in new businesses and regions. In addition, when we enter into these businesses and regions with partners through joint ventures or other strategic alliances, we and those partners may have disagreements with respect to strategic directions or other aspects of business, or may otherwise be unable to coordinate or cooperate with each other, any of which could materially and adversely affect our operations in such businesses and regions.

We may fail to successfully complete or integrate our new acquisitions and joint ventures and may fail to realize the anticipated benefits.

We continue to seek opportunities to develop new businesses that we believe are complementary to our existing product and service portfolio and expand our global business through selective acquisitions.

In 2014 and 2015, we acquired an 83.9% interest in Neosnetworks Co., Ltd. (“Neosnetworks”), a provider of residential and small business electronic security and other related alarm monitoring services, for an aggregate purchase price of approximately Won 64.0 billion and a 49.0% equity stake in Iriver Ltd. (“Iriver”), a manufacturer of digital audio players and other portable media devices, for an aggregate purchase price of approximately Won 54.5 billion. In October 2016, we acquired the remaining 16.1% interest in Neosnetworks through SK Telink. In 2014, a 95.2%-owned subsidiary of SK Planet acquired a 100.0% ownership interest in Shopkick Inc. (“Shopkick”), the developer of “shopkick,” a mobile shopping application that checks in and rewards customers that arrive at a participating retail store in order to penetrate the mobile commerce market in the United States. For a more detailed description of our recent investments in new businesses, see “Item 5.B. Liquidity and Capital Resources — Capital Requirements — Investments in New Businesses and Global Expansion and Other Needs.”

In addition, in November 2015, we entered into a share purchase agreement with CJ O Shopping Co., Ltd. (“CJ O Shopping”) to acquire a 30.0% interest in CJ HelloVision, a fixed-line cable TV broadcast service provider, and SK Broadband entered into a merger agreement with CJ HelloVision. However, in July 2016, the Korea Fair Trade Commission denied approval of the proposed merger, which was a closing condition to the consummation of the merger agreement, and both the share purchase agreement and the merger agreement were subsequently terminated. Similarly, while we are hoping to benefit from a range of synergies from our recent or future acquisitions as well as develop new growth engines for our business, we may not be able to successfully complete or integrate such acquisitions or new businesses and may fail to realize the expected benefits in the near term, or at all.

Due to the existing high penetration rate of wireless telecommunications services in Korea, we are unlikely to maintain our subscriber growth rate, which could adversely affect our results of operations.

According to data published by the MSIP and the historical population data published by the Ministry of the Interior, the penetration rate for the Korean wireless telecommunications industry as of December 31, 2016 was approximately 111.3%, which is relatively high compared to many industrialized countries. Therefore, we expect that the penetration rate for wireless telecommunications service in Korea will remain relatively stable. As a result of the already high penetration rate in Korea for wireless telecommunications services coupled with our leading

 

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market share, we expect our subscriber growth rate to decrease. Slowed growth in the penetration rate without a commensurate increase in revenues through the introduction of new services and increased use of our services by existing subscribers would likely have a material adverse effect on our financial condition, results of operations and cash flows.

Our business and results of operations may be adversely affected if we fail to acquire adequate additional spectrum or use our bandwidth efficiently to accommodate subscriber growth and subscriber usage.

One of the principal limitations on a wireless network’s subscriber capacity is the amount of spectrum available for use by the network. We currently use 10 MHz of bandwidth in the 800 MHz spectrum for our CDMA services, 40 MHz of bandwidth in the 2.1 GHz spectrum for our WCDMA services, 20 MHz of bandwidth in the 2.1 GHz spectrum, 20 MHz of bandwidth in the 800 MHz spectrum, 35 MHz of bandwidth in the 1.8 GHz spectrum and 60 MHz of bandwidth in the 2.6 GHz spectrum for our LTE services, as well as 30 MHz of spectrum in the 2.3 GHz band for our wireless broadband Internet (“WiBro”) services.

The growth of our wireless data businesses has been a significant factor in the increased utilization of our bandwidth, since wireless data applications are generally more bandwidth-intensive than voice services. In particular, the increasing popularity of smartphones and data intensive applications among smartphone users has recently been a major factor for the high utilization of our bandwidth. This trend has been offset in part by the implementation of new technologies, such as our tri-band LTE-A technology, which enables more efficient usage of our bandwidth than was possible on our basic LTE network. However, if the current trend of increased data transmission use by our subscribers continues, or the volume of the multimedia content we offer through our wireless data services substantially grows, our bandwidth capacity requirements are likely to increase. While we believe that we can address the capacity constraint issue through system upgrades and efficient allocation of bandwidth, inability to address such capacity constraints in a timely manner may adversely affect our business, results of operations, financial position and cash flows. In the event we are unable to maintain sufficient bandwidth capacity, our subscribers may perceive a general slowdown of wireless telecommunications services. Growth of our wireless telecommunications business will depend in part upon our ability to effectively manage our bandwidth capacity and to implement efficiently and in a timely manner new bandwidth-efficient technologies if they become available. We cannot assure you that bandwidth constraints will not adversely affect the growth of our wireless telecommunications business.

We may choose to participate in frequency bandwidth auctions held by the MSIP in 2017, if any, in order to acquire bandwidths that are complementary to our existing network. We may be required to pay a substantial amount to acquire bandwidth capacity in order to meet increasing bandwidth demand and we may not be successful in acquiring the necessary bandwidth to meet such demand, which may adversely affect our financial condition and results of operations.

We rely on key researchers and engineers and senior management, and the loss of the services of any such personnel or the inability to attract and retain them may negatively affect our business.

Our success depends to a significant extent upon the continued service of our research and development and engineering personnel, and on our ability to continue to attract, retain and motivate qualified researchers and engineers. In particular, our focus on leading the market in introducing new services has meant that we must aggressively recruit engineers with expertise in cutting-edge technologies. We also depend on the services of experienced key senior management, and if we lose their services, it would be difficult to find and integrate replacement personnel in a timely manner, or at all.

The loss of the services of any of our key research and development and engineering personnel or senior management without adequate replacement, or the inability to attract new qualified personnel, would have a material adverse effect on our operations.

We need to observe certain financial and other covenants under the terms of our debt instruments, the failure to comply with which would put us in default under those instruments.

Certain of our debt instruments contain financial and other covenants with which we are required to comply on an annual and semi-annual basis. The financial covenants with respect to SK Telecom’s debt instruments include,

 

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but are not limited to, a maximum net debt-to-EBITDA ratio of 2.75 and a minimum interest coverage ratio of 4.00, each as determined on a separate financial statement basis. The debt arrangements also contain negative pledge provisions limiting our ability to provide liens on our assets as well as cross-default and cross-acceleration clauses, which give related creditors the right to accelerate the amounts due under such debt if an event of default or acceleration has occurred with respect to our existing or future indebtedness, or if any material part of our indebtedness or indebtedness of our subsidiaries is capable of being declared payable before the stated maturity date. In addition, such covenants restrict our ability to raise future debt financing.

If we breach our financial or other covenants, our financial condition will be adversely affected to the extent we are not able to cure such breaches or repay the relevant debt.

We may have to make further financing arrangements to meet our capital expenditure requirements and debt payment obligations.

As a network-based wireless telecommunications provider, we have had, and expect to continue to have, significant capital expenditure requirements as we continue to build out, maintain and upgrade our networks. We spent Won 2,490.5 billion for capital expenditures in 2016. We expect to spend a similar amount for capital expenditures in 2017 compared to 2016 for a range of projects, including investments to improve and expand our LTE network and LTE-A services, investments to improve and expand our Wi-Fi network, investments to develop our platform services business portfolio and funding for mid- to long-term research and development projects, as well as other initiatives, primarily related to the development of new growth businesses, as well as initiatives related to our ongoing businesses in the ordinary course. If we acquire new bandwidths in any frequency bandwidth auctions held by the MSIP in 2017, we may be required to spend additional amounts on capital expenditures in connection with building out our networks on such new bandwidths.

In particular, we continue to make significant capital investments to expand and upgrade our wireless networks in response to growing bandwidth demand by our subscribers. Bandwidth usage by our subscribers has rapidly increased in recent years primarily due to the increasing popularity of smartphones and data intensive applications among smartphone users. If heavy usage of bandwidth-intensive services grows beyond our current expectations, we may need to invest more capital than currently anticipated to expand the bandwidth capacity of our networks or our customers may have a suboptimal experience when using our services. Any of these events could adversely affect our competitive position and have a material adverse effect on our business, financial condition, results of operation and cash flow. For a more detailed discussion of our capital expenditure plans and a discussion of other factors that may affect our future capital expenditures, see “Item 5.B. Liquidity and Capital Resources.”

As of December 31, 2016, we had approximately Won 1,542.8 billion in contractual payment obligations due in 2017, which mostly involve repayment of debt obligations and payments related to frequency licenses. See “Item 5.B. Liquidity and Capital Resources — Contractual Obligations and Commitments.”

We have not arranged firm financing for all of our current or future capital expenditure plans and contractual payment obligations. We have, in the past, obtained funds for our proposed capital expenditure and payment obligations from various sources, including our cash flow from operations as well as from financings, primarily debt and equity financings. Any material adverse change in our operational or financial condition could impact our ability to fund our capital expenditure plans and contractual payment obligations. Still volatile financial market conditions may also curtail our ability to obtain adequate funding. Inability to fund such capital expenditure requirements may have a material adverse effect on our financial condition, results of operations and business. In addition, although we currently anticipate that the capital expenditure levels estimated by us will be adequate to meet our business needs, such estimates may need to be adjusted based on developments in technology and markets. In the event we are unable to meet any such increased expenditure requirements or to obtain adequate financing for such requirements, on terms acceptable to us, or at all, this may have a material adverse effect on our financial condition, results of operations and business.

Termination or impairment of our relationship with a small number of key suppliers for network equipment and for leased lines could adversely affect our results of operations, financial position and cash flows.

We purchase wireless network equipment from a small number of suppliers. To date, we have purchased substantially all of the equipment for our networks from Samsung Electronics Co., Ltd. (“Samsung Electronics”),

 

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Ericsson-LG Co., Ltd. (“Ericsson-LG”) and Nokia Siemens Networks B.V. We believe Samsung Electronics currently manufactures approximately half of the wireless handsets sold to our subscribers. Although other manufacturers sell the equipment we require, sourcing such equipment from other manufacturers could result in unanticipated costs in the maintenance and enhancement of our wireless networks. Inability to obtain the equipment needed for our networks in a timely manner may have an adverse effect on our business, financial condition, results of operations and cash flows.

We cannot assure you that we will be able to continue to obtain the necessary equipment from one or more of our suppliers. Any discontinuation or interruption in the availability of equipment from our suppliers for any reason could have an adverse effect on our results of operations. Inability to lease adequate lines at commercially reasonable rates may impact the quality of the services we offer and may also damage our reputation and our business.

Our business relies on technology developed by us, and our business will suffer if we are unable to protect our proprietary rights.

We own numerous patents and trademarks worldwide, and have applications for patents pending in many countries, including Korea, Japan, China and the United States, and in Europe. In addition to active research and development efforts, our success depends in part on our ability to obtain patents and other intellectual property rights covering our services.

We may be required to defend against charges of infringement of patent or other proprietary rights of third parties. Although we have not experienced any significant patent or other intellectual property disputes, we cannot be certain that any significant patent or other intellectual property disputes will not occur in the future. Defending our patent and other proprietary rights could require us to incur substantial expense and to divert significant resources of our technical and management personnel, and could result in our loss of rights to employ certain technologies to provide services.

Malicious and abusive Internet practices could impair our services.

Our wireless and fixed-line subscribers increasingly utilize our network to access the Internet and, as a consequence, we or they may become victim to common malicious and abusive Internet activities, such as unsolicited mass advertising (i.e., “spam”), hacking of personal information and dissemination of viruses, worms and other destructive or disruptive software. These activities could have adverse consequences on our network and our customers, including degradation of service, excessive call volume to call centers and damage to our or our customers’ equipment and data. Significant incidents could lead to customer dissatisfaction and, ultimately, loss of customers or revenue, in addition to increased costs to us to service our customers and protect our network. For example, in July 2011, there was a leak of personal information of subscribers of websites operated by SK Communications Co., Ltd. (“SK Communications”), our consolidated subsidiary. Various lawsuits have been filed against SK Communications alleging that the leak was caused by its poor management of subscribers’ personal information. With respect to three of the lawsuits for which final judgments have been rendered, the relevant courts have rendered judgments in favor of SK Communications. As of December 31, 2016, twelve of the lawsuits, seeking damages of approximately Won 0.8 billion in aggregate, were pending at various district courts, various high courts and the Supreme Court of Korea. Any significant loss of our subscribers or revenue due to incidents of malicious and abusive Internet practices or significant increase in costs of serving those subscribers could adversely affect our business, financial condition and results of operations.

Labor disputes may disrupt our operations.

Although we are not experiencing any significant labor disputes, there can be no assurance that we will not experience labor disputes in the future, including protests and strikes, which could disrupt our business operations and have an adverse effect on our financial condition and results of operation.

Every two years, the union and management negotiate and enter into a new collective bargaining agreement that has a two-year duration, which is focused on employee benefits and welfare. Employee wages are separately negotiated on an annual basis. Although we consider our relations with our employees to be good, there can be no assurance that we will be able to maintain such a working relationship with our employees and will not experience labor disputes resulting from disagreements with the labor union in the future.

 

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Our businesses are subject to extensive Government regulation and any change in Government policy relating to the telecommunications industry could have a material adverse effect on our results of operations, financial condition and cash flows.

Most of our businesses are subject to extensive governmental supervision and regulation. When the former president Park Geun-hye took office in February 2013, she announced that the Government will work toward reducing telecommunications service charges and promoting transparency in the decision making of telecommunications service providers. Accordingly, the Government has set detailed policy objectives to (1) gradually reduce and abolish initial subscription fees by 2015, (2) expand MVNO and mobile VoIP service, (3) intensify regulations on handset subsidies and (4) construct a data-based rate system.

Pursuant to the above policy objectives, the MSIP discussed with us, KT and LG U+ gradually reducing and abolishing initial subscription fees by 2015. Accordingly, we gradually reduced our initial subscription fees by 40% in August 2013 and again by an additional 50% in August 2014. Starting in November 2014, we ceased charging initial subscription fees to new subscribers. KT and LG U+ also gradually reduced the initial subscription fees that they charge and have ceased charging initial subscription fees to new subscribers as of March 31, 2015. Similarly, the Government has periodically reviewed the rates charged by wireless telecommunications service providers and has, from time to time, suggested rate reductions. Although these suggestions were not binding, we have implemented some rate reductions in response to such recommendations. The MSIP may suggest other rate reductions in the future and any further rate reductions we make in response to such suggestion may adversely affect our results of operations.

In furtherance of the above policy objectives, the Government also enacted the MDDIA, which became effective on October 1, 2014. The MDDIA was enacted for the purpose of establishing a transparent and fair distribution practice for mobile devices, and it limits the amount of subsidies a wireless telecommunications service provider can provide to subscribers in order to prevent excessive competition among wireless telecommunications service providers. Pursuant to the MDDIA, wireless telecommunications service providers are prohibited from (i) unfairly providing discriminatory subsidies based on criteria such as type of subscription, subscription plan and characteristics of the subscriber, (ii) providing subsidies exceeding a maximum limit established by the KCC (such limit to be determined between Won 250,000 and Won 350,000, which may be adjusted every six months, with the current limit set at Won 330,000, effective as of April 8, 2015) for the purchase of mobile phone models that were launched within the last 15 months, and (iii) entering into a separate agreement with subscribers imposing obligations to use a specific subscription plan as a condition for providing subsidies. In addition, under the MDDIA, wireless telecommunications service providers are obliged to provide certain benefits, such as discounted rates, to subscribers who subscribe to their service without receiving subsidies. The prohibition from providing mobile phone subsidies exceeding the amount set by the KCC is set to expire in September 2017 pursuant to the expiration of the three-year effective period of the relevant provision of the MDDIA. In the past, certain legislators have introduced bills that would abolish the ceiling on mobile phone subsidies, arguing that such action would be beneficial to consumers. We cannot provide assurance that an abolishment of the ceiling on mobile phone subsidies will not have a material adverse effect on our results of operations as we believe such an amendment to the MDDIA may lead to an increase in our marketing expenses and affect consumer behavior and our competitors in ways we cannot fully predict. See “Item 5. Operating and Financial Review and Prospects — Item 5.A. Operating Results — Overview — New Regulations Relating to Handset Subsidies.”

The Government also plays an active role in the selection of technology to be used by telecommunications operators in Korea. For example, the MIC adopted the WCDMA and CDMA2000 technologies as the only standards available in Korea for implementing third generation services. The MSIP may impose similar restrictions on the choice of technology used in future telecommunications services, and it is possible that technologies promoted by the Government in the future may not provide the best commercial returns for us.

Furthermore, the Government sets the policies regarding the use of frequencies and allocates the spectrum of frequencies used for wireless telecommunications. See “Item 4.B. Business Overview — Law and Regulation — Competition Regulation — Frequency Allocation.” The reallocation of the spectrum to our existing competitors could increase competition among wireless telecommunications service providers, which may have an adverse effect on our business.

 

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Pursuant to the Telecommunications Business Act, certain wireless telecommunications service providers designated by the MSIP, which currently include only us, are required to lease their networks or allow use of their networks (collectively, “wholesale lease”) to other network service providers, such as an MVNO, that have requested such wholesale lease in order to provide their own services using the leased networks. To date, fourteen MVNOs have commenced providing wireless telecommunications services using the networks leased from us. We believe that leasing a portion of our bandwidth capacity to an MVNO would impair our ability to use our bandwidth in ways that would generate maximum revenues and would strengthen our MVNO competitors by granting them access and lowering their costs to enter into our markets. Accordingly, our profitability may be adversely affected.

Our wireless telecommunications services depend, in part, on our interconnection arrangements with domestic and international fixed-line and other wireless networks. Our interconnection arrangements, including the interconnection rates we pay and interconnection rates we charge, affect our revenues and operating results. The MSIP determines the basic framework for interconnection arrangements, including policies relating to interconnection rates in Korea. The KCC, which determined such basic framework under the previous Government, changed the basic framework for interconnection arrangements several times. We cannot assure you that we will not be adversely affected by the MSIP’s interconnection policies and future changes to such policies. See “Item 4.B. Business Overview — Interconnection — Domestic Calls.”

In addition, the MSIP may revoke our licenses or suspend any of our businesses if we fail to comply with its rules, regulations and corrective orders, including the rules restricting beneficial ownership and control or any violation of the conditions of our licenses. Alternatively, in lieu of suspension of our business, the MSIP may levy a monetary penalty of up to 3.0% of the average of our annual revenue for the preceding three fiscal years. The KCC had the same authority in the previous Government and exercised such authority to suspend our business and impose fines on us. For information about the penalties imposed on us for violating Governmental regulations, see “Item 8.A. Consolidated Statements and Other Financial Information — Legal Proceedings — KCC and MSIP Proceedings.” Such penalties, which may include the revocation of cellular licenses, suspension of business or imposition of monetary penalties by the MSIP, could have a material adverse effect on our business. We believe we are currently in compliance with the material terms of all our cellular licenses.

We are subject to additional regulations as a result of our dominant market position in the wireless telecommunications sector, which could harm our ability to compete effectively.

The Government endeavors to promote competition in the Korean telecommunications markets through measures designed to prevent a dominant service provider from exercising its market power and deterring the emergence and development of viable competitors. We have been designated by the MSIP as the “dominant network service provider” in respect of our wireless telecommunications business. As such, we are subject to additional regulations to which certain of our competitors are not subject. For example, under current Government regulations, we must obtain prior approval from the MSIP to raise our existing rates or introduce new rates. On June 24, 2016, the Government proposed a bill to the National Assembly to change the approval requirement to a simple reporting requirement, which is the requirement for our competitors. However, the bill is still under review by the relevant sub-committee and there is no assurance as to whether such bill will be passed. See “Item 4.B. Business Overview — Law and Regulation — Competition Regulation — Rate Regulation.” The MSIP could also require us to charge higher usage rates than our competitors for future services or to take certain actions earlier than our competitors, as when the KCC required us to introduce number portability earlier than our competitors, KT and LG U+.

We also qualify as a “market-dominating business entity” under the Fair Trade Act, which subjects us to additional regulations, including the application of varied interconnection rates. For more information about the interconnection rates applicable to us and our competitors, see “Item 4.B. Business Overview — Interconnection.”

The additional regulations to which we are subject has affected our competitiveness in the past and may materially hurt our profitability and impede our ability to compete effectively against our competitors in the future.

 

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Concerns that radio frequency emissions may be linked to various health concerns could adversely affect our business and we could be subject to litigation relating to these health concerns.

In the past, allegations that serious health risks may result from the use of wireless telecommunications devices or other transmission equipment have adversely affected share prices of some wireless telecommunications companies in the United States. In May 2011, the International Agency for Research on Cancer (the “IARC”), a part of the World Health Organization, announced that it has classified radiofrequency electromagnetic fields associated with wireless phone use as possibly carcinogenic to humans, based on an increased risk for glioma, a malignant type of brain cancer. The IARC conducts research on the causes of human cancer and the mechanisms of carcinogenesis and aims to develop scientific strategies for cancer control. We cannot assure you that these health concerns will not adversely affect our business. Several class action and personal injury lawsuits have been filed in the United States against several wireless phone manufacturers and carriers, asserting product liability, breach of warranty and other claims relating to radio transmissions to and from wireless phones. Certain of these lawsuits have been dismissed. We could be subject to liability or incur significant costs defending lawsuits brought by our subscribers or other parties who claim to have been harmed by or as a result of our services. In addition, the actual or perceived risk of wireless telecommunications devices could have an adverse effect on our business by reducing the number of our subscribers or the usage per subscriber.

Our ability to deliver services may be disrupted due to a systems failure, shutdown in our networks or natural disasters.

Our services are currently carried through our wireless and fixed-line networks, which could be vulnerable to damage or interruptions in operations due to fires, floods, earthquakes, power losses, telecommunication failures, network software flaws, unauthorized access, computer viruses and similar events. The occurrence of any of these events could impact our ability to deliver services and have a negative effect on our results of operations.

A global or Korean economic downturn may have a material adverse impact on our business and the ability to meet our funding needs, and could cause the market value of our common shares and American Depositary Shares (“ADSs”) to decline.

In recent years, difficulties affecting the global financial sectors, adverse conditions and volatility in the worldwide credit and financial markets, fluctuations in oil and commodity prices and the general weakness of the global economy have increased the uncertainty of global economic prospects in general and have adversely affected the global and Korean economies. In addition, the global financial markets continue to experience significant volatility as a result of, among other things, the slowdown of economic growth and financial instability in China and other major emerging market economies, as well as political and social instability in various countries, including countries in the Middle East and Northern Africa such as Iraq, Syria and Egypt, as well as Ukraine and Russia. In light of the high level of interdependence of the global economy, any of the foregoing factors may continue to negatively impact local economic conditions in Korea and global economic conditions and financial markets, which could have a material adverse effect on our business, financial condition and results of operations.

We are exposed to risks related to changes in the global and Korean economic environments, changes in interest rates and instability in the global financial markets. Adverse global and Korean economic conditions may lead to overall decline and volatility in securities prices of Korean companies, including ours, which may result in trading and valuation losses on our trading and investment securities portfolio. Increases in credit spreads, as well as limitations on the availability of credit resulting from heightened concerns about the stability of the markets generally and the strength of counterparties specifically may lead many lenders and institutional investors to reduce or cease providing funding to borrowers, which may negatively impact our liquidity and results of operations. Major market disruptions and adverse changes in economic conditions and regulatory climate may further impair our ability to meet our desired funding needs. We cannot predict future changes in economic conditions. Adverse developments in the global or Korean economies or financial markets may have a material adverse effect on our business and the ability to meet our funding needs, as well as negatively affect the market value of our common shares and ADSs.

 

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Depreciation of the value of the Won against the Dollar and other major foreign currencies may have a material adverse effect on our results of operations and the market value of our common shares and ADSs.

Substantially all of our revenues are denominated in Won. Depreciation of the Won may materially affect our results of operations because, among other things, it causes:

 

   

an increase in the amount of Won required by us to make interest and principal payments on our foreign currency-denominated debt; and

 

   

an increase, in Won terms, of the costs of equipment that we purchase from overseas sources which we pay for in Dollars or other foreign currencies.

Fluctuations in the exchange rate between the Won and the Dollar will affect the Dollar equivalent of the Won price of the our common shares on the KRX KOSPI Market of the Korea Exchange (the “KRX KOSPI Market”). These fluctuations also will affect:

 

   

the amounts a registered holder or beneficial owner of ADSs will receive from the American Depositary Receipt (“ADR”) depositary in respect of dividends, which will be paid in Won to the ADR depositary and converted by the ADR depositary into Dollars;

 

   

the Dollar value of the proceeds that a holder will receive upon sale in Korea of our common shares; and

 

   

the secondary market price of our ADSs.

For historical exchange rate information, see “Item 3.A. Selected Financial Data — Exchange Rates.”

Risks Relating to Korea

Unfavorable financial and economic developments in Korea may have an adverse effect on us.

We are incorporated in Korea, and a significant portion of our operations is based in Korea. As a result, we are subject to political, economic, legal and regulatory risks specific to Korea. The economic indicators in Korea in recent years have shown mixed signs of growth and uncertainty, and future growth of the economy is subject to many factors beyond our control.

In recent years, adverse conditions and volatility in the worldwide financial markets, fluctuations in oil and commodity prices and the general weakness of the global economy have contributed to the uncertainty of global economic prospects in general and have adversely affected, and may continue to adversely affect, the Korean economy. The value of the Won relative to major foreign currencies in general and the U.S. dollar in particular has also fluctuated widely. See “Item 3.A. Selected Financial Data — Exchange Rates.” A depreciation of the Won increases the cost of imported goods and services and the Won revenue needed by Korean companies to service foreign currency denominated debt. An appreciation of the Won, on the other hand, causes export products of Korean companies to be less competitive by raising their prices in terms of the relevant foreign currency and reduces the Won value of such export sales. Furthermore, as a result of adverse global and Korean economic conditions, there has been significant volatility in the stock prices of Korean companies in recent years. Future declines in the Korea Composite Stock Price Index (known as the “KOSPI”) and large amounts of sales of Korean securities by foreign investors and subsequent repatriation of the proceeds of such sales may continue to adversely affect the value of the Won, the foreign currency reserves held by financial institutions in Korea and the ability of Korean companies to raise capital. Any future deterioration of the Korean or global economy could adversely affect our business, financial condition and results of operations.

Developments that could have an adverse impact on Korea’s economy in the future include:

 

   

adverse conditions or uncertainty in the economies of countries and regions that are important export markets for Korea, such as China, the United States, Europe and Japan, or in emerging market economies in Asia or elsewhere, as well as increased uncertainty in light of a future Brexit;

 

   

increased sovereign default risks in select countries and the resulting adverse effects on the global financial markets;

 

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adverse changes or volatility in foreign currency reserve levels, commodity prices (including oil prices), exchange rates (including fluctuation of the U.S. dollar, the euro, the Japanese yen or the Chinese renminbi exchange rates), interest rates, inflation rates or stock markets;

 

   

a continuing rise in the level of household debt and increasing delinquencies and credit defaults by retail or small- and medium-sized enterprise borrowers;

 

   

continuing adverse conditions in the economies of countries and regions that are important export markets for Korea, such as the United States, Europe, Japan and China, or in emerging market economies in Asia or elsewhere;

 

   

decreases in the market prices of Korean real estate;

 

   

declines in consumer confidence and a slowdown in consumer spending;

 

   

the continued growth of the Chinese economy, to the extent its benefits (such as increased exports to China) are outweighed by its costs (such as competition in export markets or for foreign investment and the relocation of the manufacturing base from Korea to China), as well as a slowdown in the growth of China’s economy, which is Korea’s most important export market;

 

   

the recent political scandal in Korea involving a confidant of the President and the resulting public protests, as well as related investigations of large Korean conglomerates and their senior management for bribery, embezzlement and other possible misconduct;

 

   

social and labor unrest;

 

   

decreases in the market prices of Korean real estate;

 

   

a decrease in tax revenues and a substantial increase in the Government’s expenditures for fiscal stimulus measures, unemployment compensation and other economic and social programs that, together, would lead to an increased Government budget deficit;

 

   

financial problems or lack of progress in the restructuring of Korean conglomerates, other large troubled companies, their suppliers or the financial sector;

 

   

loss of investor confidence arising from corporate accounting irregularities and corporate governance issues concerning certain Korean conglomerates;

 

   

increases in social expenditures to support an aging population in Korea or decreases in economic productivity due to the declining population size in Korea;

 

   

the economic impact of any pending or future free trade agreements;

 

   

geo-political uncertainty and risk of further attacks by terrorist groups around the world;

 

   

natural or man-made disasters that have a significant adverse economic or other impact on Korea (such as the sinking of the Sewol ferry in 2014, which significantly dampened consumer sentiment in Korea) or its major trading partners;

 

   

the occurrence of severe health epidemics in Korea and other parts of the world, such as the Middle East Respiratory Syndrome outbreak in Korea in 2015;

 

   

deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from territorial or trade disputes or disagreements in foreign policy (such as the ongoing controversy between Korea and China regarding the deployment of a Terminal High Altitude Area Defense system in Korea by the United States);

 

   

political uncertainty or increasing strife among or within political parties in Korea;

 

   

hostilities or political or social tensions involving oil producing countries in the Middle East and North Africa and any material disruption in the global supply of oil or increase in the price of oil;

 

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an increase in the level of tensions or an outbreak of hostilities between North Korea and Korea or the United States; and

 

   

changes in financial regulations in Korea.

Political and societal unrest surrounding the impeachment of President Park Geun-hye could adversely affect the Korean economy and our business.

In November 2016, the Korean prosecutor’s office indicted a confidant of President Park Geun-hye who had allegedly used her ties with the President to extort donations from Korean business groups for two non-profit foundations over which she is purported to have substantial influence, as well as a number of current and former presidential aides, on charges of, among others, abuse of power, coercion and leaking classified documents. On November 30, 2016, a special independent prosecutor was appointed to conduct an investigation of the extent of the President’s involvement, and mass weekend rallies have been held in Seoul and other cities both to protest against, and to express support for, President Park.

On December 9, 2016, the National Assembly voted in favor of impeaching President Park for a number of alleged constitutional and criminal violations, including violation of the Constitution and abuse of power by allowing her confidant to exert influence on state affairs and allowing senior presidential aides to aid in her extortion from companies. President Park was suspended from power immediately, with the prime minister simultaneously taking over the role of acting President. On March 10, 2017, the Constitutional Court unanimously upheld the parliamentary vote to impeach President Park, triggering her immediate dismissal. A special election to elect a new President is scheduled to be held on May 9, 2017. In connection with its investigation of former President Park, the special independent prosecutor also conducted related investigations of several large Korean business groups and members of their senior management for bribery, embezzlement and other possible misconduct, which the Korean prosecutor’s office has continued following the end of the special independent prosecutor’s term. There is no assurance that such events will not have a material adverse effect on the Korean economy and on our business, financial condition and results of operations.

Escalations in tensions with North Korea could have an adverse effect on us and the market value of our common shares and ADSs.

Relations between Korea and North Korea have been tense throughout Korea’s modern history. The level of tension between the two Koreas has fluctuated and may increase abruptly as a result of future events. In particular, since the death of Kim Jong-il in December 2011, there has been increased uncertainty with respect to the future of North Korea’s political leadership and concern regarding its implications for political and economic stability in the region. Although Kim Jong-il’s third son, Kim Jong-un, has assumed power as his father’s designated successor, the long-term outcome of such leadership transition remains uncertain.

In addition, there have been heightened security concerns in recent years stemming from North Korea’s nuclear weapon and long-range missile programs as well as its hostile military and other actions against Korea. Some of the significant incidents in recent years include the following:

 

   

From time to time, North Korea has conducted ballistic missile tests. In February 2016, North Korea launched a long-range rocket in violation of its agreement with the United States as well as United Nations sanctions barring it from conducting launches that use ballistic missile technology. Despite international condemnation, North Korea released a statement that it intends to continue its rocket launch program and it conducted additional ballistic missile tests in June 2016, a submarine-launched ballistic missile test in August 2016 and intermediate-range ballistic missile tests in February and March 2017. In February and March 2017, the United Nations Security Council issued unanimous statements condemning North Korea and agreeing to continue to closely monitor the situation and to take further significant measures.

 

   

North Korea renounced its obligations under the Nuclear Non-Proliferation Treaty in January 2003 and conducted three rounds of nuclear tests between October 2006 to February 2013, which increased tensions in the region and elicited strong objections worldwide. In January 2016, North Korea conducted a fourth

 

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nuclear test, claiming that the test involved its first hydrogen bomb, which claim has not been independently verified. In response to such test (as well as North Korea’s long-range rocket launch in February 2016), the United Nations Security Council unanimously passed a resolution in March 2016 condemning North Korea’s actions and significantly expanding the scope of the sanctions applicable to North Korea, while the United States and the European Union also imposed additional sanctions on North Korea. In September 2016, North Korea conducted a fifth nuclear test, claiming to have successfully detonated a nuclear warhead that could be mounted on ballistic rockets, which claim has not been independently verified.

 

   

In August 2015, two Korean soldiers were injured in a landmine explosion near the Korean demilitarized zone. Claiming the landmines were set by North Koreans, the Korean army re-initiated its propaganda program toward North Korea utilizing loudspeakers near the demilitarized zone. In retaliation, the North Korean army fired artillery rounds on the loudspeakers, resulting in the highest level of military readiness for both Koreas. High-ranking officials from North Korea and Korea subsequently entered into an agreement on August 25, 2015 intended to diffuse military tensions.

 

   

In March 2010, a Korean naval vessel was destroyed by an underwater explosion, killing many of the crewmen on board. The Government formally accused North Korea of causing the sinking, while North Korea denied responsibility. Moreover, in November 2010, North Korea fired more than one hundred artillery shells that hit Korea’s Yeonpyeong Island near the Northern Limit Line, which acts as the de facto maritime boundary between Korea and North Korea on the west coast of the Korean peninsula, causing casualties and significant property damage. The Government condemned North Korea for the attack and vowed stern retaliation should there be further provocation.

North Korea’s economy also faces severe challenges, which may further aggravate social and political pressures within North Korea. There can be no assurance that the level of tension affecting the Korean peninsula will not escalate in the future. Any further increase in tensions, which may occur, for example, if North Korea experiences a leadership crisis, high-level contacts between Korea and North Korea break down or military hostilities occur, could have a material adverse effect on our business, results of operations and financial condition and the market value of our common shares and ADSs.

Korea’s legislation allowing class action suits related to securities transactions may expose us to additional litigation risk.

The Securities-related Class Action Act of Korea enacted in January 2004 allows class action suits to be brought by shareholders of companies (including us) listed on the KRX KOSPI Market for losses incurred in connection with purchases and sales of securities and other securities transactions arising from (1) false or inaccurate statements provided in the registration statements, prospectuses, business reports, audit reports, semi-annual or quarterly reports and material fact reports and omission of material information in such documents, (2) insider trading, (3) market manipulation and (4) unfair trading. This law permits 50 or more shareholders who collectively hold 0.01% of the shares of a company to bring a class action suit against, among others, the issuer and its directors and officers. Because of the relatively recent enactment of the act, there is not enough judicial precedent to predict how the courts will apply the law. Litigation can be time-consuming and expensive to resolve, and can divert management time and attention from the operation of a business. We are not aware of any basis upon which such suit may be brought against us, nor are any such suits pending or threatened. Any such litigation brought against us could have a material adverse effect on our business, financial condition and results of operations.

Risks Relating to Securities

If SK Holdings causes us to breach the foreign ownership limitations on our common shares, we may experience a change of control.

The Telecommunications Business Act currently sets a 49.0% limit on the aggregate foreign ownership of our issued shares. Under the Telecommunications Business Act, as amended, a Korean entity, such as SK Holdings Co., Ltd. (“SK Holdings”), is deemed to be a foreign entity if its largest shareholder (determined by aggregating the shareholdings of such shareholder and its related parties) is a foreigner and such shareholder (together with the shareholdings of its related parties) holds 15.0% or more of the issued voting stock of the Korean entity. As of

 

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December 31, 2016, SK Holdings owned 20,363,452 shares of our common stock, or approximately 25.22%, of our issued shares. If SK Holdings were considered to be a foreign shareholder, then its shareholding in us would be included in the calculation of our aggregate foreign shareholding and our aggregate foreign shareholding (based on our foreign ownership level as of December 31, 2016, which we believe was 40.8%) would exceed the 49.0% ceiling on foreign shareholding. As of December 31, 2016, the two largest foreign shareholders of SK Holdings each held a 3.50% stake therein.

If our aggregate foreign shareholding limit is exceeded, the MSIP may issue a corrective order to us, the breaching shareholder (including SK Holdings if the breach is caused by an increase in foreign ownership of SK Holdings) and the foreign shareholder which owns in the aggregate 15.0% or more of SK Holdings. Furthermore, if SK Holdings is considered a foreign shareholder, it will be prohibited from exercising its voting rights with respect to the shares held in excess of the 49.0% ceiling, which may result in a change in control of us. In addition, the MSIP will be prohibited from granting us licenses or permits necessary for entering into new telecommunications businesses until our aggregate foreign shareholding is reduced to below 49.0%. For a description of further actions that the MSIP could take, see “Item 4.B. Business Overview — Law and Regulation — Foreign Ownership and Investment Restrictions and Requirements.”

Sales of our shares by SK Holdings and/or other large shareholders may adversely affect the market value of our common shares and ADSs.

Sales of substantial amounts of our common shares, or the perception that such sales may occur, could adversely affect the prevailing market value of our common shares or ADSs or our ability to raise capital through an offering of our common shares.

As of December 31, 2016, SK Holdings owned 25.22% of our total issued common shares and has not agreed to any restrictions on its ability to dispose of our shares. See “Item 7.A. Major Shareholders.” We can make no prediction as to the timing or amount of any sales of our common shares. We cannot assure you that future sales of our common shares, or the availability of our common shares for future sale, will not adversely affect the prevailing market value of our common shares or ADSs from time to time.

If an investor surrenders his or her ADSs to withdraw the underlying shares, he or she may not be allowed to deposit the shares again to obtain ADSs.

Under the deposit agreement, holders of our common shares may deposit those shares with the ADR depositary’s custodian in Korea and obtain ADSs, and holders of ADSs may surrender ADSs to the ADR depositary and receive our common shares. However, under the terms of the deposit agreement, as amended, the depositary bank is required to obtain our prior consent to any such deposit if, after giving effect to such deposit, the total number of our common shares represented by ADSs, which was 9,106,281 shares as of March 31, 2017, exceeds a specified maximum, subject to adjustment under certain circumstances. In addition, the depositary bank or the custodian may not accept deposits of our common shares for issuance of ADSs under certain circumstances, including (1) if it has been determined by us that we should block the deposit to prevent a violation of applicable Korean laws and regulations or our articles of incorporation or (2) if a person intending to make a deposit has been identified as a holder of at least 3.0% of our common shares. See “Item 10.B. Memorandum and Articles of Association — Description of American Depositary Shares.” It is possible that we may not give the consent. Consequently, an investor who has surrendered his or her ADSs and withdrawn the underlying shares may not be allowed to deposit the shares again to obtain ADSs.

An investor in our ADSs may not be able to exercise preemptive rights for additional new shares and may suffer dilution of his or her equity interest in us.

The Korean Commercial Code and our articles of incorporation require us, with some exceptions, to offer shareholders the right to subscribe for new shares in proportion to their existing ownership percentage whenever new shares are issued. If we offer a right to subscribe for additional new common shares or any other rights of similar nature, the ADR depositary, after consultation with us, may make the rights available to an ADS holder or use reasonable efforts to dispose of the rights on behalf of the ADS holder and make the net proceeds available to

 

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the ADS holder. The ADR depositary, however, is not required to make available to an ADS holder any rights to purchase any additional shares unless it deems that doing so is lawful and feasible and:

 

   

a registration statement filed by us under the Securities Act is in effect with respect to those shares; or

 

   

the offering and sale of those shares is exempt from, or is not subject to, the registration requirements of the Securities Act.

We are under no obligation to file any registration statement with respect to any ADSs. If a registration statement is required for an ADS holder to exercise preemptive rights but is not filed by us, the ADS holder will not be able to exercise his or her preemptive rights for additional shares. As a result, ADS holders may suffer dilution of their equity interest in us.

Short selling of our ADSs by purchasers of securities convertible or exchangeable into our ADSs could materially adversely affect the market price of our ADSs.

SK Holdings, through one or more special purpose vehicles, has engaged and may in the future engage in monetization transactions relating to its ownership interest in us. These transactions have included and may include offerings of securities that are convertible or exchangeable into our ADSs. Many investors in convertible or exchangeable securities seek to hedge their exposure in the underlying equity securities at the time of acquisition of the convertible or exchangeable securities, often through short selling of the underlying equity securities or similar transactions. Since a monetization transaction could involve debt securities linked to a significant number of our ADSs, we expect that a sufficient quantity of ADSs may not be immediately available for borrowing in the market to facilitate settlement of the likely volume of short selling activity that would accompany the commencement of a monetization transaction. This short selling and similar hedging activity could place significant downward pressure on the market price of our ADSs, thereby having a material adverse effect on the market value of ADSs owned by you.

A holder of our ADSs may not be able to enforce a judgment of a foreign court against us.

We are a corporation with limited liability organized under the laws of Korea. Substantially all of our directors and officers and other persons named in this document reside in Korea, and all or a significant portion of the assets of our directors and officers and other persons named in this document and substantially all of our assets are located in Korea. As a result, it may not be possible for holders of our ADSs to effect service of process within the United States, or to enforce against us any judgments obtained from the United States courts based on the civil liability provisions of the federal securities laws of the United States. There is doubt as to the enforceability in Korea, either in original actions or in actions for enforcement of judgments of United States courts, of civil liabilities predicated on the United States federal securities laws.

We are generally subject to Korean corporate governance and disclosure standards, which may differ from those in other countries.

Companies in Korea, including us, are subject to corporate governance standards applicable to Korean public companies, which may differ in some respects from standards applicable in other countries, including the United States. As a reporting company registered with the SEC and listed on the New York Stock Exchange (the “NYSE”), we are, and in the future will be, subject to certain corporate governance standards as mandated by the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). However, foreign private issuers, including us, are exempt from certain corporate governance requirements under the Sarbanes-Oxley Act or under the rules of the NYSE. There may also be less publicly available information about Korean companies, such as us, than is regularly made available by public or non-public companies in other countries. Such differences in corporate governance standards and less public information available could result in corporate governance practices or disclosures that are perceived as less than satisfactory by investors in certain countries.

There are special risks involved with investing in securities of Korean companies, including the possibility of restrictions being imposed by the Government in emergency circumstances.

As we are a Korean company and operate in a business and cultural environment that is different from that of other countries, there are risks associated with investing in our securities that are not typical for investments in securities of companies in other jurisdictions.

 

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Under the Korean Foreign Exchange Transactions Law, if the Government deems that certain emergency circumstances, including sudden fluctuations in interest rates or exchange rates, extreme difficulty in stabilizing the balance of payments or substantial disturbance in the Korean financial and capital markets, are likely to occur, it may impose any necessary restriction such as requiring Korean or foreign investors to obtain prior approval from the Minister of Strategy and Finance for the acquisition of Korean securities or for the repatriation of interest, dividends or sales proceeds arising from Korean securities or from disposition of such securities or other transactions involving foreign exchange.

 

Item 4. INFORMATION ON THE COMPANY

 

Item 4.A. History and Development of the Company

As Korea’s first wireless telecommunications service provider, we have a recognized history of leadership and innovation in the domestic telecommunications sector. Today, we remain Korea’s leading wireless telecommunications services provider and have continued to pioneer the commercial development and implementation of state-of-the-art wireless technologies. We believe we are also a leader in developing new products and services that reflect the increasing convergence of telecommunications technologies, as well as the growing synergies between the telecommunications sector and other industries, and are well-positioned to become Korea’s leading platform service provider through our next-generation growth businesses in IoT solutions, media and e-commerce and other innovative products offered through our platform services.

In June 2015, SK Broadband, in which we held a 50.6% interest, became our wholly-owned subsidiary pursuant to a share exchange transaction (the “Share Exchange”) through which we acquired all of the shares of SK Broadband that we did not otherwise own in exchange for 1,692,824 of our treasury shares and cash.

In February 2012, we acquired a 21.1% equity stake in SK Hynix, one of the world’s largest memory-chip makers by revenue, for an aggregate purchase price of approximately Won 3.4 trillion, and became its largest shareholder.

On March 31, 2017, we had a market capitalization of approximately Won 20.3 trillion (US$18.2 billion, as translated at the noon buying rate of March 31, 2017) or approximately 1.5% of the total market capitalization on the KRX KOSPI Market, making us the fourteenth largest company listed on the KRX KOSPI Market based on market capitalization on that date. Our ADSs, each representing one-ninth of one share of our common stock, have traded on the NYSE since June 27, 1996.

We established our telecommunications business in March 1984 under the name of Korea Mobile Telecommunications Co., Ltd. We changed our name to SK Telecom Co., Ltd., effective March 21, 1997. In January 2002, we merged with Shinsegi, which was then the third-largest wireless telecommunications service provider in Korea. Our registered office is at SK T-Tower, 65, Eulji-ro, Jung-gu, Seoul 04539, Korea and our telephone number is +82-2-6100-2114.

Korean Telecommunications Industry

Established in March 1984, we became the first wireless telecommunications service provider in Korea. We remained the sole provider of wireless telecommunications services until April 1996, when Shinsegi commenced cellular service. The Government began to introduce competition into the fixed-line and wireless telecommunications services markets in the early 1990’s. During this period, the Government allowed new competitors to enter the fixed-line sector, sold a controlling stake in us to the SK Group, and granted a cellular license to our first competitor, Shinsegi. In October 1997, three additional companies began providing wireless telecommunications services under Government licenses to provide wireless telecommunications services. In 2000 and 2001, the Korean wireless telecommunications market experienced significant consolidation. In January 2002, Shinsegi was merged into us. Additionally, two of the other wireless telecommunications services providers merged.

There are currently three mobile network operators in Korea: our company, KT and LG U+. As of December 31, 2016, the market share of the Korean wireless telecommunications market, in terms of number of subscribers, of KT and LG U+ was approximately 30.6% and 20.3%, respectively (compared to our market share of

 

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49.1%), each including MVNO subscribers leasing the respective networks. As of December 31, 2016, MVNOs had a combined market share of 11.3%, of which MVNOs leasing our networks represented 10.7%, MVNOs leasing KT’s networks represented 17.2% and MVNOs leasing LG U+’s networks represented 4.0%.

Telecommunications industry growth in Korea has been among the most rapid in the world, with fixed-line penetration being under five lines per 100 population in 1978 and increasing to 47.9 lines per 100 population as of December 31, 2006 before decreasing to 31.6 lines per 100 population as of December 31, 2016, and wireless penetration increasing from 7.0 subscribers per 100 population in 1996 to 116.6 subscribers per 100 population as of December 31, 2016. The table below sets forth certain subscription and penetration information regarding the Korean telecommunications industry as of the dates indicated:

 

     As of December 31,  
     2016      2015      2014      2013      2012  
     (In thousands, except for per population amounts)  

Population of Korea(1)

     51,700        51,529        51,328        51,141        50,948  

Wireless Subscribers

     60,287        57,937        56,310        54,681        53,624  

Wireless Subscribers per 100 Population

     116.6        112.4        109.7        106.9        105.3  

Telephone Lines in Service

     15,746        16,341        16,939        17,620        18,261  

Telephone Lines per 100 Population

     31.6        31.7        33.0        34.5        35.8  

 

 

(1) Source: The Ministry of the Interior.

Since the introduction of short text messaging in 1998, Korea’s wireless data market has grown rapidly. This growth has been driven, in part, by the rapid development of wireless Internet service since its introduction in the second half of 1999 and the implementation of LTE technology providing for fast data transmission speeds and large data transmission capacity. As of December 31, 2016, approximately 55.1 million Korean wireless subscribers owned Internet-enabled handsets capable of accessing wireless Internet services, including 46.4 million subscribers that own smartphones that have direct access to the Internet using mobile Internet technology. The table below sets forth certain penetration information regarding the number of Internet-enabled handsets, smartphones and wireless subscribers in Korea as of the dates indicated:

 

     As of December 31,  
     2016     2015     2014     2013     2012  
     (In thousands, except for percentage data)  

Number of Wireless Internet-Enabled Handsets

     55,085       53,737       52,833       50,858       50,420  

Number of Smartphones

     46,418       43,668       40,560       37,517       32,727  

Total Number of Wireless Subscribers

     60,287       57,937       56,310       54,681       53,624  

Penetration of Wireless Internet-Enabled Handsets

     91.4     92.8     93.8     93.0     94.0

Penetration of Smartphones

     77.0     75.4     72.0     66.9     61.0

In addition to its well-developed wireless telecommunications sector, Korea has one of the largest Internet markets in the Asia Pacific region. According to Korea Internet & Security Agency, the percentage of Internet users in Korea was 88.3% of the population in July 2016. From the end of 2005 to the end of 2016, the number of broadband Internet access subscribers increased from approximately 12.2 million to approximately 20.6 million. In connection with such growth in broadband Internet usage, the number of IPTV subscribers has also increased rapidly. The table below sets forth certain information regarding broadband Internet access subscribers and IPTV subscribers as of the dates indicated:

 

     As of December 31,  
     2016      2015      2014      2013      2012  
     (In thousands)  

Number of Broadband Internet Access Subscribers(1)

     20,556        20,025        19,199        18,738        18,253  

Number of IPTV Subscribers

     11,850        10,991        9,670        8,738        6,457  

 

 

(1) Includes subscribers accessing Internet service using digital subscriber line, or xDSL, connections; cable modem connections; local area network, or LAN, connections; fiber-to-the-home, or FTTH, connections and satellite connections.

 

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Item 4.B. Business Overview

Overview

We are Korea’s leading wireless telecommunications services provider and continue to pioneer the commercial development and implementation of state-of-the-art wireless and fixed-line technologies and services as well as develop our next-generation growth businesses in IoT solutions, media and e-commerce and other innovative products offered through our platform services. Our operations are reported in four segments:

 

   

cellular services, which include wireless voice and data transmission services, sales of wireless devices, IoT solutions and platform services;

 

   

fixed-line telecommunication services, which include fixed-line telephone services, broadband Internet services, advanced media platform services (including IPTV) and business communications services;

 

   

e-commerce services, which include 11st, our open marketplace business, and online-to-offline (“O2O”) commerce solutions; and

 

   

other businesses.

Our Business Strategy

We believe that the current trends in the Korean telecommunications industry are characterized by technological change, evolving consumer needs and increasing digital convergence. Against the backdrop of these industry trends, we aim to maintain our leading position in the Korean market for wireless telecommunications services and actively develop our next-generation growth businesses in IoT solutions, media and e-commerce and other innovative products offered through our platform services. We plan to further utilize our big data analysis capabilities to create products and services that are tailored to our customers’ evolving needs, as well as incorporate artificial intelligence capabilities directly into many of the products and services we offer.

Our corporate vision is to be a “Partner for New Possibilities” for both individuals and businesses by leveraging our network infrastructure and cutting-edge technologies. To take advantage of these industry trends and further realize our corporate vision, we have undertaken the following strategic initiatives.

 

   

Maintain our leadership in the wireless services business by offering differentiated value-added products and services. We plan to maintain our leadership in the wireless services business by providing products and services with differentiated value propositions offered by our competitors. For example, we will continue to develop high-quality devices with convenient and premium features at reasonable price points that run exclusively on our networks such as the Luna S and the Sol Prime. In addition, we will continue to offer various rate plans that are tailored to meet our customers’ needs for increased data usage such as our “T Signature” plans, which offer unlimited wireless data usage for fixed rates as well as a multitude of other premium benefits. We plan to strengthen our customer relationships by engaging our subscribers to integrate our service offerings in various aspects of their daily lives such as “T map,” our interactive navigation service which we provide to all users free of charge, “T Pay,” our mobile payment and digital wallet service offered to our wireless subscribers, and “oksusu,” our mobile IPTV service with a wide range of unique media offerings. We also provide bundled subscriptions to our wireless and fixed-line service offerings, and we believe such bundled subscriptions contribute to increased customer retention and acquisition of new subscribers for both our wireless and fixed-line services due to convenience. In addition, we believe our “T Membership” program, our membership service, also contributes to our subscriber retention with the breadth of membership benefits we provide through our membership partners.

 

   

Develop our next-generation growth businesses. We aim to develop our next-generation growth businesses in IoT solutions, media and e-commerce and other innovative products offered through our platform services, which we believe complement and create synergies with our wireless and fixed-line services and through which we can generate new sources of revenue growth.

Through our IoT solutions business, we offer “Smart Home,” a home monitoring service for residential customers and customized IoT solutions utilizing machine-to-machine (“M2M”) connections to our business customers. We endeavor to provide customized value-added services to our business customers and create

 

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an ecosystem through which domestic and global manufacturers can develop innovative hardware for our IoT solutions business. In 2016, we partnered with car manufacturers to successfully launch Korea’s first “connected car” service integrating our interactive navigation service “T map” with their in-vehicle navigation systems. We expect to further expand our “connected car” technologies over the next few years. Through our platform services business, we provide innovative products and services that seek to meet our customers’ evolving needs in an increasingly connected world, including artificial intelligence solutions. In September 2016, we launched NUGU, the first intelligent virtual assistant service launched in Korea with Korean language capabilities based on advanced voice recognition technologies. NUGU currently offers a wide range of services including music streaming, connectivity with “Smart Home” and other IoT solutions for the home, ordering food delivery, and informational and other personal assistance services, and we plan to continually enhance its functionalities through software updates. Furthermore, we will continue to enlarge the scope of our media services and content offerings available on our advanced media platform to provide our subscribers with a vast library of high-quality content that can be accessed through our wireless and fixed-line networks. We believe these services will enable us to increase the retention of our wireless subscribers as well as attract new customers.

 

   

Further expand our e-commerce business globally. With the expertise we have gained through our operation of “11st,” our online open marketplace, and our O2O commerce businesses in Korea as well as certain markets in Southeast Asia and the U.S., we intend to further expand into other overseas markets and lead the growth of the e-commerce industry in such markets.

Cellular Services

We offer wireless voice and data transmission services, sell wireless devices and provide IoT solutions and innovative platform services through our cellular services segment. Our wireless voice and data transmission services are offered through our backbone networks that collectively can be accessed by approximately 99.0% of the Korean population. We had 29.6 million wireless subscribers, including MVNO subscribers leasing our networks, as of December 31, 2016, representing a market share of 49.1%, the largest market share among Korean wireless telecommunications service providers. The table below sets forth the number of subscribers, including subscribers of MVNOs that lease our wireless networks, using our various digital wireless networks as of the dates indicated:

 

     As of December 31,  
     2016      2015      2014      2013      2012  
     (in thousands)  

Network

              

LTE

     21,078        18,980        16,737        13,487        7,530  

WCDMA

     6,491        7,008        8,020        9,909        14,459  

CDMA

     2,026        2,638        3,521        3,957        4,972  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     29,595        28,626        28,279        27,352        26,961  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In 2016, 2015 and 2014, our cellular services segment revenue was Won 13,004.9 billion, Won 13,269.3 billion and Won 13,527.9 billion, respectively, representing approximately 76.1%, 77.4% and 78.8%, respectively, of our consolidated revenue.

Wireless Services

We offer wireless voice transmission and data transmission services to our subscribers through our backbone networks. Our wireless telecommunications services are available to our subscribers receiving service under the SK Telecom brand. In addition, customers can obtain wireless telecommunications services that operate on our network from MVNOs that lease our wireless networks. We derive revenues from our wireless telecommunications service principally through monthly plan-based fees as described in “— Rate Plans” below.

To complement our basic voice transmission services, we provide a voice-over-LTE service, known as our “HD Voice” service, to all of our LTE subscribers. HD Voice service is a premium communication service which features high-quality voice transmission, fast call connection, voice-to-video call switching and digital content sharing during calls.

 

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We also offer our subscribers a wide range of wireless data transmissions services. Our messaging service allows our subscribers to send and receive text, graphic, audio and video messages. In addition, our subscribers can access a wide variety of digital content and services through mobile applications providing music, video, gaming, news, commerce and financial services as well as solutions that enable subscribers to access the Internet and e-mail. We intend to continue to build our wireless data services as a platform for growth, extending our portfolio of wireless data services and developing new content for our subscribers.

Through service agreements with various foreign wireless telecommunications service providers, we offer cellular global roaming services, branded as our “T-Roaming” service. Global roaming services allow subscribers traveling abroad to make and receive calls using their regular mobile phone numbers. In addition, we provide global roaming service to foreigners traveling to Korea. In such cases, we generally receive a fee from the traveler’s local wireless telecommunications service provider.

Through SK Telink, we also operate our MVNO business under the brand “7Mobile,” which we believe offers excellent quality at reasonable rates utilizing SK Telecom’s wireless networks. SK Telink is focused on developing low-cost distribution channels and targeting niche customer segments that have a lower average revenue per user than that of SK Telecom’s subscriber base.

In addition, we provide interconnection service to connect our networks to domestic and international fixed-line and other wireless networks. See “Item 4.B. Business Overview — Interconnection.”

Wireless Device Sales

We offer several categories of wireless devices, including smartphones and basic phones, tablets and other Internet access devices and wearable devices that are sold through an extensive distribution network, which consists of authorized exclusive dealers and independent retailers, as well as branch offices and stores directly operated by us through our wholly-owned subsidiary, PS&Marketing Co., Ltd. (“PS&Marketing”). As of December 31, 2016, approximately 21.9 million, or 74.0%, of our subscribers owned smartphones that have direct access to the Internet compared to approximately 20.6 million subscribers, or 72.0%, as of December 31, 2015.

Smartphones and Basic Phones.    All of the smartphones we offer are enabled to utilize our LTE and/or WCDMA networks and run on various operating systems, such as Apple iOS and Google Android. Most of the basic phones we offer are enabled to utilize our WCDMA networks and have the ability to access wireless Internet services.

Tablets and Other Internet Devices.    We offer tablets which can access the Internet via our LTE and/or WCDMA networks and a Wi-Fi connection. The tablets run primarily on the Apple iOS and Google Android operating systems. In addition, we also offer “T Pocket-Fi” devices that provide a mobile LTE connection and are capable of connecting multiple Wi-Fi enabled devices to the Internet at one time. We offer targeted rate plans for our T Pocket-Fi device. See “— Rate Plans” below.

Wearable Devices.    We offer various wearable devices including smart watches, “T kids’ phone – Joon” and “T pet,” our pet tracking device. These devices utilize our WCDMA network and have specific features for the relevant target customer. For example, T kids’ phone – Joon is a wearable phone targeted towards children and provides simple calling, messaging and chat services as well as GPS tracking capabilities. T pet devices enable pet owners to send voice messages to their pets, track their position using global positioning system (“GPS”) technology as well as track and log their activity. We offer targeted rate plans that are specific to these wearable devices. See “— Rate Plans” below.

We purchase a substantial majority of our wireless devices from Samsung Electronics, Apple and LG Electronics. We also offer a number of devices that were designed by us to exclusively run on our networks such as the Luna which was launched in September 2015 and the Sol which was launched in January 2016. The Luna and the Sol were both designed to include convenient features to easily access media contents that are popular among our subscribers and to provide high-quality devices at a relatively low-to-mid range price point. We launched the Luna S in October 2016 and the Sol Prime in January 2017 to also compete with premium smartphones. We intend to continue to work with device manufacturers to develop exclusive devices offering high quality and convenience at competitive prices.

 

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IoT Solutions

Through our IoT solutions business, we provide a home monitoring service platform for residential customers and network access and enhanced services to support telemetry-type applications, which are characterized by M2M wireless connections, to business customers. In order to promote the growth of our IoT solutions business, we recently deployed new networks nationwide that are designed to support IoT devices, namely our high-speed LTE-M network in March 2016 and our low-cost Low Power Wide Area Network based on LoRa technology in July 2016.

In May 2015, we launched “Smart Home,” a mobile application-based home monitoring service for residential customers. Smart Home is a paid subscription service available not only to our wireless and fixed-line service subscribers but also to subscribers of our competitors’ wireless and fixed-line services. Through Smart Home, users can control and monitor their home environment from their mobile devices and enhance the safety and convenience of their daily lives. We have partnered with more than 60 electronics and appliance manufacturers, including Samsung Electronics and LG Electronics, to develop a wide range of appliances, electronic devices, door security, heating and lighting systems that are compatible with our Smart Home service.

We also provide network access and customized IoT solutions to our business customers. Our M2M services support devices that are used in a variety of market segments, including retail, utilities, security, automotive, agriculture and data analytics. For example, in 2016, we partnered with Renault Samsung Motors, SsangYong Motor, Jaguar Land Rover and Kia Motors to integrate T-map, our interactive navigation service, with their in-vehicle navigation systems, and we expect to further expand our “connected car” technologies over the next few years. In addition, we provide enhanced solutions to businesses in order to connect with and monitor their equipment, such as fleet management devices used to monitor city-operated rental bicycles and utility monitoring devices for smart grid applications.

Platform Services

Through our platform services business, we seek to provide innovative products and services that meet our customers’ evolving needs in an increasingly connected world. For example, we provide location-based services such as “T map,” an interactive navigation service which we provide to our and our competitors’ wireless subscribers free of charge. T map uses GPS technology to transmit driving directions, real-time traffic updates and emergency rescue assistance to wireless devices. As of December 31, 2016, there were approximately 10.6 million total subscribers to our T map service, of which approximately 9.3 million were our wireless subscribers. As discussed in “— IoT Solutions”, in 2016, we integrated our T map services with our automotive IoT solutions.

In addition, we provide “T phone” service, which is available on most devices running on the Google Android operating system. In October 2016, we extended our T phone service to devices running on the Apple operating system. Our T phone service provides our customers with a number of convenient call functions, including a function to block spam calls and a function called “T114” that informs customers of the phone numbers of stores, hospitals and other facilities closest in proximity to the customer’s current location. In May 2016, we expanded access to our T phone service to users regardless of whether they have a wireless service subscription with us. As of December 31, 2016, there were more than 10 million subscribers to the T phone service compared to approximately 8.0 million subscribers as of December 31, 2015.

We also offer artificial intelligence solutions through our platform services business. For example, in September 2016, we launched NUGU, the first intelligent virtual assistant service launched in Korea with Korean language capabilities based on advanced voice recognition technologies. NUGU currently offers a wide range of services including music streaming, connectivity with “Smart Home” and other IoT solutions for the home, ordering food delivery, and informational and other personal assistance services, and we plan to continually enhance its functionalities through software updates. Through cloud-based deep-learning technology, NUGU is designed to evolve on its own as it collects more data about its users over time.

In November 2016, we launched our web and mobile application “hidden,” a social networking platform for users to share their expertise and talents in various areas such as food, leisure, fashion, beauty and pets, by creating their own content or by offering classes or other activities to interested users for a fee. As of December 31, 2016, hidden had approximately 1.4 million monthly average users and over 600 active experts.

 

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Rate Plans

We offer our wireless telecommunications services on both a postpaid and prepaid basis. Approximately 93.8% of our subscribers received our wireless telecommunications services on a postpaid basis as of December 31, 2016. Postpaid accounts primarily represent retail subscribers under contract with SK Telecom under which a subscriber is billed in advance a monthly fixed rate in return for a monthly network service allowance and usage for outgoing voice calls and wireless data services beyond the allowance is billed in arrears, where payment of the total amount of the bill is due at the end of the month. The standard contract period for our rate plans is 24 months, although our subscribers have the option to enter into shorter term contracts or no fixed-term contract at all. We provide various subsidies and discounts, including handset subsidies, depending on the length of the contract and the subscriber’s chosen rate plan. Our prepaid service enables individuals to obtain wireless telecommunications services without a fixed-term contract by paying for all services in advance according to expected usage. We do not charge our customers for incoming calls, although we do receive interconnection charges from KT and other companies for calls from the fixed-line network terminating on our networks and interconnection revenues from other wireless network operators. See “Item 4.B. Business Overview — Interconnection.”

We also charge our customers a 10.0% value-added tax. We can offset the value-added tax we collect from our customers against value-added tax refundable to us by the Korean tax authorities. We remit taxes we collect from our customers to the Korean tax authorities. We record revenues in our financial statements net of such taxes.

Basic Rate Plans.    We offer various postpaid account plans for smartphones and basic phones that are designed to meet a wide range of subscriber needs and interests. As of December 31, 2016, approximately 13 million subscribers have subscribed to “Band Data” plans, which are our representative smartphone rate plans featuring unlimited domestic voice minutes and text messaging and a fixed data transmission allowance per month as well as free access to live TV on “oksusu,” our mobile IPTV service, that range from Won 29,900 to Won 100,000 per month. Our “Voice Free” plans are available for our basic phones and feature a fixed allowance of voice minutes and 50 text messages per month with rates that range from Won 19,000 to Won 94,000 per month. We also offer a standard rate plan for Won 11,000 per month, through which the subscriber is charged per usage amount, other than on text message usage up to 50 messages per month.

In addition, we provide a variety of differentiated rate plans for our customer segments by age such as children, teenagers and senior citizens. We also offer rate plans for specific customer segments, such as our “Band Data Global Pack” rate plans for foreigners featuring unlimited domestic voice minutes and text messaging, a fixed allowance of international voice minutes and data transmission per month and our rate plans for people in the military service featuring unlimited domestic voice minutes, text messaging and data transmission for Won 2,000 per day of use while on leave. In 2016, we launched our “T Signature” rate plans for customers seeking unlimited wireless data usage for fixed rates and a multitude of other premium benefits such as mobile device insurance coverage and mobile device upgrades, as well as our “Band YT” rate plans targeting customers in their twenties and thirties seeking a wider range of content services such as subscriptions to upgraded music streaming services.

For our T Pocket-Fi device, we provide a fixed monthly data transmission allowance of 10 GB for Won 16,500 per month and 20 GB for Won 22,500 per month. With respect to the wearable devices that we offer, we offer targeted rate plans such as the “T Outdoor” rate plan for smart watches at Won 11,000 per month, the “T pet” rate plan for our T pet device at Won 5,000 per month and the “T kids” rate plan for our T kids’ phone – Joon devices at Won 8,000 per month.

Data Add-on Rate Plans.    We offer a variety of optional “add-on” rate plans that are designed to meet a wide range of subscriber needs with respect to increased data usage that followed the widespread use of smartphones and faster transmission speeds made possible by LTE technology. For example, we offer data plans that offer unlimited data based on time, place and occasion such as our “Subway Free” plan, which offers unlimited wireless data usage on subway platforms and inside subways and our “Commuter Free” plan, which offers unlimited wireless data usage during rush hour, each for a fixed rate of Won 9,000 per month. For certain rate plan subscribers, we also offer a daily allowance of 1 GB of oksusu access and a monthly allowance of 8,000 points to purchase media content on oksusu through our “Band Play Pack” plan for Won 5,000 per month. “Safe Option Premium” offers an additional daily data transmission allowance of 50 MB to subscribers who have used the maximum data transmission on their existing plan without incurring additional data transmission fees for a fixed rate of Won 8,000

 

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per month. We also offer “T Data Coupons,” through which subscribers can purchase a fixed amount of data for a fixed price. T Data Coupons range from Won 2,000 for 100 MB of data to Won 33,000 for 5 GB of data. As T Data Coupons are valid for one year after first use, we believe they are attractive to sporadic data users. T Data Coupons can also be sent as “gifts” to family and friends that need additional data allowance. We believe that our data add-on rate plan offerings have contributed to the increase in data usage to 5.2 GB of average monthly data usage per LTE subscriber as of December 31, 2016 from 3.9 GB as of December 31, 2015.

Roaming Plans.    We provide fixed-rate international roaming plans such as our “T Roaming Data OnePass” plans which provide data roaming services at different speeds depending on usage amount for Won 9,000 to Won 15,000 per day and are available in up to 150 countries, depending on the specific plan chosen. With respect to international calls placed by a subscriber, unless the subscriber uses one of our fixed-rate international roaming plans, we bill the subscriber the international rate charged by the Korean international telephone service provider through which the call is routed. We remit to that provider the international charge less our usage charges. See “Item 4.B. Business Overview — Interconnection.”

Digital Wireless Network

We offer wireless voice and data transmission services throughout Korea using digital wireless networks, primarily consisting of our LTE network, WCDMA network, CDMA network, Wi-Fi network and LoRa network. We continually upgrade and increase the capacity of our wireless networks to keep pace with advancements in technology, the growth of our subscriber base and the increased usage of voice and wireless data services by our subscribers.

LTE Network.    We commenced commercial wireless telecommunications services based on LTE technology, which is generally referred to as a fourth generation technology, on July 1, 2011 and expanded the coverage area of our LTE services to nationwide by the end of April 2012. We launched our LTE multi-carrier service in the 1.8 GHz spectrum in July 2012. In June 2013, we commenced providing commercial LTE-A services at speeds of up to 150 Mbps using carrier aggregation technology which combines spectrum frequencies to improve data transmission speed and capacity, and in June 2014, we launched wideband LTE-A services at speeds of up to 225 Mbps and expanded coverage nationwide in 2014. In December 2014, we commenced tri-band LTE-A services, which bundles three different bandwidths to allow faster network service at speeds of up to 300 Mbps in Seoul and other metropolitan areas. Since then, we expanded coverage nationwide and as of December 31, 2015, the last date for which the MSIP has announced such information, the nationwide geographic coverage percentage of our tri-band LTE-A service was approximately 51.9%. As of December 31, 2016, we were the only wireless network operator to provide subscribers with accurate information with respect to the geographic coverage area of our networks, according to the MSIP. We continue to deploy improved LTE-A technology to increase the maximum data transmission speed of our services. In March 2016, we launched our LTE-M services at speeds of up to 10 Mbps for M2M connections relating to our IoT solutions. LTE technology has become widely accepted globally as the standard fourth generation technology. LTE technology enables data to be transmitted at speeds faster than our CDMA and WCDMA networks. Our continued upgrades to our LTE technology enables even faster data transmission speeds, as shown below.

 

Wireless network technology

(Date of commencement of services)

   Maximum download speed for data
transmission
     Maximum upload speed for data
transmission
 

LTE (July 2011)

     75 Mbps        37.5 Mbps  

LTE-A (June 2013)

     150 Mbps        75 Mbps  

Wideband LTE-A (June 2014)

     225 Mbps        112.5 Mbps  

Tri-band LTE-A (December 2014)

     500 Mbps        250 Mbps  

LTE-M (March 2016)

     10 Mbps        5 Mbps  

The faster data transmission speed of our LTE network has allowed us to offer significantly improved wireless data transmission services, providing our subscribers with faster wireless access to multimedia content. We have been building new access networks and evolved packet cores for our LTE network, while we utilize our existing WCDMA network for other parts of our LTE network. For more information about our capital expenditures relating to our LTE network, see “Item 5.B. Liquidity and Capital Resources.”

 

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CDMA and WCDMA Networks.    CDMA technology is a continuous digital transmission technology that accommodates higher throughput than analog technology by using various coding sequences to allow concurrent transmission of voice and data signals for wireless communication. In January 1996, we launched our first wireless network based on CDMA technology and became the world’s first to commercialize CDMA cellular service.

WCDMA technology enables us to offer significantly faster and higher-quality voice and data transmission and supports more sophisticated wireless data transmission services than is possible through our CDMA network. We commenced provision of our WCDMA services on a limited basis in Seoul at the end of 2003. Since then, we expanded our WCDMA network nationwide and implemented various technologies to improve data transmission speeds within our WCDMA network.

Wi-Fi Network.    Wi-Fi technology enables our subscribers with Wi-Fi-capable devices such as smartphones, laptops and tablet computers to access mobile Internet. We started to build Wi-Fi access points in 2010 and, as of December 31, 2016, we had more than 137,000 Wi-Fi access points in public areas such as shopping malls, restaurants, coffee shops, subways and airports where, generally, the demand for high-speed wireless Internet service is high. While each Wi-Fi access point typically has a radius of approximately 20-30 meters, some of our Wi-Fi hot zones, which have multiple Wi-Fi access points, including those installed at public transportation facilities and amusement parks, have much wider service areas. We also have a WiBro network that we use as a backhaul for our Wi-Fi network.

LoRa Networks.    A Low-Power Wide-Area Network based on LoRa technology is a type of telecommunications network designed to support communication among IoT devices. It can transmit data over tens of kilometers while consuming much less power than LTE networks, lowering costs for connectivity as well as lowering battery power usage. We completed the nationwide deployment of our LoRa network in July 2016. We expect that our LoRa network will provide the infrastructure necessary for the growth of not only our own IoT solutions business but also the IoT industry as a whole.

Network Infrastructure

The principal components of our wireless networks are:

 

   

cell sites, which are physical locations equipped with transmitters, receivers and other equipment that communicate by radio signals with wireless handsets within range of the cell (typically a 3 to 40 kilometer radius);

 

   

switching stations, which switch voice and data transmissions to their proper destinations, which may be, for instance, a mobile phone of one of our subscribers (for which transmissions would originate and terminate on our wireless networks), a mobile phone of a KT or LG U+ subscriber (for which transmissions would be routed to KT’s or LG U+’s wireless networks, as applicable), a fixed-line telephone number (for which calls would be routed to the public switched telephone network of a fixed-line network operator), an international number (for which calls would be routed to the network of a long distance service provider) or an Internet site; and

 

   

transmission lines, which link cell sites to switching stations and switching stations with other switching stations.

As of December 31, 2016, our LTE, WCDMA, CDMA and WiBro networks had an aggregate of approximately 55,000 cell sites.

We have purchased substantially all of the equipment for our networks from Samsung Electronics, Ericsson–LG and Nokia Siemens Networks B.V. Most of the transmission lines we use, including virtually all of the lines linking switching stations, as well as a portion of the lines linking cell sites to switching stations, comprise optical fiber lines that we own and operate directly. However, we have not undertaken to install optical fiber lines to link every cell site and switching station. In places where we have not installed our own transmission lines, we have leased lines from KT and LG U+. We intend to increase the efficiency of our network utilization and provide optimal services by internalizing transmission lines.

 

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We use a wireless network surveillance system. This system oversees the operation of cell sites and allows us to monitor our main equipment located throughout the country from one monitoring station. The automatic inspection and testing provided to the cell sites lets the system immediately rebalance to the most suitable setting, and the surveillance system provides for automatic dispatch of repair teams and quick recovery in emergency situations.

Marketing, Distribution and Customer Service

Marketing.    Our marketing strategy is focused on offering solutions tailored to the needs of our various customer segments, promoting our brand and leveraging our extensive distribution network. Our marketing plan includes a coordinated program of television, print, radio, outdoor signage, Internet and point-of-sale media promotions designed to relay a consistent message across all of our markets. Our “T” brand signifies the centrality of “Telecommunications” and “Technology” to our business and also seeks to emphasize our commitment to providing “Top” quality, “Trustworthy” products and services to our customers. We market our wireless products and services under the “T” brand.

We have implemented certain information technology improvements in connection with our marketing strategy, including customer management systems, as well as more effective information security controls. We believe these upgrades have enhanced our ability to process and utilize marketing- and subscriber-related data, which, in turn, has helped us to develop more effective and targeted marketing strategies. We currently operate a customer information system designed to provide us with an extensive customer database. Our customer information system includes a billing system that provides us with comprehensive account information for internal purposes and enables us to efficiently respond to customer requests. Our customers can also change their rate plans, verify the charges accrued on their accounts, receive their bills online and send text messages to our other subscribers through our website at www.tworld.co.kr and through our “T world” mobile application.

We strive to improve subscriber retention through our T Membership program, which is a membership service available to our wireless subscribers. Our T Membership program provides various membership benefits to its members such as discounts with our membership partners for dining, shopping, entertainment and travel, access to our online membership shopping mall and invitations to various promotional events. Although our competitors also have similar membership programs, we believe that our T Membership program has a competitive advantage over our competitors’ membership programs due to our large subscriber base and breadth of membership benefits.

Distribution.    We use a combination of an extensive network, including branch offices and stores, directly operated by us through our wholly-owned subsidiary, PS&Marketing, almost 4,000 authorized exclusive dealers and an extensive network of independent retailers in order to increase subscriber growth while reducing subscriber acquisition costs.

As part of our initiative to provide a differentiated customer service experience, we operate T Premium Stores that allow our potential and existing subscribers to experience certain of our services such as services that are available through our IoT solutions and platform services. As of December 31, 2016, we operated approximately 200 T Premium Stores and we intend to further expand the number of T Premium Stores in 2017.

In addition, we operate an online distribution channel, “T world Direct,” through which subscribers can conveniently purchase wireless devices and subscribe to our services online. We intend to continue to develop our online distribution channel to leverage our offline distribution capabilities to provide convenience and additional value to our subscribers. For example, subscribers purchasing wireless devices through T World Direct can opt to pick up their devices at one of our offline stores.

Currently, authorized dealers are entitled to an initial commission for each new subscriber registered by the dealer, as well as an average ongoing commission calculated as a percentage of that subscriber’s monthly plan-based rate for the first four years. In order to strengthen our relationships with our exclusive dealers, we offer a dealer financing plan, pursuant to which we provide to each authorized dealer an interest-free or low-interest loan of up to Won 4.0 billion with a repayment period of up to three years. As of December 31, 2016, we had an aggregate of approximately Won 66.0 billion outstanding in loans to authorized dealers.

 

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Customer Service.    We provide high-quality customer service directly through our two wholly-owned subsidiaries, Service Ace Co., Ltd. and Service Top Co., Ltd., rather than rely on outsourcing. Network O&S Co., Ltd. operates our switching stations and related transmission and power facilities and offers quality customer service primarily to our business customers. We have held the top position with respect to our telecommunications service and retail sales service in Korea’s leading three customer satisfaction indices, the National Customer Satisfaction Index, the Korean Customer Satisfaction Index and the Korean Standard Service Quality Index, for over 16 years each.

Fixed-line Telecommunication Services

We offer fixed-line telephone, broadband Internet and advanced media platform services (including IPTV) and business communications services through our fixed-line telecommunication services segment. Our fixed-line telecommunications services are provided by our subsidiaries, SK Broadband and SK Telink. The following table sets forth historical information about our subscriber base for our fixed-line telecommunication services for the periods indicated:

 

     As of December 31,  
     2016      2015      2014  

Fixed-Line Telephone (including VoIP)(1)

     4,277,939        4,672,195        4,774,748  

Broadband Internet

     5,207,495        5,036,057        4,810,493  

IPTV(2)

     3,962,033        3,481,969        2,819,130  

 

 

(1) Includes subscribers to VoIP services of SK Broadband and SK Telink.

 

(2) Includes subscribers to SK Broadband’s B tv service and excludes video-on-demand only service subscribers.

In 2016, 2015 and 2014, our fixed-line telecommunication services segment revenue was Won 2,651.2 billion, Won 2,494.5 billion and Won 2,449.9 billion, respectively, representing approximately 15.5%, 14.6% and 14.3%, respectively, of our consolidated revenue.

Fixed-line Telephone Services

Our fixed-line telephone services comprise local, domestic long distance, international long distance and VoIP services. VoIP is a technology that transmits voice data through an Internet Protocol network. As of December 31, 2016, we had approximately 4.3 million fixed-line telephone subscribers (including subscribers to VoIP services of SK Broadband and SK Telink). Our fixed-line telephone services are primarily offered under the “B phone” brand name. SK Telink also provides affordable international calling services under the brand name “00700.”

Broadband Internet Access Services

Our broadband Internet access network covered more than 80% of households in Korea as of December 31, 2016. As of December 31, 2016, we had approximately 5.2 million broadband Internet access subscribers. We offer broadband Internet access products with various throughput speeds, including “band Giga,” which is up to 10 times faster than data transmission speeds on networks utilizing fiber-to-the-home, or FTTH, technology and allows for data transmission at a maximum speed of 1 Gbps.

Advanced Media Platform (including IPTV)

As part of our initiative to be the leading next-generation platform provider, we aim to provide an advanced media platform with various media content and service offerings.

We have offered video-on-demand services since 2006 and launched real-time IPTV services in 2009. We currently offer IPTV services under the brand name “B tv” with access to more than 166 live high definition channels as well as video-on-demand service providing a wide range of media content, including recent box office movie releases, popular U.S. and other foreign TV shows and various children’s TV programs. We also offer “B tv UHD,” which is an ultra-high definition IPTV service and has a resolution that is four times as high as the standard high definition broadcasting service in the IPTV industry. As of December 31, 2016, we had approximately 4.0 million IPTV subscribers.

 

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In January 2016, we launched “oksusu,” a mobile IPTV service that is a combination of the services we previously provided as “B tv mobile” and “hoppin” and provides subscribers access to a wide variety of media contents, including various television programs, movies and other video contents that can be downloaded to wireless devices. Oksusu subscribers have access to more than 90 live TV channels, a wide range of sports contents and popular U.S. and other foreign TV shows, among other contents. We are also collaborating with media content developers to provide original media content for our oksusu service. As of December 31, 2016, we had approximately 6.6 million subscribers to oksusu.

We continue to expand the scope of our media services and content offerings to provide our subscribers with a vast library of high-quality content that can be accessed through our wireless networks and our fixed-line network.

Business Communications Services

We offer other business communications services to our business customers, including corporations and government entities. Our business communications services include leased line solutions, Internet data center solutions and network solution services.

Our leased line solutions are exclusive lines that allow point-to-point connection for voice and data traffic between two or more geographically separate points. We hold a license to operate leased line services on a nationwide basis in Korea and also use international transmission lines to provide leased line services to other countries. Our leased line services enable high volumes of data to be transmitted swiftly and reliably. We also provide back-up storage for transmitted data. Through our Internet data center, we provide our business subscribers with server-based support including co-location, dedicated server hosting and cloud computing services. Our network solution service utilizes our network infrastructure and voice platform to provide 24-hour monitoring and control of our customers’ networks. Through this service, we conduct remote monitoring of our customers’ data and voice communications infrastructure and network and traffic conditions, and carry out preventive examinations and on-site visits.

Rate Plans

For our residential customers, we offer both bundled rate plans for a combination of our fixed-line service offerings as well as individual rate plans for each separate service offering. Bundled rate plans are offered at a discount compared to subscribing to the same services through individual rate plans. Approximately 84% of subscribers to our fixed-line services subscribe to two or more of our services through our bundled rate plans. Bundled rate plans for a combination of fixed-line telephone, broadband Internet access and IPTV services range from Won 28,000 to Won 67,000 per month.

Our “Unlimited Home Phone” plan for subscribers to our fixed-line telephone service features unlimited domestic land-to-land voice minutes for a fixed rate and range from Won 7,000 to Won 10,500 per month depending on whether or not the subscriber opts for a contract and if so, the length of the contract period. We offer individual fixed-rate plans for our broadband Internet access service that range from Won 20,000 to Won 50,000 per month depending on the data throughput speed and existence and length of a contract. We offer individual fixed-rate plans for our IPTV service that range from Won 6,000 to Won 28,000 per month depending on the number of channels provided and existence and length of a contract. In addition, subscribers can purchase individual videos on demand or subscribe to certain paid content on a periodic basis.

With respect to our business communications services, we offer rates that are tailored to the specific needs of our business customers. We also charge certain installation fees and equipment rental fees as well as other ancillary fees with respect to certain of our fixed-line telecommunications services.

Marketing, Distribution and Customer Service

We focus on bringing our fixed-line telephone, broadband Internet and advanced media platform services (including IPTV) to residential users, and various business communications services to corporate users. We market our fixed-line telecommunications products and services under the “B” brand. Our “B” brand signifies the centrality of “Broadband” to our business and also seeks to emphasize our commitment to providing the “Best” quality products and services to our customers that go “Beyond” expectations, leading to a “Bravo” response. Our “B” brand also strengthens our shared identity with our wireless service’s “T” brand.

 

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We currently outsource a significant portion of our retail sales force needs. We market our services and provide after-sales service support to customers through more than 90 customer centers and a network of more than 240 authorized exclusive dealers located throughout Korea. In addition, SK Telecom’s direct retail stores and authorized dealers for wireless telecommunications services also market our fixed-line telephone, broadband Internet and advanced media platform services (including IPTV), which we believe has contributed to the increase in the number of subscribers to such services. We have contracts with our customer centers to sell our services exclusively. These centers receive a commission for each service contract and installation contract secured. In addition, we pay these centers for the maintenance and repair work that they perform for our subscribers. Customer and service centers often enter into sub-contracts with smaller distribution outlets within their area to increase their sales coverage and engage in telemarketing efforts. Authorized dealers are entitled to an initial commission for each new subscriber registered by the dealer.

Sales to business subscribers are handled through our in-house sales group. Our sales teams focus on securing contracts with large commercial complexes, allowing us to install our remote terminals at their premises. After installation, sales teams direct their attention to individual business clients within these premises. Sales teams that have secured contracts with business clients remain the primary contacts for all aspects of the client’s needs, including further installation and customer and follow-up service.

E-Commerce Services

Our e-commerce services segment consists primarily of our marketplace business and O2O commerce business operated by our subsidiary, SK Planet. In 2016, 2015 and 2014, our e-commerce services segment revenue was Won 1,001.3 billion, Won 1,060.0 billion and Won 972.0 billion, respectively, representing approximately 5.9%, 6.2% and 5.7%, respectively, of our consolidated revenue.

Marketplace.    We operate “11st” which is an online open marketplace that offers a wide range of products through an online and mobile platform. Individual consumers can buy a vast array of products such as clothes and accessories, beauty products, groceries, baby products, books, office supplies, furniture, home goods, outdoor and sporting goods, appliances, electronics, travel packages, entertainment tickets and local deals for restaurants and other services from small- to large-sized retailers that operate “mini malls” on the 11st platform.

As of December 31, 2016, the mobile version of 11st was the leading mobile commerce platform in terms of unique visitors according to Korean Click. The mobile version of 11st is continuing to grow with an increase in the percentage of annual gross merchandise volume, which represents the total annual monetary value of customer purchases of goods and services, net of estimated refunds, derived from the mobile platform to 52% in 2016 from 41% in 2015 and 28% in 2014.

We have expanded our online open marketplace business globally to Turkey, Indonesia, Malaysia and Thailand. In March 2013, Dogus Planet, a joint venture between SK Planet and Dogus Group, a Turkish conglomerate, launched “n11.com” in Turkey. In March 2014, XL Planet, a joint venture between SK Planet and XL Axiata Tbk, an Indonesian mobile telecommunications service provider, launched “elevenia” in Indonesia. Further, in April 2015, Celcom Planet, a joint venture between SK Planet and Celcom Axiata, a Malaysian telecommunications service provider, launched “11street” in Malaysia. Our online marketplaces in Turkey, Indonesia and Malaysia have rapidly grown into top tier players. In February 2017, SK Planet launched 11street in Thailand through a wholly-owned subsidiary.

We intend to continue our efforts to increase usage of the mobile version of 11st, enhance the convenience of our 11st mobile and web user interface and develop our growth in overseas e-commerce markets.

O2O Commerce.    We provide diverse O2O commerce solutions under the “Syrup” brand name, which include the following:

 

   

Syrup Wallet, a mobile wallet service that is the successor to our Smart Wallet service, allows users to conveniently manage membership card points and payment methods such as coupons, credit cards and gift vouchers on their mobile devices for both online and offline purchases and provides shopping information to users in certain shopping areas using advanced location-based technology;

 

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OK Cashbag by Syrup, Korea’s largest loyalty points program in terms of number of members with more than 53,000 participating merchants and 34 million members, which allows members to collect and redeem loyalty points at its partnering merchants and offers differentiated marketing services to such partnering merchants;

 

   

Syrup Pay, a convenient and secure payment service through which users can register their credit card to simplify payments for online and mobile purchases, including through 11st, our online open marketplace;

 

   

Syrup Gifticon, an online and mobile gift exchange and delivery service;

 

   

Syrup Order, a food ordering service that allows users to conveniently place and pay for orders at restaurants in advance;

 

   

Syrup Table, a location-based restaurant discovery service that provides users with information about nearby restaurants; and

 

   

Syrup Style, a shopping platform allowing users in Korea and China to conveniently view and purchase clothing from well-known offline fashion stores on their mobile devices.

The cumulative number of monthly average users of our O2O commerce solutions was 12 million as of December 31, 2016.

We are also expanding our O2O commerce solutions business globally. In October 2014, a 95.2%-owned subsidiary of SK Planet acquired a 100.0% ownership interest in Shopkick, the developer of “shopkick,” a mobile shopping application that checks in and rewards customers that arrive at a participating retail store, for an aggregate purchase price of Won 230.9 billion and the assumption of Won 18.7 billion in current liabilities.

Other Businesses

We strive to continually diversify our products and services and develop new growth engines that we believe are complementary to our existing products and services, such as our portal service and other miscellaneous businesses, which we include in our others segment. In 2016, 2015 and 2014, our others segment revenue was Won 434.4 billion, Won 312.9 billion and Won 214.0 billion, respectively, representing approximately 2.5%, 1.8% and 1.2%, respectively, of our consolidated revenue.

We offer a portal service under our “Nate” brand name through SK Communications. Nate can be accessed through its website, www.nate.com, or through its mobile application. Nate offers a wide variety of content and services, including Nate Search, an Internet search engine, Nate News, which provides a library of articles about current events, sports, entertainment and culture, Nate Pann, a user-generated content service as well as access to free e-mail accounts through Nate Mail.

We offer high-end audio devices under the brand name “Astell&Kern” that are manufactured by our subsidiary, Iriver. In 2016, two of Iriver’s audio devices were selected as CES Innovation Awards Honorees in the Portable Media Player and Accessories category and High Performance Home Audio/Video category, respectively, and in 2017, an Iriver audio device was selected as an CES Innovation Awards Honoree in the Accessories category. In August 2014, we acquired a 39.3% equity interest in Iriver, a manufacturer of digital audio players and other portable media devices, which we increased to 49.0% in December 2014, for an aggregate purchase price of approximately Won 54.5 billion. We also acquired Won 5.0 billion of convertible bonds issued by Iriver, which may be converted into additional equity interests in Iriver when certain conditions are met.

In addition, we operate a security and network surveillance business through Neosnetworks, a provider of residential and small business electronic security and other related alarm monitoring services. In 2014 and 2015, we acquired an 83.9% interest in Neosnetworks for an aggregate of Won 64.0 billion, as part of our initiative to further develop our IoT solutions business. In October 2016, we acquired the remaining 16.1% interest in Neosnetworks through SK Telink.

We also operate a mobile application marketplace, “One Store” in collaboration with KT, LG U+ and NAVER Corporation. Through this joint collaboration, we expect to increase the competitiveness of One Store to compete with Google Playstore, the leading mobile application marketplace in Korea. As of December 31, 2016, we held a 65.5% interest in One Store.

 

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Interconnection

Our wireless and fixed-line networks interconnect with the public switched telephone networks operated by KT and SK Broadband and, through their networks, with the international gateways of KT and LG U+, as well as the networks of the other wireless telecommunications service providers in Korea. These connections enable our subscribers to make and receive calls from telephones outside our networks. Under Korean law, service providers are required to permit other service providers to interconnect to their networks. If a new service provider desires interconnection with the networks of an existing service provider but the parties are unable to reach an agreement within 90 days, the new service provider can appeal to the KCC.

Domestic Calls

Guidelines issued by the MSIP require that all interconnection charges levied by a regulated carrier take into account (i) the actual costs to that carrier of carrying a call or (ii) imputed costs. Starting in 2016, the MSIP determines interconnection rates applicable to each carrier based on changes in traffic volume, taking into account other factors such as research results, competition and trends in technology development.

Wireless-to-Fixed-line.     According to our interconnection arrangement with KT, for a call from our wireless network to KT’s fixed-line network, we collect the usage rate from our wireless subscriber and in turn pay KT the interconnection charges. Similarly, KT pays interconnection charges to SK Broadband for a call from KT’s wireless network to SK Broadband’s fixed-line network. The interconnection rate applicable to both KT and SK Broadband was Won 11.98 per minute, Won 13.44 per minute and Won 14.73 per minute for 2016, 2015 and 2014, respectively.

Fixed-line-to-Wireless.    The MSIP determines interconnection arrangements for calls from a fixed-line network to a wireless network. For a call initiated by a fixed-line user to one of our wireless subscribers, the fixed-line network operator collects our usage fee from the fixed-line user and remits to us an interconnection charge. Interconnection with KT accounts for substantially all of our fixed-line-to-wireless interconnection revenue and expenses.

The interconnection rates paid by fixed-line network service providers to each wireless network service provider are set out below. Beginning in 2017, a single interconnection rate applies to all wireless telecommunications service providers, which will eliminate the cost benefit that KT and LG U+ had historically derived from the higher interconnection rates they had received.

 

     Rate per Minute  

Applicable Year

   SK Telecom      KT      LG U+  

2012

    27.05       28.03       28.15  

2013

     26.27        26.98        27.04  

2014

     22.22        22.73        22.78  

2015

     19.53        19.92        19.96  

2016

     17.03        17.14        17.17  

2017

     14.56        14.56        14.56  

Wireless-to-Wireless.     Interconnection charges also apply to calls between wireless telephone networks in Korea. Under these arrangements, the operator originating the call pays an interconnection charge to the operator terminating the call. The applicable interconnection rate is the same as the fixed-line-to-wireless interconnection rate set out in the table above.

Our revenues from the wireless-to-wireless charge were Won 540.3 billion in 2016, Won 582.6 billion in 2015 and Won 651.2 billion in 2014. Our expenses from these charges were Won 548.1 billion in 2016, Won 579.0 billion in 2015 and Won 700.3 billion in 2014. The charges above were agreed among the parties involved and confirmed by the KCC.

 

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International Calls and International Roaming Arrangements

With respect to international calls, if a call is initiated by our wireless subscribers, we bill the wireless subscriber for the international charges of KT, LG U+ or SK Broadband, and we receive interconnection charges from such operators. If an international call is received by our subscriber, KT, LG U+ or SK Broadband pays interconnection charges to us based on our imputed costs.

To complement the services we provide to our subscribers in Korea, we offer international voice and data roaming services. We charge our subscribers usage fees for global roaming service and, in turn, pay foreign wireless network operators fees for the corresponding usage of their network. For a more detailed discussion of our global roaming services, see “Item 4.B. Business Overview — Cellular Services — Wireless Services” above.

Competition

We operate in highly saturated and competitive markets, and we believe that our subscriber growth is affected by many factors, including the expansion and technical enhancement of our networks, the development and deployment of new technologies, the effectiveness of our marketing and distribution strategy, the quality of our customer service, the introduction of new products and services, competitive pricing of our rate plans, new market entrants and regulatory changes.

Historically, there has been considerable consolidation in the telecommunications industry, resulting in the current competitive landscape comprising three mobile and fixed network operators in the Korean market, KT, LG U+ and us. Our competitors have substantial financial, technical, marketing and other resources to respond to our business offerings.

The following table shows the market share information, based on number of subscribers, as of December 31, 2016, for the following markets.

 

     Market Share (%)  
     SK Telecom      KT      LG U+      Others  

Wireless Service(1)

     49.1        30.6        20.3         

LTE Service(1)

     45.5        30.8        23.7         

Fixed-Line Telephone (including VoIP)

     15.2        57.8        17.4        9.6  

Broadband Internet

     25.3        41.4        17.6        15.7  

IPTV(2)

     13.1        23.2        8.4        55.3  

 

 

(1) Includes MVNO subscribers that lease the wireless networks of the respective mobile network operator.

 

(2) Excludes video-on-demand only service subscribers. Market share is expressed as a percentage of the pay TV market (which includes IPTV, cable TV and satellite TV).

Cellular Services

As of December 31, 2016, we had 29.6 million subscribers, representing a market share of approximately 49.1%, including MVNO subscribers leasing our networks. As of December 31, 2016, KT and LG U+ had 18.5 million and 12.2 million subscribers, respectively, representing approximately 30.6% and 20.3%, respectively, of the total number of wireless subscribers in Korea on such date, each including MVNO subscribers leasing its networks. As of December 31, 2016, we had 21.1 million LTE subscribers and KT and LG U+ had 14.3 million and 11.0 million LTE subscribers, respectively, each including MVNO subscribers leasing its networks.

In 2016, we had 6.1 million activations and 5.1 million deactivations. For 2016, our monthly churn rate ranged from 1.4% to 1.5%, with an average monthly churn rate of 1.5% for 2016, which remained unchanged from 2015. In 2016, we gained 47.0% of the total number of new wireless subscribers and subscribers that migrated to a different wireless telecommunications service provider, compared to KT with 27.7% and LG U+ with 25.3%.

We also compete for subscriber activations with MVNOs, including MVNOs that lease our networks. MVNOs generally provide rate plans that are relatively cheaper than similar rate plans of the wireless network providers from which they lease their networks, including us. To date, fourteen MVNOs have commenced providing wireless

 

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telecommunications services. As of December 31, 2016, MVNOs had a combined market share of 11.3%, of which MVNOs leasing our networks represented 46.3%, MVNOs leasing KT’s networks represented 46.5% and MVNOs leasing LG U+’s networks represented 7.2%.

In addition, other companies may enter the telecommunications service market by acquiring the required licenses from the MSIP. For example, in October 2015, Sejong Telecom, K Mobile and Quantum Mobile applied for licenses to become Korea’s fourth mobile network operator. Although the MSIP rejected the applications of all three companies in January 2016, the MSIP may continue its efforts to find an eligible applicant to be Korea’s fourth mobile network operator in the future. For a description of the risks associated with the competitive environment in which we operate, see “Item 3.D. Risk Factors — Risks Relating to Our Business — Competition may reduce our market share and harm our results of operations and financial condition.”

Prior to 2015, competition in the wireless telecommunications business had caused us to significantly increase our marketing and advertising expenses. Between 2012 and 2014, marketing expenses as a percentage of SK Telecom’s revenue, on a separate basis, fluctuated heavily between 23.9% to 33.7%, depending on the competitive landscape. Such percentage was 24.3% in 2015 and 23.9% in 2016. We attribute such stabilization to the maturity of the LTE market and the implementation of the MDDIA, which prohibits wireless telecommunications service providers from unfairly providing discriminatory subsidies based on certain criteria and from providing subsidies exceeding a maximum limit established by the KCC for the purchase of mobile phone models that were launched within the last 15 months, among other restrictions and requirements. For a more detailed discussion of the MDDIA, see “Item 4.B. Business Overview — Law and Regulation — Competition Regulation — Rate Regulation.”

The prohibition from providing mobile phone subsidies exceeding the amount set by the KCC is set to expire in September 2017 pursuant to the expiration of the three-year effective period of the relevant provision of the MDDIA. In the past, certain legislators have introduced bills that would abolish the ceiling on mobile phone subsidies, arguing that such action would be beneficial to consumers. We cannot provide assurance that an abolishment of the ceiling on mobile phone subsidies will not have a material adverse effect on our results of operations as we believe such an amendment to the MDDIA could increase our marketing expenses and affect consumer behavior and our competitors in ways we cannot fully predict.

We face competition from KT and LG U+ as well as other platform service providers in our other cellular service businesses. For example, our Smart Home service competes with KT’s Giga IoT Home service and LG U+’s IoT@Home service.

Fixed-Line Telecommunication Services

Our fixed-line telephone service competes with KT and LG U+ as well as providers of other VoIP services. As of December 31, 2016, our market share of the fixed-line telephone and VoIP service market was 15.2% (including the services provided by SK Broadband and SK Telink) in terms of number of subscribers compared to KT with 57.8% and LG U+ with 17.4%.

We are the second largest provider of broadband Internet access services in Korea in terms of both revenue and subscribers, and our network covered more than 80% of households in Korea as of December 31, 2016. As of December 31, 2016, our market share of the broadband Internet market was 25.3% in terms of number of subscribers compared to KT with 41.4% and LG U+ with 17.6%.

Our IPTV service competes with other providers of such pay TV services, including KT, LG U+ and cable companies. As of December 31, 2016, our market share of the pay TV market (which includes IPTV, cable TV and satellite TV) was 13.1% compared to KT with 23.2% and LG U+ with 8.4% and the collective market share of other pay TV providers of 55.3%. With respect to our mobile IPTV business, we face competition from similar services provided by KT and LG U+. We also face increasing competition from global media streaming service providers such as Amazon Video and Netflix, which launched its services in Korea in January 2016.

E-Commerce Services

The e-commerce industry is evolving rapidly and is intensely competitive, and we face a broad array of competitors domestically and increasingly, internationally. Our marketplace business, 11st, faces intense

 

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competition from various e-commerce providers, including online open marketplaces such as Gmarket, Auction and Interpark and online social commerce operators such as Coupang, Ticket Monster, and Wemakeprice. We also face competition from traditional retailers with online and mobile shopping portals such as SSG.com and Lotte.com, home shopping providers with online and mobile shopping portals such as CJ Mall by CJ O Shopping, GS Shop by GS Homeshopping and Hyundai Hmall by Hyundai Homeshopping, and various online marketplaces for specific consumer segments or product groups.

The O2O commerce solutions industry is in its early stages of development and is heavily fragmented with a wide range of services being introduced. Thus, it is difficult to determine the markets in which we compete with respect to such services at this stage of the industry’s development.

Other Investments and Relationships

We have investments in several other businesses and companies and have entered into various business arrangements with other companies. Our principal investments fall into the following categories:

SK Hynix

In February 2012, we acquired a 21.1% equity stake in SK Hynix, one of the world’s largest memory-chip makers by revenue, for an aggregate purchase price of approximately Won 3.4 trillion, and became its largest shareholder. By investing in the export-driven semiconductor business, we aim to achieve a more diversified business portfolio, as well as seeking global growth opportunities utilizing SK Hynix’s overseas network. SK Hynix designs, manufactures and sells advanced memory semiconductor products, including DRAM and NAND flash products, used in various electronic devices. SK Hynix operates four wafer fabrication facilities in Korea and China.

In 2016, 2015 and 2014, SK Hynix and its subsidiaries, on a consolidated basis, reported revenues of Won 17,198.0 billion, Won 18,798.0 billion and Won 17,125.6 billion, respectively, profit before income tax of Won 3,216.5 billion, Won 5,269.1 billion and Won 5,047.7 billion, respectively, and profit for the year of Won 2,960.5 billion, Won 4,323.6 billion and Won 4,195.2 billion, respectively. As of December 31, 2016, 2015 and 2014, SK Hynix and its subsidiaries, on a consolidated basis, reported total assets of Won 32,216.0 billion, Won 29,677.9 billion and Won 26,883.3 billion, respectively, and total equity of Won 24,023.5 billion, Won 21,387.7 billion and Won 18,036.3 billion, respectively.

Healthcare Business

We believe that the healthcare business is one of the new growth industries as society ages and medical and health technologies evolve and become integrated with information and communication technologies (“ICT”). In 2011, we began pursuing new opportunities in the healthcare business area by acquiring a 9.3% equity interest in NanoEnTek Inc. (“NanoEnTek”), a biotechnology and nanotechnology company manufacturing, among others, point-of-care diagnostics devices. In April 2014, we became the largest shareholder of NanoEnTek with a 26.0% equity interest. In January 2016, NanoEnTek acquired Bio Focus Co., Ltd., a manufacturer of in vitro diagnostic products. In 2016, NanoEnTek received approvals from the U.S. Food and Drug Administration and the China Food and Drug Administration to market certain of its devices in the United States and China. In January 2012, we established a joint venture, Healthconnect Co., Ltd. (“Healthconnect”), with Seoul National University Hospital to develop a health management service model for mobile device users utilizing ICT and currently hold a 49.5% equity interest in Healthconnect.

We are also seeking opportunities in global healthcare markets. In the first quarter of 2013, we acquired a 49.0% equity interest in X’ian Tianlong Science and Technology Co., Ltd. (“Tianlong”), a Chinese medical device manufacturer, which has since expanded its product portfolio with the development of a new diagnostic product and entry into new business areas. In July 2014, we established the SK Telecom Healthcare R&D Center in Shenzhen, China and the Shenzhen VISTA-SK Medical Center, which we believe will provide us with a strong foothold in expanding our healthcare business in China. Shenzhen VISTA-SK Medical Center was established through a joint venture with Vista Medical Center, a major private healthcare service provider based in Beijing, China, and has the capacity to provide medical examinations and checkups to approximately 30,000 people annually. We also collaborate with a hospital in the Wuxi region to operate a Smart Primary Healthcare Center based on ICT

 

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healthcare solutions, and we plan to provide a mobile healthcare clinic to underserved regions. We believe that there are opportunities to create synergies among these centers and the medical device business of Tianlong in expanding our healthcare business in China.

In June 2014, we also entered into a contract to provide medical information systems to six Saudi Arabian hospitals for approximately Won 70.0 billion through a consortium with Seoul National University Bundang Hospital. We established a joint venture in Saudi Arabia in March 2016 to provide medical information systems to additional hospitals and further expand our healthcare business in the Middle East.

KEBHana Card

In February 2010, we purchased shares newly issued by Hana SK Card Co., Ltd. (which was subsequently merged into KEB Card Co., Ltd. and renamed KEBHana Card Co., Ltd. (“KEBHana Card”) in November 2014), a credit card services provider, for a total purchase price of Won 400.0 billion. We currently hold 15.0% of the total outstanding shares of KEBHana Card. KEBHana Card offers certain credit card products that provide for discounts on some of our wireless network services and integrate T Membership benefits, among other features.

Hana-SK Fintech Corporation

In order to provide an everyday finance platform, we entered into a joint venture agreement with Hana Financial Group in July 2016. Combining our leading mobile technology and big data analysis capabilities with Hana Financial Group’s financial service, Hana-SK Fintech Corporation plans to provide innovative mobile financial services such as mobile asset management, easy payment and overseas wire transfer services. We hold a 49.0% equity interest in the joint venture, and Hana Financial Group holds the remaining 51.0%. The services are scheduled to launch in the first half of 2017.

Other Investments

Our other investments include:

 

   

SKY Property Management.    We currently own a 33.0% equity interest in SKY Property Management Ltd. (“SKY Property Management”), with a book value as of December 31, 2016 of Won 263.2 billion. SKY Property Management was established in 2008 to manage buildings and real estate developments in China, in which affiliated companies of the SK Group had invested or will invest.

 

   

Kakao.    We currently own a 2.0% equity interest in Kakao, with a book value as of December 31, 2016 of Won 104.5 billion, pursuant to the transaction in February 2016 through which we sold our 15.0% interest in Loen Entertainment to Kakao for Won 218.0 billion in cash and 1,357,367 new shares of Kakao.

 

   

SM Mobile Communications.    We currently own a 46.2% equity interest in SM Mobile Communications, with a book value as of December 31, 2016 of Won 12.1 billion, pursuant to the transaction in October 2016 through which we transferred our media platform businesses Hotzil and 5Ducks to SM Mobile Communications in exchange for shares of SM Mobile Communications.

For more information regarding our investment securities, see note 8 of the notes to our consolidated financial statements.

Law and Regulation

Overview

Korea’s telecommunications industry is subject to comprehensive regulation by the MSIP, which is responsible for information and telecommunications policies. The MSIP regulates and supervises a broad range of communications issues, including:

 

   

entry into the telecommunications industry;

 

   

scope of services provided by telecommunications service providers;

 

   

allocation of radio spectrum;

 

   

setting of technical standards and promotion of technical standardization;

 

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rates, terms and practices of telecommunications service providers;

 

   

interconnection and revenue-sharing between telecommunications service providers;

 

   

research and development of policy formulation for information and telecommunications; and

 

   

competition among telecommunications service providers.

Pursuant to amendments to the Government Organization Act and the Act on the Establishment and Operation of Korea Communications Commission, both effective as of March 23, 2013, the MSIP was established. The MSIP is charged with regulating information and telecommunications, the function which was formerly performed by the KCC in the previous Government. The KCC, which had taken over the regulatory functions relating to information and telecommunications policies and radio and broadcasting management from the MIC in 2008, is currently charged with regulating the public interest aspects of and fairness in broadcasting. In this annual report, we refer to the MIC and the KCC as the relevant governmental authorities in connection with any approval granted or action taken by the MIC or the KCC, as applicable, prior to such amendments and to the MSIP or other relevant governmental authority in connection with any approval granted or to be granted or action taken or to be taken by the MSIP or such other relevant governmental authority subsequent to such amendments.

Telecommunications service providers are currently classified into three categories: network service providers, value-added service providers, and specific service providers. We are classified as a network service provider because we provide telecommunications services with our own telecommunications networks and related facilities. As a network service provider, we are required to obtain a license from the MSIP for the services we provide. Our licenses permit us to provide cellular services, third generation wireless telecommunications services using WCDMA and WiBro technologies and fourth generation wireless telecommunications services using LTE technology.

The MSIP may revoke our licenses or suspend any of our businesses if we fail to comply with its rules, regulations and corrective orders, including the rules restricting beneficial ownership and control and corrective orders issued in connection with any violation of rules restricting beneficial ownership and control or any violation of the conditions of our licenses. Alternatively, in lieu of suspension of our business, the MSIP may levy a monetary penalty of up to 3.0% of the average of our annual revenue for the preceding three fiscal years. A network service provider that wants to cease its business or dissolve must obtain MSIP approval.

In the past, the Government has stated that its policy was to promote competition in the Korean telecommunications market through measures designed to prevent the dominant service provider in any such market from exercising its market power in such a way as to prevent the emergence and development of viable competitors. While all network service providers are subject to MSIP regulation, we are subject to increased regulation because of our position as the dominant wireless telecommunications services provider in Korea.

Competition Regulation

The KCC is charged with ensuring that network service providers engage in fair competition and has broad powers to carry out this goal. If a network service provider is found to be in violation of the fair competition requirement, the KCC may take corrective measures it deems necessary, including, but not limited to, prohibiting further violations, requiring amendments to the articles of incorporation or to service contracts with customers, requiring the execution or performance of, or amendments to, interconnection agreements with other network service providers and prohibiting advertisements to solicit new subscribers. The KCC is required to consult with the Minister of the MSIP before it takes certain corrective measures.

In addition, we qualify as a “market-dominating business entity” under the Fair Trade Act. Accordingly, we are prohibited from engaging in any act of abusing our position as a market-dominating entity, such as unreasonably determining, maintaining or altering service rates, unreasonably controlling the rendering of services, unreasonably interfering with business activities of other business entities, hindering unfairly the entry of newcomers or substantially restricting competition to the detriment of the interests of consumers.

 

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Because we are a member company of the SK Group, which is a large business group as designated by the FTC, we are subject to the following restrictions under the Fair Trade Act:

 

   

Restriction on debt guarantee among affiliates.    Any affiliate within the SK Group may not guarantee the debts of another domestic affiliate, except for certain guarantees prescribed in the Fair Trade Act, such as those relating to the debts of a company acquired for purposes of industrial rationalization, bid deposits for overseas construction work or technology development funds.

 

   

Restriction on cross-investment.    A member company of the SK Group may not acquire or hold shares in an affiliate belonging to the SK Group that owns shares in the member company.

 

   

Restrictions on circular investments.    A member company of the SK Group may not acquire or hold shares which would constitute “circular investments” in an affiliate company which also forms part of the SK Group where “circular investments” refer to a cross-affiliate shareholding relationship under which three or more affiliate companies become connected through cross affiliate shareholdings by owning shares in other affiliates or by becoming an entity whose shares are owned by other affiliates.

 

   

Public notice of board resolution on large-scale transactions with specially related persons.    If a member company of the SK Group engages in a transaction with a specially related person in the amount of 5.0% or more of the member company’s capital or paid-in capital or for Won 5.0 billion or more, the transaction must be approved by a resolution of the member company’s board of directors and the member company must publicly disclose the transaction.

 

   

Restrictions on investments by subsidiaries and sub-subsidiaries of holding companies.    The Fair Trade Act prohibits subsidiaries of holding companies from investing in, or holding shares of common stock of, domestic affiliates that belong to the same large business group, unless such domestic affiliates are their own subsidiaries. Furthermore, any subsidiaries of a holding company’s subsidiaries (“sub-subsidiaries”) are prohibited from investing in, or holding shares of common stock of, domestic affiliates that belong to the same large business group, unless all shares issued by the affiliates are held by the sub-subsidiary. Therefore, we and other subsidiaries of SK Holdings may not invest in any domestic affiliate that is also a member company of the SK Group, except in the case where we invest in our own subsidiary or where another subsidiary of SK Holdings invests in its own subsidiary.

 

   

Public notice of the current status of a business group.    Under the Fair Trade Act and the Enforcement Decree thereof, a member company of the SK Group must publicly disclose the general status of the SK Group, including the name, business scope and financial status of affiliates, information on the officers of affiliates, information on shareholding and cross-investments between member companies of the SK Group, information on transactions with certain related persons and, if a member company engages in a transaction with an affiliated company in the amount of 5.0% or more of the member company’s quarterly sales or Won 5.0 billion or more, information on transactions with such affiliated company on a quarterly basis.

Number Portability.    In January 2003, the MIC announced its plan to implement number portability with respect to wireless telecommunications service in Korea. The number portability system allows wireless subscribers to switch wireless telecommunications service providers while retaining the same mobile phone number.

In addition, the Government has been integrating mobile telephone identification numbers into a common prefix identification number “010” and gradually retracting the current mobile service identification numbers which had been unique to each wireless telecommunications service provider, including “011” for our cellular services, since January 1, 2004. All new subscribers have been given the “010” prefix starting January 2004. As the next step in the “010” integration process, the mobile telephone number prefix for all WCDMA and LTE service users has been changed to “010” as of January 1, 2014. The MSIP plans to complete the integration process by around June 2021, when all mobile telephone numbers would have the prefix identification number “010.”

Rate Regulation.    Most network service providers must report to the MSIP the rates and contractual terms for each type of service they provide. However, as the dominant network service provider for specific services (based on having the largest market share in terms of number of subscribers and meeting certain revenue thresholds), we must obtain prior approval of the MSIP on our rates and terms of service; provided, however, that such pre-approval of the MSIP is not required, if we are planning to reduce the rates for any type of services that we provide under the

 

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MSIP-approved contractual terms. The MSIP’s policy is to approve rates if they are appropriate, fair and reasonable (that is, if the rates have been reasonably calculated, considering supply costs, profits, classification of costs and profits for each service, cost savings through changes in the way services are provided and the influence on fair competition, among others). The MSIP may order changes in the submitted rates if it deems the rates to be significantly unreasonable or against public policy. On June 24, 2016, the Government proposed a bill to the National Assembly to change the approval requirement to a simple reporting requirement, which is the requirement for our competitors. However, the bill is still under review by the relevant sub-committee and there is no assurance as to whether such bill will be passed.

Furthermore, in 2007, the Government announced a “road map” highlighting revisions in regulations to promote deregulation of the telecommunications industry. In accordance with the road map and pursuant to the Combined Sales Regulation, promulgated in May 2007, telecommunications service providers are now permitted to bundle their services, such as wireless data transmission service, wireless voice transmission service, broadband Internet access service, fixed-line telephone service and IPTV service, at a discounted rate; provided, however, that we and KT, as market-dominating business entities under the Telecommunications Business Act, allow other competitors to employ the services provided by us and KT, respectively, so that such competitors can provide similar discounted package services. In September 2007, the regulations and provisions under the Telecommunications Business Act were amended to permit licensed transmission service providers to offer local, domestic long-distance and international telephone services, as well as broadband Internet access and Internet phone services, without additional business licenses.

Moreover, under the amended Telecommunications Business Act, which became effective on September 23, 2010, an MVNO system was adopted for a duration of three years until September 22, 2013. The expiration date of the system was extended to September 22, 2016 under the amended Telecommunications Business Act, which became effective on August 13, 2013. Under this system, the MSIP may designate and obligate certain wireless telecommunications services providers to allow an MVNO, at such MVNO’s request, to use their telecommunication network facilities at a rate mutually agreed upon that complies with the standards set by the MSIP. We were designated as the only wireless telecommunications services provider obligated to allow the other wireless telecommunications services provider to use our telecommunications network facilities. Since the expiration of the MVNO system on September 22, 2016, we have continued to lease our networks to MVNOs based on mutually agreed upon terms. To date, fourteen MVNOs have commenced providing wireless telecommunications services using the networks leased from us.

On October 1, 2014, the MDDIA, enacted for the purpose of establishing a transparent and fair mobile distribution practice, became effective. The MDDIA limits the amount of subsidies a wireless telecommunications service provider can provide to subscribers in order to prevent excessive competition among wireless telecommunications service providers. Pursuant to the MDDIA, wireless telecommunications service providers are prohibited from (i) unfairly providing discriminatory subsidies based on criteria such as type of subscription, subscription plan and characteristics of the subscriber, (ii) providing subsidies exceeding a maximum limit established by the KCC (such limit to be determined between Won 250,000 and Won 350,000, which may be adjusted every six months, with the current limit set at Won 330,000, effective as of April 24, 2015) for the purchase of mobile phone models that were launched within the last 15 months, and (iii) entering into a separate agreement with subscribers imposing obligations to use a specific subscription plan as a condition for providing subsidies. In addition, under the MDDIA, wireless telecommunications service providers are obliged to provide benefits, such as discounted rates, to subscribers who subscribe to the service without receiving subsidies. The prohibition from providing mobile phone subsidies exceeding the amount set by the KCC is set to expire in September 2017 pursuant to the expiration of the three-year effective period of the relevant provision of the MDDIA. In the past, certain legislators have introduced bills that would abolish the ceiling on mobile phone subsidies, arguing that such action would be beneficial to consumers.

Interconnection.    Dominant network service providers such as ourselves that own essential infrastructure facilities or possess a certain market share are required to provide interconnection of their telecommunications network facilities to other service providers upon request. The MSIP sets and announces the standards for determining the scope, procedures, compensation and other terms and conditions of such provision, interconnection or co-use. We have entered into interconnection agreements with KT, LG U+ and other network service providers

 

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permitting these entities to interconnect with our network. We expect that we will be required to enter into additional agreements with new operators as the MSIP grants permits to additional telecommunications service providers.

Frequency Allocation.    The MSIP has the discretion to allocate and adjust the frequency bandwidths for each type of service and may auction off the rights to certain frequency bandwidths. Upon allocation of new frequency bandwidths or adjustment of frequency bandwidths, the MSIP is required to give a public notice. The MSIP also regulates the frequency to be used by each radio station, including the transmission frequency used by equipment in our cell sites. All of our frequency allocations are for a definite term. We pay fees to the MSIP for our frequency usage that are determined based upon our number of subscribers, frequency usage by our networks and other factors. For 2016, 2015 and 2014, the fee amounted to Won 186.8 billion, Won 189.8 billion and Won 188.1 billion, respectively.

We currently use 10 MHz of bandwidth in the 800 MHz spectrum for our CDMA services, 40 MHz of bandwidth in the 2.1 GHz spectrum for our WCDMA services, 20 MHz of bandwidth in the 2.1 GHz spectrum, 20 MHz of bandwidth in the 800 MHz spectrum, 35 MHz of bandwidth in the 1.8 GHz spectrum and 60 MHz of bandwidth in the 2.6 GHz spectrum for our LTE services, as well as 30 MHz of spectrum in the 2.3 GHz band for our WiBro services. For more information regarding the license fees for the various bandwidths that we use, see “Item 5.B. Liquidity and Capital Resources — Capital Requirements — Capital Expenditures” and note 15 of the notes to our consolidated financial statements.

For risks relating to the maintenance of adequate bandwidth capacity, see “Item 3.D. Risk Factors — Risks Relating to Our Business — Our business and results of operations may be adversely affected if we fail to acquire adequate additional spectrum or use our bandwidth efficiently to accommodate subscriber growth and subscriber usage.”

Mandatory Contributions and Obligations

Universal Service Obligation.    All telecommunications service providers other than value-added service providers, specific service providers and regional paging service providers or any telecommunications service providers whose net annual revenue is less than an amount determined by the MSIP (currently set at Won 30.0 billion) are required to provide “universal” telecommunications services including local telephone services, local public telephone services, telecommunications services for remote islands and wireless communication services for ships and telephone services for handicapped and low-income citizens, or contribute toward the supply of such universal services. The MSIP designates universal services and the service provider who is required to provide each service. Currently, under the MSIP guidelines, we are required to offer free subscription and a discount of between 30.0% to 50.0% of our monthly fee for wireless telecommunications services to handicapped and low-income citizens.

In addition to such universal services for handicapped and low-income citizens, we are also required to make certain monetary contributions to compensate for other service providers’ costs for the universal services. The size of a service provider’s contribution is based on its net annual revenue (calculated pursuant to the MSIP guidelines, which differ from our accounting practices). Our contribution amount for our fiscal year 2015 has not yet been determined. In 2015, our contribution amount was Won 21.0 billion for our fiscal year 2014. In 2014, our contribution amount was Won 21.8 billion for our fiscal year 2013. As a wireless telecommunications services provider, we are not considered a provider of universal telecommunications services and do not receive funds for providing universal service. Other network service providers that do provide universal services make all or a portion of their “contribution” in the form of expenses related to the universal services they provide.

Foreign Ownership and Investment Restrictions and Requirements

Because we are a network service provider, and the exception for the foreign shareholding limit under the amended Telecommunications Business Act, which became effective on August 13, 2013, does not apply to us, foreign governments, individuals, and entities (including Korean entities that are deemed foreigners, as discussed below) are prohibited from owning more than 49.0% of our voting stock. Korean entities whose largest shareholder is a foreign government or a foreigner (together with any of its related parties) that owns 15.0% or more of the

 

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outstanding voting stock of such Korean entities are also deemed foreigners. If this 49.0% ownership limitation is violated, certain of our foreign shareholders will not be permitted to exercise voting rights in excess of the limitation, and the MSIP may require other corrective action.

As of December 31, 2016, SK Holdings owned 20,363,452 shares of our common stock, or approximately 25.22% of our issued shares. As of December 31, 2016, the two largest foreign shareholders of SK Holdings each held a 3.5% stake therein. If such foreign shareholders increase their shareholdings in SK Holdings to 15% or more and any such foreign shareholder constitutes the largest shareholder of SK Holdings, SK Holdings will be considered a foreign shareholder, and its shareholding in us would be included in the calculation of our aggregate foreign shareholding. If SK Holdings’ shareholding in us is included in the calculation of our aggregate foreign shareholding, then our aggregate foreign shareholding, assuming the foreign ownership level as of December 31, 2016 (which we believe was 40.8%), would reach 66.0%, exceeding the 49.0% ceiling on foreign shareholding.

If our aggregate foreign shareholding limit is exceeded, the MSIP may issue a corrective order to us, the breaching shareholder (including SK Holdings if the breach is caused by an increase in foreign ownership of SK Holdings) and the foreign shareholder which owns in the aggregate 15.0% or more of SK Holdings. Furthermore, SK Holdings will be prohibited from exercising its voting rights with respect to the shares held in excess of the 49.0% ceiling, which may result in a change in control of us. In addition, the MSIP will be prohibited from granting us licenses or permits necessary for entering into new telecommunications businesses until our aggregate foreign shareholding is reduced to below 49.0%. If a corrective order is issued to us by the MSIP arising from the violation of the foregoing foreign ownership limit, and we do not comply within the prescribed period under such corrective order, the MSIP may:

 

   

revoke our business license;

 

   

suspend all or part of our business; or

 

   

if the suspension of business is deemed to result in significant inconvenience to our customers or to be detrimental to the public interest, impose a one-time administrative penalty of up to 3.0% of the average of our annual revenue for the preceding three fiscal years.

Additionally, the Telecommunications Business Act also authorizes the MSIP to assess monetary penalties of up to 0.3% of the purchase price of the shares for each day the corrective order is not complied with, as well as a prison term of up to one year or a penalty of Won 50 million. See “Item 3.D. Risk Factors — Risks Relating to Securities — If SK Holdings causes us to breach the foreign ownership limitations on our common shares, we may experience a change of control.”

We are required under the Foreign Exchange Transaction Act to file a report with a designated foreign exchange bank or with the Ministry of Strategy and Finance (the “MOSF”), in connection with any issue of foreign currency denominated securities by us in foreign countries. Issuances of US$30 million or less require the filing of a report with a designated foreign exchange bank, and issuances that are over US$30 million in the aggregate within one year from the filing of a report with a designated foreign exchange bank require the filing of a report with the MOSF.

The Telecommunications Business Act provides for the creation of a Public Interest Review Committee under the MSIP to review investments in or changes in the control of network service providers. The following events would be subject to review by the Public Interest Review Committee:

 

   

the acquisition by an entity (and its related parties) of 15.0% or more of the equity of a network service provider;

 

   

a change in the largest shareholder of a network service provider;

 

   

agreements by a network service provider or its shareholders with foreign governments or parties regarding important business matters of such network service provider, such as the appointment of officers and directors and transfer of businesses; and

 

   

a change in the shareholder that actually controls a network service provider.

 

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If the Public Interest Review Committee determines that any of the foregoing transactions or events would be detrimental to the public interest, then the MSIP may issue orders to stop the transaction, amend any agreements, suspend voting rights, or divest the shares of the relevant network service provider. Additionally, if a dominant network service provider (which would currently include us and KT), together with its specially related persons (as defined under the FSCMA), holds more than 5.0% of the equity of another dominant network service provider, the voting rights on the shares held in excess of the 5.0% limit may not be exercised.

Patents and Licensed Technology

Access to the latest relevant technology is critical to our ability to offer the most advanced wireless telecommunications services and to design and manufacture competitive products. In addition to active internal and external research and development efforts as described in “Item 5.C. Research and Development, Patents and Licenses, etc.,” our success depends in part on our ability to obtain patents, licenses and other intellectual property rights covering our products. We own numerous patents and trademarks worldwide, and have applications for patents pending in many countries, including Korea, Japan, China and the United States and in Europe. Our patents are mainly related to LTE technology and wireless Internet applications. We have also acquired a number of patents related to WCDMA and CDMA technologies. There are no licensed patents that are material to our business.

We are not currently involved in any material litigation regarding patent infringement. For a description of the risks associated with our reliance on intellectual property, see “Item 3.D. Risk Factors — Risks Relating to Our Business — Our business relies on technology developed by us, and our business will suffer if we are unable to protect our proprietary rights.”

Seasonality of the Business

Our business is not affected by seasonality.

 

Item 4.C. Organizational Structure

Organizational Structure

We are a member of the SK Group, based on the definition of “group” under the Fair Trade Act. As of December 31, 2016, SK Group members owned in aggregate 25.22% of the shares of our issued common stock. The SK Group is a diversified group of companies incorporated in Korea with interests in, among other things, telecommunications, trading, energy, chemicals, engineering and leisure industries.

Significant Subsidiaries

For information regarding our subsidiaries, see note 1(2) of the notes to our consolidated financial statements.

 

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Item 4.D. Property, Plants and Equipment

The following table sets forth certain information concerning our principal properties as of December 31, 2016:

 

Location

  

Primary Use

   Approximate Area
in Square Feet
 

Seoul Metropolitan Area

   Corporate Headquarters      988,447  
   Regional Headquarters      607,249  
   Customer Service Centers      107,277  
   Training Centers      616,845  
   Central Research and Development Center      482,719  
   Others(1)      1,229,682  

Busan

   Regional Headquarters      363,282  
   Others(1)      656,774  

Daegu

   Regional Headquarters      148,065  
   Others(1)      303,432  

Jeolla and Jeju Provinces

   Regional Headquarters      265,614  
   Others(1)      733,313  

Chungcheong Province

   Regional Headquarters      459,302  
   Others(1)      802,812  

 

 

(1) Includes cell sites.

In December 2004, we constructed a building with an area of approximately 82,624 square feet, of which we have full ownership, for use as our corporate headquarters. In addition, we own or lease various locations for cell sites and switching equipment. We do not anticipate that we will encounter material difficulties in meeting our future needs for any existing or prospective leased space for our cell sites. See “Item 4.B. Business Overview — Cellular Services — Network Infrastructure.”

We maintain a range of insurance policies to cover our assets and employees, including our directors and officers. We are insured against business interruption, fire, lightning, flooding, theft, vandalism, public liability and certain other risks that may affect our assets and employees. We believe that the types and amounts of our insurance coverage are in accordance with general business practices in Korea.

 

Item 4.E. UNRESOLVED STAFF COMMENTS

We do not have any unresolved comments from the SEC staff regarding our periodic reports under the Exchange Act.

 

Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion together with our consolidated financial statements and the related notes thereto which appear elsewhere in this annual report. We prepare our consolidated financial statements in accordance with IFRS as issued by the IASB. In addition, you should read carefully the section titled “— Critical Accounting Policies, Estimates and Judgments” as well as note 3 of the notes to our consolidated financial statements which provide summaries of certain critical accounting policies that require our management to make difficult, complex or subjective judgments relating to matters which are highly uncertain and that may have a material impact on our financial conditions and results of operations.

 

Item 5.A. Operating Results

Overview

Our operations are reported in four segments: (1) cellular services, which include wireless voice and data transmission services, sales of wireless devices, IoT solutions and platform services, (2) fixed-line telecommunication services, which include fixed-line telephone services, broadband Internet services, advanced media platform services (including IPTV) and business communications services, (3) e-commerce services, which

 

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include our open marketplace platform, 11st, and O2O commerce solutions, and (4) other businesses, which include our portal service, our hardware business and other operations that do not meet the quantitative thresholds to be separately considered reportable segments.

In our cellular services segment, we earn revenue principally from our wireless voice and data transmission services through monthly plan-based fees, usage charges for outgoing voice calls, usage charges for wireless data services and value-added service fees paid by our wireless subscribers as well as interconnection fees paid to us by other telecommunications operators for use of our wireless network by their customers and subscribers. We also derive revenue from sales of wireless devices by our subsidiary, PS&Marketing. Other sources of revenue include revenue from our IoT solutions and platform services as well as other miscellaneous cellular services.

In our fixed-line telecommunication services segment, we earn revenue principally from our fixed-line telephone services and broadband Internet services and advanced media platform services (including IPTV) through monthly plan-based fees and usage charges as well as interconnection fees paid to us by other telecommunications operators for use of our fixed-line network by their customers and subscribers. In addition, we derive revenue from international calling services and our business communications services through customized fee arrangements with our business customers.

Our e-commerce services segment became a separate reportable segment as of January 1, 2016. In our e-commerce services segment, we derive revenue from our consolidated subsidiary SK Planet, which earns revenue principally through third-party seller fees earned (including commissions) for transactions in which it acts as a selling agent to the “mini malls” on 11st, its online open marketplace platform, as well as advertising revenue from 11st and its O2O commerce solutions. In March 2016, SK Planet effected a spin-off of its former platform and T Store businesses by establishing SK TechX Co., Ltd. (“SK TechX”) and One Store, respectively. As a result, the results of operations from SK Planet’s former platform business and T store business are included in our e-commerce services segment for the years ended December 31, 2014 and 2015 but such revenues are included in our others segment for the year ended December 31, 2016.

In our others segment, we earn revenue from our hardware businesses through sales of projection display devices and high-end audio devices, our security business operated by our subsidiary, Neosnetworks, advertising revenue from our “Nate” portal service operated by our subsidiary, SK Communications, and sales commissions through our mobile application marketplaces. As discussed above, the results of operations from SK TechX and One Store are included in our others segment for the year ended December 31, 2016.

Our cellular service revenue and fixed-line telecommunications service revenue depend principally upon the number of our wireless subscribers, the rates we charge for our services, the frequency and volume of subscriber usage of our services and the terms of our interconnection with other telecommunications operators. Our e-commerce service revenue depends principally upon the gross merchandise volume, which is the total monetary value of customer purchases of goods and services, net of estimated refunds, of 11st and the number of merchants that utilize 11st and our O2O platforms to advertise and promote their products and services and the extent of such advertisement and promotion.

Among other factors, management uses operating profit of each reportable segment presented in accordance with K-IFRS (“segment operating profit”) in its assessment of the profitability of each reportable segment. The sum of segment operating profit for all four reportable segments differs from our operating profit presented in accordance with IFRS by IASB as segment operating profit does not include certain items such as donations, gain and loss from disposal of property and equipment and intangible assets and impairment loss on property and equipment and intangible assets. For a reconciliation of operating profit presented in accordance with IFRS by IASB and operating profit presented in accordance with K-IFRS, see “— Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS.”

In addition to the information set forth below, see note 4 of the notes to our consolidated financial statements for more detailed information regarding each of our reportable segments.

A number of recent developments have had or are expected to have a material impact on our results of operations, financial condition and capital expenditures. These developments include:

New Regulations Relating to Handset Subsidies.    We provide handset subsidies to subscribers who agree to use our service for a predetermined service period and purchase handsets on an installment basis. Generally, handset

 

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subsidies may be provided to any subscriber that uses our service and purchases handsets either directly from us or through third parties. Prior to the implementation of the MDDIA, there was intense competition among wireless telecommunications service providers to acquire subscribers by providing higher subsidies. In October 2014, the Government started limiting the amount of subsidies a wireless telecommunications service provider can provide to subscribers in order to prevent excessive competition among wireless telecommunications service providers under the MDDIA. Pursuant to the MDDIA, wireless telecommunications service providers are prohibited from (i) unfairly providing discriminatory subsidies based on criteria such as type of subscription, subscription plan and characteristics of the subscriber, (ii) providing subsidies exceeding a maximum limit established by the KCC (such limit to be determined between Won 250,000 and Won 350,000, which may be adjusted every six months, with the current limit set at Won 330,000, effective as of April 8, 2015) for the purchase of mobile phone models that were launched within the last 15 months, and (iii) entering into a separate agreement with subscribers imposing obligations to use a specific subscription plan as a condition for providing subsidies. In addition, under the MDDIA, wireless telecommunications service providers are obliged to provide certain benefits, such as discounted rates, to subscribers who subscribe to their service without receiving subsidies. The prohibition from providing mobile phone subsidies exceeding the amount set by the KCC is set to expire in September 2017 pursuant to the expiration of the three-year effective period of the relevant provision of the MDDIA. In the past, certain legislators have introduced bills that would abolish the ceiling on mobile phone subsidies, arguing that such action would be beneficial to consumers.

In 2016, the number of subscribers who elected to receive discounted rates in lieu of receiving handset subsidies pursuant to the MDDIA increased due to greater public awareness of the availability of such discounted rates as well as the increase in the applicable discount rate to 20% in April 2015 from 12% in October 2014. According to the MSIP, an average of 26.5% of all new subscribers of SK Telecom, KT and LG U+ elected to receive discounted rates in lieu of handset subsidies in September 2016 compared to 1.5% in the six months prior to the increase in the applicable discount rate. Such increase contributed to a decrease in cellular services revenue in 2016 compared to 2015 but also led to a decrease in our marketing expenses for cellular services for the same period. Furthermore, failure to comply with the MDDIA may lead to suspension of our business or imposition of monetary penalties. For more information about the MDDIA and the penalties imposed for violating Government regulations, see “Item 4.B. Business Overview — Law and Regulation — Competition Regulation — Rate Regulation” and “Item 8.A. Consolidated Statements and Other Financial Information — Legal Proceedings — KCC and MSIP Proceedings.”

Abolishment of Initial Subscription Fees.    Upon recommendation by the MSIP, we, KT and LG U+ agreed to gradually reduce initial subscription fees charged to new customers and in August 2013, reduced the initial subscription fee by 40% and again by an additional 50% in August 2014. Starting in November 2014, we ceased charging any initial subscription fees to new customers. The gradual reduction and ultimate abolishment of initial subscription fees adversely impacted our wireless service revenues in 2016 and 2015 compared to 2014. For more information about the rates we charge, see “Item 4.B. Business Overview — Cellular Services — Rate Plans” and “Item 4.B. Business Overview — Law and Regulation — Competition Regulation — Rate Regulation.”

Decrease in Interconnection Fees.    Our wireless telecommunications services depend, in part, on our interconnection arrangements with domestic and international fixed-line and other wireless networks. Charges for interconnection affect our revenues and operating results. The MSIP determines the basic framework for interconnection arrangements, including policies relating to interconnection rates in Korea. Under our interconnection agreements, we are required to make payments in respect of calls which originate from our networks and terminate in the networks of other Korean telecommunications operators, and the other operators are required to make payments to us in respect of calls which originate in their networks and terminate in our network. The MSIP has continued to gradually decrease the interconnection rates in Korea, which has led to a continued decrease in our interconnection revenue as well as interconnection expenses from 2012 to 2016 and any further reduction in interconnection rates by the MSIP may continue to impact our results of operations. Beginning in 2017, a single interconnection rate paid by fixed-line network service providers for fixed-line to wireless calls applies to all wireless telecommunications service providers. For more information about our interconnection revenue and expenses, see “Item 4.B. Business Overview — Interconnection.”

 

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Decrease in Monthly Revenue per Subscriber.    We measure monthly average per subscriber using two metrics: billing average monthly per subscriber (“billing ARPU”) and total average monthly revenue per subscriber (“total ARPU”). Billing average monthly revenue per subscriber is derived by dividing the sum of total SK Telecom revenues from voice service and data service for the period by the monthly average number of subscribers (excluding the number of MVNO subscribers leasing our networks) for the period, then dividing that number by the number of months in the period. Total ARPU is derived by dividing the sum of total SK Telecom revenues from voice service, data service, initial subscription fees and interconnection revenue, as well as other revenues, for the period by the monthly average number of subscribers (excluding the number of MVNO subscribers leasing our networks) for the period, then dividing that number by the number of months in the period.

Our billing ARPU decreased by 1.3% to Won 35,636 in 2016 from Won 36,118 in 2015, which represented an increase of 1.3% from Won 35,663 in 2014. The decrease in billing ARPU in 2016 was primarily due to a decrease in revenue attributable to an increase in the number of subscribers who elected to receive discounted rates in lieu of receiving handset subsidies. The increase in billing ARPU in 2015 was primarily due to the increase in LTE subscribers who subscribe to data plans with higher monthly basic charges than our other wireless telecommunications services and greater data service usage attributable to increases in the number of smartphone users, offset in part by a decrease in revenue due to an increase in the applicable discount rate for the subscribers that elected to receive discounted rates in lieu of receiving handset subsidies.

Our total ARPU decreased by 2.6% to Won 41,126 in 2016 from Won 42,221 in 2015, which represented a slight decrease of 0.7% from Won 42,512 in 2014. The decrease in total ARPU in 2016 was primarily due to a decrease in revenue attributable to an increase in the number of subscribers who elected to receive discounted rates in lieu of receiving handset subsidies. The slight decrease in total ARPU in 2015 was primarily due to decreases in initial subscription fees and interconnection revenue, mostly offset by the reasons set forth above relating to the increase in billing ARPU in 2015.

Acquisition of SK Networks’ Retail Distribution Business.    In April 2014, PS&Marketing acquired the retail distribution business of SK Networks. As a result of such acquisition, there were increases in wireless device sales in 2016 and 2015 compared to 2014, in which the acquisition only impacted results of operations for part of the year, along with an increase in various related operating expenses, including cost of products that have been resold and labor costs.

Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS

In addition to preparing consolidated financial statements in accordance with IFRS as issued by the IASB included in this annual report, we also prepare financial statements in accordance with K-IFRS as adopted by the KASB, which we are required to file with the FSC and the Korea Exchange under the FSCMA.

Beginning with our financial statements prepared in accordance with K-IFRS as of and for the year ended December 31, 2012, we are required to adopt certain amendments to K-IFRS No. 1001, Presentation of Financial Statements, as adopted by KASB in 2012. The amendments require operating profit, which is calculated as operating revenue less operating expense, to be separately presented on the consolidated statement of income. Operating expense represents expenses incurred in our main operating activities and includes cost of products that have been resold and selling, general and administrative expenses. Accordingly, beginning with our consolidated statements of income prepared in accordance with K-IFRS for the year ended December 31, 2012, we present operating profit in accordance with the amended K-IFRS No. 1001, Presentation of Financial Statements. Prior to the adoption of the amendments to K-IFRS No. 1001, Presentation of Financial Statements, the operating profit we presented in our consolidated statements of income prepared in accordance with K-IFRS took into account certain other operating revenue and other operating expenses that are no longer included in the calculation of operating profit pursuant to these amendments.

In our consolidated statements of income prepared in accordance with IFRS as issued by the IASB included in this annual report, such changes in presentation were not adopted. As a result, the presentation of operating profit in our consolidated statements of income prepared in accordance with IFRS as issued by the IASB included in this annual report differs from the presentation of operating profit in the consolidated statements of income prepared in accordance with K-IFRS for the corresponding periods. The table below sets forth a reconciliation of our operating

 

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profit as presented in our consolidated statements of income prepared in accordance with IFRS as issued by the IASB for the years ended December 31, 2016, 2015 and 2014 to the operating profit as presented in the consolidated statements of income prepared in accordance with K-IFRS after giving effect to the amendments to K-IFRS No. 1001, Presentation of Financial Statements, for each of the corresponding years.

 

     For the Year Ended December 31,  
     2016     2015     2014  
     (In billions of Won)  

Operating profit pursuant to IFRS by IASB

   1,303.4     1,495.4     1,607.8  

Differences:

      

Other income pursuant to IFRS

      

Fee revenues

     (0.6           (8.2

Gain on disposal of property and equipment and intangible assets

     (6.9     (7.1     (8.8

Others

     (59.1     (23.8     (39.5
  

 

 

   

 

 

   

 

 

 
     (66.6     (30.9     (56.5

Other operating expenses pursuant to IFRS that are classified as other non-operating expenses pursuant to K-IFRS

      

Loss on impairment of property and equipment and intangible assets

     24.5       35.8       47.5  

Loss on disposal of property and equipment and intangible assets

     63.8       21.4       33.0  

Donations

     96.6       72.5       67.8  

Bad debt for accounts receivable — other

     40.3       15.3       17.9  

Others

     73.7       98.5       107.6  
  

 

 

   

 

 

   

 

 

 
     298.9       243.5       273.8  
  

 

 

   

 

 

   

 

 

 

Operating profit pursuant to K-IFRS

   1,535.7     1,708.0     1,825.1  
  

 

 

   

 

 

   

 

 

 

However, there is no impact on profit for the years or earnings per share for the years ended December 31, 2016, 2015 and 2014.

Recently Issued International Financial Reporting Standards

We plan to adopt certain amendments to IFRS 9, Financial Instruments, IFRS 15, Revenue from Contracts with Customers and IFRS 16, Leases. See note 3(26) of the notes to our consolidated financial statements for a summary of significant accounting standards that have been issued but not yet adopted. The expected impact of the adoption of these amendments on our consolidated results of operations and financial position is currently unknown or cannot be reasonably estimated.

Operating Results

The following table sets forth summary consolidated income statement information, including that expressed as a percentage of operating revenue and other income, for the periods indicated:

 

     For the Year Ended December 31,  
     2016     2015     2014  
     (In billions of Won, except percentages and earnings per share data)  

Operating revenue and other income

   17,158.3       100.0   17,167.6       100.0   17,220.3       100.0

Revenue

     17,091.8       99.6       17,136.7       99.8       17,163.8       99.7  

Other income

     66.5       0.4       30.9       0.2       56.5       0.3  

Operating expenses

     15,854.9       92.4       15,672.2       91.3       15,612.4       90.7  

Operating profit

     1,303.4       7.6       1,495.4       8.7       1,607.8       9.3  

Profit before income tax

     2,096.1       12.2       2,035.4       11.9       2,253.8       13.1  

Income tax expense

     436.0       2.5       519.5       3.0       454.5       2.6  

Profit (loss) for the year

     1,660.1       9.7       1,515.9       8.8       1,799.3       10.4  

Attributable to:

            

Owners of the Parent Company

     1,676.0       9.8       1,518.6       8.8       1,801.2       10.5  

Non-controlling interests

     (15.9     (0.1     (2.7     (0.0     (1.9     (0.0

 

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The following table sets forth additional information about our operations with respect to our reportable segments during the periods indicated:

 

    Year Ended December 31,  
    2016     2015     2014  
    Amount     Percentage of
Total Revenue
    Amount     Percentage of
Total Revenue
    Amount     Percentage of
Total Revenue
 
    (In billions of Won, except percentages)  

Cellular Services Revenue

           

Wireless Service(1)

  10,583.0       61.9   10,720.5       62.6   11,010.6       64.2

Cellular Interconnection

    614.4       3.6       710.0       4.1       817.0       4.8  

Wireless Device Sales

    922.4       5.4       963.4       5.6       761.6       4.4  

Miscellaneous(2)

    885.1       5.2       875.4       5.1       938.6       5.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Cellular Services Revenue

    13,004.9       76.1       13,269.3       77.4       13,527.9       78.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fixed-line Telecommunication Services Revenue

           

Fixed-line Telephone Service

    357.8       2.1       420.6       2.5       467.3       2.7  

Fixed-line Interconnection

    134.1       0.8       57.1       0.3       57.4       0.3  

Broadband Internet Service

    1,472.8       8.6       1,308.8       7.6       1,152.7       6.7  

International Calling Service

    96.0       0.6       99.1       0.6       112.0       0.7  

Miscellaneous(3)

    590.5       3.4       608.9       3.6       660.5       3.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Fixed-line Telecommunication Services Revenue

    2,651.2       15.5       2,494.5       14.6       2,449.9       14.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

E-commerce Services

Revenue(4)(6)

    1,001.3       5.9       1,060.0       6.2       972.0       5.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Revenue

           

Portal Service(5)

    54.2       0.3       71.8       0.4       80.3       0.5  

Miscellaneous(4)(6)

    380.2       2.1       241.1       1.4       133.7       0.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Revenue

    434.4       2.4       312.9       1.8       214.0       1.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenue

    17,091.8       100.0       17,136.7       100.0       17,163.8       100.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenue Growth

    (0.3 )%        (0.2 )%        3.4  

Segment Operating Expense(7)

           

Cellular Services

    11,205.8       65.6       11,591.0       67.6       11,773.5       68.6  

Fixed-line Telecommunication Services

    2,518.8       14.7       2,386.2       13.9       2,369.5       13.8  

E-commerce Services

    1,366.5       8.0       1,066.7       6.3       962.2       5.6  

Others

    465.0       2.7       384.8       2.2       233.5       1.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Operating Expense

    15,556.1       91.0       15,428.7       90.0       15,338.7       89.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment Operating Profit

           

Cellular Services

    1,799.1       10.5       1,678.3       9.8       1,754.4       10.2  

Fixed-line Telecommunication Services

    132.4       0.8       108.3       0.6       80.4       0.5  

E-commerce Services

    (365.2     (2.1     (6.7     (0.0     9.8       0.1  

Others

    (30.6     (0.2     (71.9     (0.4     (19.5     (0.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Operating Profit

  1,535.7       9.0   1,708.0       10.0   1,825.1       10.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1) Wireless service revenue includes revenue from wireless voice and data transmission services principally derived through monthly plan-based fees, usage charges for outgoing voice calls, usage charges for wireless data services and value-added service fees paid by our wireless subscribers.

 

(2) Miscellaneous cellular services revenue includes revenue from our IoT solutions as well as other miscellaneous cellular services.

 

(3) Miscellaneous fixed-line telecommunication services revenue includes revenues from business communications services (other than fixed-line telephone service) provided by SK Broadband and VoIP services provided by SK Telink.

 

(4) E-commerce services revenue is derived from SK Planet’s revenue, which includes revenues from 11st, our open marketplace platform, and O2O commerce solutions. In March 2016, SK Planet effected a spin-off of its former platform and T Store businesses by establishing SK TechX Co., Ltd. and One Store, respectively. As a result, the results of operations from SK Planet’s former platform business and T store business are included in our e-commerce services segment for the years ended December 31, 2014 and 2015 but such revenues are included in our others segment for the year ended December 31, 2016.

 

(5) Portal service revenue includes revenues from “Nate,” our online portal service operated by SK Communications, and Cyworld, a social networking service formerly operated by SK Communications. In March 2014, the Cyworld business was spun-off into an unaffiliated company.

 

(6) Miscellaneous others revenue includes revenues from our hardware business, our security business operated by our subsidiary, Neosnetworks, and our online open marketplace for mobile applications, among other operations. Additionally, as a result of SK Planet’s spin-off of its former platform and T Store businesses, the results of operations from SK TechX and One Store are included in our others segment for the year ended December 31, 2016 under miscellaneous others revenue.

 

(7) “Segment operating expense” means operating expense for each reportable segment presented in accordance with K-IFRS and therefore, does not include certain expenses that are classified as other non-operating expenses under K-IFRS. For more information on the difference between our consolidated operating expense pursuant to K-IFRS and pursuant to IFRS as issued by the IASB, see “— Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS.”

2016 Compared to 2015

Operating Revenue and Other Income.    Our consolidated operating revenue and other income decreased by 0.1% to Won 17,158.3 billion in 2016 from Won 17,167.6 billion in 2015, due to a decrease in operating revenue, offset in part by an increase in other income, as discussed below.

Our consolidated operating revenue decreased slightly by 0.3% to Won 17,091.8 billion in 2016 from Won 17,136.7 billion in 2015, primarily due to decreases in wireless service revenue, cellular interconnection revenue, fixed-line telephone service revenue and e-commerce services revenue, partially offset by increases in broadband Internet service and advanced media platform service revenue, miscellaneous revenue and fixed-line interconnection revenue, each as further discussed below.

Our consolidated other income increased by 115.2% to Won 66.5 billion in 2016 from Won 30.9 billion in 2015 primarily due to refunds received in 2016 in connection with the overturn of certain fines previously imposed on us by the FTC that we had paid.

The following sets forth additional information about our operating revenues with respect to each of our reportable segments.

 

   

Cellular services: The revenue of our cellular services segment, which is composed of revenues from wireless service, cellular interconnection, wireless device sales and miscellaneous cellular services, decreased by 2.0% to Won 13,004.9 billion in 2016 from Won 13,269.3 billion in 2015. The decrease in our cellular services revenue was due to decreases in our wireless service revenue, cellular interconnection revenue and wireless device sales.

Wireless service revenue decreased by 1.3% to Won 10,583.0 billion in 2016 from Won 10,720.5 billion in 2015, primarily attributable to an increase in the number of subscribers who elected to receive discounted rates in

 

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lieu of receiving handset subsidies pursuant to the MDDIA due to greater public awareness of the availability of such discounted rates as well as the increase in the applicable discount rate to 20% in April 2015 from 12% in October 2014.

Cellular interconnection revenue decreased by 13.5% to Won 614.4 billion in 2016 from Won 710.0 billion in 2015. The decrease was primarily attributable to decreases in interconnection rates and land-to-mobile call volume in 2016.

Wireless device sales decreased by 4.3% to Won 922.4 billion in 2016 from Won 963.4 billion in 2015, primarily attributable to a decrease in the number of wireless devices sold in 2016 as a result of the maturity of the wireless device market.

 

   

Fixed-line telecommunications services: The revenue of our fixed-line telecommunication services segment, which is composed of revenues from broadband Internet service and advanced media platform service (including IPTV), fixed-line telephone service, international calling service, fixed-line interconnection and miscellaneous fixed-line telecommunication services, increased by 6.3% to Won 2,651.2 billion in 2016 from Won 2,494.5 billion in 2015, due to increases in our broadband Internet service and advanced media platform service (including IPTV) revenue and fixed-line interconnection revenue, partially offset by decreases in fixed-line telephone service revenue, miscellaneous fixed-line telecommunication services revenue and international calling service revenue.

Revenue from our broadband Internet service and advanced media platform service (including IPTV) increased by 12.5% to Won 1,472.8 billion in 2016 from Won 1,308.8 billion in 2015, primarily due to an increase in the number of IPTV subscribers to 4.0 million subscribers as of December 31, 2016 from 3.5 million subscribers as of December 31, 2015 and an increase in the purchase of paid media content by IPTV subscribers. Fixed-line interconnection revenue increased by 134.9% to Won 134.1 billion in 2016 from Won 57.1 billion in 2015, primarily due to additional interconnection charges we received from KT and LG U+ as a result of certain changes to the methodology for calculating interconnection charges.

Fixed-line telephone service revenue decreased by 14.9% to Won 357.8 billion in 2016 from Won 420.6 billion in 2015, primarily due to a decrease in residential calling volume as a result of shifting consumer preferences toward wireless communication. Miscellaneous fixed-line telecommunication services revenue decreased by 3.0% to Won 590.5 billion in 2016 from Won 608.9 billion in 2015, primarily due to a decline in new contracts for business communications services provided by SK Broadband. International calling service revenue decreased by 3.1% to Won 96.0 billion in 2015 from Won 99.1 billion in 2015, primarily due to a decrease in international calling volume.

 

   

E-commerce services: The revenue of our e-commerce services segment, which is primarily composed of revenues from 11st, our open marketplace platform, and O2O commerce solutions, decreased by 5.5% to Won 1,001.3 billion in 2016 from Won 1,060.0 billion in 2015, primarily due to the spin-off of SK Planet’s former platform and T Store businesses, revenues from which are excluded from our e-commerce services segment beginning in 2016.

 

   

Others: The revenue of our others segment, which is composed of revenue from our portal service and miscellaneous other revenue, increased by 38.8% to Won 434.4 billion in 2016 from Won 312.9 billion in 2015, due to an increase in miscellaneous other revenue. Miscellaneous other revenue increased by 57.7% to Won 380.2 billion in 2016 from Won 241.1 billion in 2015, primarily due to the spin-off of SK Planet’s former platform and T Store businesses, revenues from which are included in our others segment beginning in 2016.

Operating Expense.    Our consolidated operating expense increased by 1.2% to Won 15,854.9 billion in 2016 from Won 15,672.2 billion in 2015, primarily due to a 3.3% increase in commissions to Won 5,376.7 billion in 2016 from Won 5,207.0 billion in 2015 and a 3.4% increase in depreciation and amortization to Won 2,941.9 billion in 2016 from Won 2,845.3 billion in 2015. Such increases were partially offset by a 6.0% decrease in cost of products that have been resold to Won 1,838.4 billion in 2016 from Won 1,955.9 billion in 2015.

 

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The increase in commissions was attributable mainly to an increase in marketing costs relating to promotional activities for 11st, our open marketplace platform, which was partially offset by a decrease in marketing costs relating to our cellular services.

The increase in depreciation and amortization was primarily due to amortization of certain frequency bandwidth usage rights we acquired or re-licensed in 2016 as well as amortization of software.

The decrease in cost of products that have been resold was primarily due to a decrease in the number of wireless devices resold in 2016.

The following sets forth additional information about our segment operating expense with respect to each of our reportable segments, which do not include certain expenses that are classified as other non-operating expenses under K-IFRS. For more information on the difference between our consolidated operating expense pursuant to K-IFRS and pursuant to IFRS as issued by the IASB, see “— Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS.”

 

   

Cellular services: The segment operating expense for our cellular services segment decreased by 3.3% to Won 11,205.8 billion in 2016 from Won 11,591.0 billion in 2015, attributable mainly to a decrease in marketing costs due to the stabilized competitive environment due to the maturity of the LTE market and the implementation of the MDDIA as well as an increase in the number of subscribers who elected to receive discounted rates in lieu of receiving handset subsidies pursuant to the MDDIA.

 

   

Fixed-line telecommunication services: The segment operating expense for our fixed-line telecommunication services segment increased by 5.6% to Won 2,518.8 billion in 2016 from Won 2,386.2 billion in 2015, primarily due to an increase in marketing costs to gain more subscribers to our ultra-high definition IPTV and high speed broadband Internet services and an increase in expenses paid to obtain certain rights to media content.

 

   

E-commerce services: The segment operating expense for our e-commerce services segment increased by 28.1% to Won 1,366.5 billion in 2016 from Won 1,066.7 billion in 2015, primarily due to an increase in marketing costs relating to promotional activities for 11st, our online open marketplace, which more than offset the impact of the exclusion of SK Planet’s former platform and T store businesses from our e-commerce services segment beginning in 2016.

 

   

Others: The segment operating expense for our others segment increased by 20.8% to Won 465.0 billion in 2016 from Won 384.8 billion in 2015, primarily due to an increase in marketing costs relating to the impact of the inclusion of SK Planet’s former platform and T store businesses in the others segment beginning in 2016.

Operating Profit.    Our consolidated operating profit decreased by 12.8% to Won 1,303.4 billion in 2016 from Won 1,495.4 billion in 2015, due to the decrease in operating revenue and other income and the increase in operating expense.

Our segment operating profit with respect to each of our reportable segments is based on K-IFRS and the sum of segment operating profit for all four reportable segments differs from our consolidated operating profit presented in accordance with IFRS by IASB. For a reconciliation of operating profit presented in accordance with IFRS by IASB and operating profit presented in accordance with K-IFRS, see “— Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS.”

 

   

Cellular services: The segment operating profit of our cellular services segment increased by 7.2% to Won 1,799.1 billion in 2016 from Won 1,678.3 billion in 2015, due to the greater decrease in segment operating expense, as compared to the decrease in segment revenue, for the reasons described above. As a result, the segment operating margin (which, with respect to each reportable segment, is segment operating profit divided by revenue from such segment, expressed as a percentage) of our cellular services segment increased to 13.8% in 2016 from 12.6% in 2015.

 

   

Fixed-line telecommunication services: The segment operating profit of our fixed-line telecommunication services segment increased by 22.1% to Won 132.4 billion in 2016 from Won 108.3 billion in 2015,

 

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primarily due to the increase in revenue from our IPTV service despite the increase in costs to expand our advanced media platform service business. As a result, the segment operating margin of our fixed-line telecommunication services segment increased to 5.0% in 2016 from 4.3% in 2015.

 

   

E-commerce services: The segment operating loss of our e-commerce services segment increased significantly to Won 365.2 billion in 2016 from Won 6.7 billion in 2015, primarily due to the increase in marketing costs relating to promotional activities for 11st described above.

 

   

Others: The segment operating loss of our others segment decreased by 57.4% to Won 30.6 billion in 2016 from Won 71.9 billion in 2015, primarily due to the inclusion of the results of operations from SK TechX and One Store in our others segments as described above.

Finance Income and Finance Costs.    Our finance income increased by 453.5% to Won 575.1 billion in 2016 from Won 103.9 billion in 2015, primarily due to a significant increase in gain on disposal of long-term investment securities to Won 459.3 billion in 2016 from Won 10.8 billion in 2015 relating to the sale of our 15.0% interest in Loen Entertainment in February 2016 and the sale of our 1.3% interest in POSCO in November 2016.

Our finance costs decreased by 6.7% to Won 326.8 billion in 2016 from Won 350.1 billion in 2015 primarily due to a 75.7% decrease in impairment loss for available-for-sale financial assets to Won 5.3 billion in 2016 from Won 21.8 billion in 2015, primarily due to an increase in the fair value of certain of our available-for-sale financial assets, and a 2.4% decrease in interest expense to Won 290.5 billion in 2016 from Won 297.7 billion in 2015.

Gains (Losses) Related to Investments in Subsidiaries and Associates.    Gains related to investments in subsidiaries and associates decreased by 30.7% to Won 544.5 billion in 2016 from Won 786.1 billion in 2015, primarily due to a 32.1% decrease in share of profits of SK Hynix to Won 572.1 billion in 2016 from Won 842.1 billion in 2015. Such decrease was primarily due to the 31.5% decrease in SK Hynix’s profit for the year to Won 2,960.5 billion in 2016 from Won 4,323.6 billion in 2015.

Income Tax.    Income tax expense decreased by 16.1% to Won 436.0 billion in 2016 from Won 519.5 billion in 2015 notwithstanding a 3.0% increase in profit before income tax to Won 2,096.1 billion in 2016 from Won 2,035.4 billion in 2015, primarily due to changes in the interpretation of certain tax regulations allowing for the use in 2016 of tax loss carryforwards incurred by SK Planet relating to its loss on disposal of shares of SK Communications. Our effective tax rate in 2016 decreased by 4.8% to 20.8% in 2016 from 25.5% in 2015, primarily for the reasons set forth above.

Profit for the Year.    Principally as a result of the factors discussed above, our profit for the year increased by 9.5% to Won 1,660.1 billion in 2016 from Won 1,515.9 billion in 2015. Profit for the year as a percentage of operating revenue and other income was 9.7% in 2016 compared to 8.8% in 2015.

2015 Compared to 2014

Operating Revenue and Other Income.    Our consolidated operating revenue and other income decreased by 0.3% to Won 17,167.6 billion in 2015 from Won 17,220.3 billion in 2014, due to the following decreases in operating revenue and other income.

Our consolidated operating revenue decreased slightly to Won 17,136.7 billion in 2015 from Won 17,163.8 billion in 2014, primarily due to decreases in wireless service revenue and cellular interconnection revenue, partially offset by increases in wireless device sales and broadband Internet service and advanced media platform service revenue, each as further discussed below.

Our consolidated other income decreased by 45.2% to Won 30.9 billion in 2015 from Won 56.5 billion in 2014 primarily due to a decrease in value-added tax refunds to Won 2.1 billion in 2015 from Won 8.1 billion in 2014 and a decrease in gain on disposal of property and equipment and intangible assets to Won 7.1 billion in 2015 from Won 8.8 billion in 2014.

The following sets forth additional information about our operating revenues with respect to each of our reportable segments.

 

   

Cellular services: The revenue of our cellular services segment, which is composed of revenues from wireless service, cellular interconnection, wireless device sales and miscellaneous cellular services,

 

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decreased by 1.9% to Won 13,269.3 billion in 2015 from Won 13,527.9 billion in 2014. The decrease in our cellular services revenue was principally due to decreases in our wireless service revenue and cellular interconnection revenue partially offset by an increase in our wireless device sales.

Wireless service revenue decreased by 2.6% to Won 10,720.5 billion in 2015 from Won 11,010.6 billion in 2014, primarily due to the decrease in initial subscription fees which we ceased charging beginning November 2014 and the increase in the number of subscribers who elected to receive discounted rates in lieu of receiving handset subsidies pursuant to the MDDIA due to the increase in the applicable discount rate to 20% in April 2015 from 12% in October 2014.

Cellular interconnection revenue decreased by 13.1% to Won 710.0 billion in 2015 from Won 817.0 billion in 2014. The decrease was primarily attributable to decreases in interconnection rates and land-to-mobile call volume in 2015.

Wireless device sales increased by 26.5% to Won 963.4 billion in 2015 from Won 761.6 billion in 2014. Such increase was due in part to the reflection of the full year impact of the acquisition by PS&Marketing in April 2014 of the retail distribution business of SK Networks in 2015 compared to 2014 in which the acquisition only impacted revenue for part of the year.

 

   

Fixed-line telecommunications services: The revenue of our fixed-line telecommunication services segment, which is composed of revenues from broadband Internet service and advanced media platform service (including IPTV), fixed-line telephone service, international calling service, fixed-line interconnection and miscellaneous fixed-line telecommunication services, increased by 1.8% to Won 2,494.5 billion in 2015 from Won 2,449.9 billion in 2014, primarily due to an increase in revenue from our broadband Internet service and advanced media platform service (including IPTV), partially offset by decreases in fixed-line telephone service revenue, miscellaneous fixed-line telecommunication services revenue and international calling service revenue. Fixed-line interconnection revenue was stable between 2014 and 2015.

Revenue from our broadband Internet service and advanced media platform service (including IPTV) increased by 13.5% to Won 1,308.8 billion in 2015 from Won 1,152.7 billion in 2014, primarily due to an increase in the number of IPTV subscribers to 3.5 million subscribers as of December 31, 2015 from 2.8 million subscribers as of December 31, 2014 and an increase in the purchase of paid media content by IPTV subscribers.

Fixed-line telephone service revenue decreased by 10.0% to Won 420.6 billion in 2015 from Won 467.3 billion in 2014, primarily due to a decrease in residential calling volume. Miscellaneous fixed-line telecommunication services revenue decreased by 7.8% to Won 608.9 billion in 2015 from Won 660.5 billion in 2014, primarily due to a decline in new contracts for business communications services provided by SK Broadband. International calling service revenue decreased by 11.5% to Won 99.1 billion in 2015 from Won 112.0 billion in 2014, primarily due to a decrease in international calling volume.

 

   

E-commerce services: The revenue of our e-commerce services segment, which is primarily composed of revenues from 11st, our open marketplace platform, and O2O commerce solutions, increased by 9.1% to Won 1,060.0 billion in 2015 from Won 972.0 billion in 2014, primarily due to increases in the annual gross merchandise volume of 11st through its mobile version and revenue from SK Planet’s advertising business.

 

   

Others: The revenue of our others segment, which is composed of revenues from our portal service and miscellaneous other revenue, increased by 46.2% to Won 312.9 billion in 2015 from Won 214.0 billion in 2014, due to an increase in miscellaneous other revenue. Miscellaneous other revenue increased by 80.3% to Won 241.1 billion in 2015 from Won 133.7 billion in 2014, primarily due to increases in revenue from our security business operated by Neosnetworks.

Operating Expense.    Our consolidated operating expense increased by 0.4% to Won 15,672.2 billion in 2015 from Won 15,612.4 billion in 2014, primarily due to a 16.4% increase in cost of products that have been resold to Won 1,955.9 billion in 2015 from Won 1,680.1 billion in 2014, a 14.1% increase in labor cost to Won 1,893.7 billion in 2015 from Won 1,659.8 billion in 2014 and a 4.8% increase in depreciation and amortization to Won 2,845.3 billion in 2015 from Won 2,714.7 billion in 2014. Such increase was partially offset by an 8.5% decrease in commissions to Won 5,207.0 billion in 2015 from Won 5,692.7 billion in 2014.

 

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The increase in cost of products that have been resold was primarily due to the reflection of the full year impact of the acquisition by PS&Marketing in April 2014 of the retail distribution business of SK Networks in 2015 compared to 2014 in which the acquisition only impacted associated costs for part of the year and an increase in high-end wireless device sales.

The increase in labor cost was primarily due to one-time severance payments in connection with our early retirement program and the increase in the number of employees at SK Broadband to further expand our advanced media platform service business and in connection with several acquisitions in 2014, including the acquisition by PS&Marketing of the retail distribution business of SK Networks in April 2014 and the acquisition by SK Planet of Shopkick in October 2014.

The increase in depreciation and amortization was primarily due to increased capital investments to upgrade our LTE network and broadband Internet fixed-line network and the increase in amortization of software.

The decrease in commissions was attributable mainly to the stabilized competitive environment due to the maturity of the LTE market and the implementation of the MDDIA as well as an increase in the number of subscribers who elected to receive discounted rates in lieu of receiving handset subsidies pursuant to the MDDIA.

The following sets forth additional information about our segment operating expense with respect to each of our reportable segments, which do not include certain expenses that are classified as other non-operating expenses under K-IFRS. For more information on the difference between our consolidated operating expense pursuant to K-IFRS and pursuant to IFRS as issued by the IASB, see “— Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS.”

 

   

Cellular services: The segment operating expense for our cellular services segment decreased by 1.6% to Won 11,591.0 billion in 2015 from Won 11,773.5 billion in 2014, primarily due to a decrease in commissions, which was partially offset by increases in cost of products that have been resold, labor cost and depreciation and amortization, each for the reasons described above.

 

   

Fixed-line telecommunication services: The segment operating expense for our fixed-line telecommunication services segment slightly increased to Won 2,386.2 billion in 2015 from Won 2,369.5 billion in 2014, primarily due to an increase in marketing costs to gain more subscribers to our IPTV service and an increase in labor cost due to an increase in the number of employees related to the expansion of our advanced media platform service business.

 

   

E-commerce services: The segment operating expense for our e-commerce services segment increased by 10.9% to Won 1,066.7 billion in 2015 from Won 962.2 billion in 2014, primarily due to an increase in marketing costs relating to various promotional events for 11st and our O2O commerce solutions and an increase in labor cost due to the increase in the number of employees pursuant to the acquisition by SK Planet of Shopkick in October 2014.

 

   

Others: The segment operating expense for our others segment increased by 64.8% to Won 384.8 billion in 2015 from Won 233.5 billion in 2014, primarily due to an increase in operating expense relating to our security business operated by Neosnetworks.

Operating Profit.    Our consolidated operating profit decreased by 7.0% to Won 1,495.4 billion in 2015 from Won 1,607.8 billion in 2014, due to the decrease in operating revenue and other income and the increase in operating expense.

Our segment operating profit with respect to each of our reportable segments is based on K-IFRS and the sum of segment operating profit for all three reportable segments differs from our consolidated operating profit presented in accordance with IFRS by IASB. For a reconciliation of operating profit presented in accordance with IFRS by IASB and operating profit presented in accordance with K-IFRS, see “— Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS.”

 

   

Cellular services: The segment operating profit of our cellular services segment decreased by 4.3% to Won 1,678.3 billion in 2015 from Won 1,754.4 billion in 2014, primarily due to the decrease in initial subscription fees which we ceased charging beginning November 2014. As a result, the segment operating margin of our cellular services segment decreased to 12.6% in 2015 from 13.0% in 2014.

 

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Fixed-line telecommunication services: The segment operating profit of our fixed-line telecommunication services segment increased by 34.7% to Won 108.3 billion in 2015 from Won 80.4 billion in 2014, primarily due to the increase in revenue from our IPTV service despite the increase in costs to expand our advanced media platform service business. As a result, the segment operating margin of our fixed-line telecommunication services segment increased to 4.3% in 2015 from 3.3% in 2014.

 

   

E-commerce services: We recognized segment operating loss of our e-commerce services segment of Won 6.7 billion in 2015 compared to segment operating profit of our e-commerce services segment of Won 9.8 billion in 2014, primarily due to an increase in marketing costs relating to promotional activities for 11st despite the increase in revenue from 11st and our O2O commerce solutions.

 

   

Others: The segment operating loss of our others segment increased by 268.7% to Won 71.9 billion in 2015 from Won 19.5 billion in 2014. As discussed above, while miscellaneous other revenue increased in 2015, operating expense relating to our security business operated by Neosnetworks increased to a greater extent, leading to a greater operating loss of our others segment.

Finance Income and Finance Costs.    Our finance income decreased by 17.8% to Won 103.9 billion in 2015 from Won 126.3 billion in 2014, primarily due to a 23.5% decrease in interest income to Won 45.9 billion in 2015 from Won 60.0 billion in 2014, which was mainly due to a general decrease in interest rates, and a 77.9% decrease in gain on valuation of derivatives to Won 1.9 billion in 2015 from Won 8.7 billion in 2014. Such decreases were partially offset by a gain on valuation of financial asset at fair value through profit or loss of Won 5.2 billion in 2015 relating to profit recognized from the early redemption of certain structured bonds compared to no such gain in 2014, a 23.4% increase in dividend income to Won 16.1 billion in 2015 from Won 13.0 billion in 2014 and a 16.1% increase in gain on foreign currency transactions to Won 18.9 billion in 2015 from Won 16.3 billion in 2014.

Our finance costs decreased by 9.5% to Won 350.1 billion in 2015 from Won 386.7 billion in 2014 primarily due to an 8.1% decrease in interest expense to Won 297.7 billion in 2015 from Won 323.9 billion in 2014, which was mainly due to a general decrease in interest rates, and a 95.2% decrease in loss relating to financial liability at fair value through profit or loss to Won 0.5 billion in 2015 from Won 10.4 billion in 2014. In 2014, we recognized such loss relating to financial liability at fair value through profit or loss due to the increase in the fair value of debentures in connection with the general decrease in interest rates. Such decreases were partially offset by a significant increase in loss on settlement of derivatives to Won 4.8 billion in 2015 from Won 0.7 billion in 2014.

Gains (Losses) Related to Investments in Subsidiaries and Associates.    Gains related to investments in subsidiaries and associates decreased 13.3% to Won 786.1 billion in 2015 from Won 906.3 billion in 2014, primarily due to an 8.1% decrease in share of profits of SK Hynix to Won 842.1 billion in 2015 from Won 916.5 billion in 2014. Such decrease was primarily due to the Won 88.7 billion gain recognized in connection with the dilution of equity interest in 2014 due to the conversion by noteholders of SK Hynix’s convertible bonds to SK Hynix’s common shares compared to no such gain recognized in 2015 despite the 3.1% increase in SK Hynix’s profit for the year to Won 4,323.6 billion in 2015 from Won 4,195.2 billion.

Income Tax.    Income tax expense from continuing operations increased by 14.3% to Won 519.5 billion in 2015 from Won 454.5 billion in 2014 notwithstanding a 9.7% decrease in profit before income tax to Won 2,035.4 billion in 2015 from Won 2,253.8 billion in 2014, primarily due to changes in unrealizable deferred taxes which led to an increase in income tax expense of Won 83.6 billion in 2015, mainly related to the dividend in kind made by SK Planet of SK Communication’s common shares to SK Telecom, compared to such changes which led to a decrease in income tax expense of Won 43.8 billion in 2014. Our effective tax rate in 2015 increased by 5.3% to 25.5% in 2015 from 20.2% in 2014, primarily for the reasons set forth above.

Profit for the Year.    Principally as a result of the factors discussed above, our profit for the year decreased by 15.8% to Won 1,515.9 billion in 2015 from Won 1,799.3 billion in 2014. Profit for the year as a percentage of operating revenue and other income was 8.8% in 2015 compared to 10.4% in 2014.

Inflation

We do not consider inflation in Korea to have had a material impact on our results of operations in recent years. According to data published by The Bank of Korea, annual inflation in Korea was 1.0% in 2016, 0.7% in 2015 and 1.3% in 2014.

 

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Item 5.B. Liquidity and Capital Resources

Liquidity

We had a working capital deficit (current liabilities in excess of current assets) of Won 447.5 billion as of December 31, 2016 and Won 96.3 billion as of December 31, 2015. The working capital deficits as of December 31, 2015 and 2016 were primarily due to working capital needs in the ordinary course of business. We plan to fund our current liabilities with the cash flow generated by our operations, proceeds from the disposal of investment securities or property and equipment that are no longer deemed profitable and proceeds from additional borrowings, as necessary.

We had cash, cash equivalents, short-term financial instruments and short-term investment securities of Won 2,081.4 billion as of December 31, 2016 and Won 1,552.3 billion as of December 31, 2015. We had outstanding short-term borrowings of Won 2.6 billion as of December 31, 2016 and Won 260.0 billion as of December 31, 2015. As of December 31, 2016, we had credit lines with several local banks that provided for borrowing of up to Won 440 billion, all of which was available for borrowing.

Cash flows from operating activities and debt financing have been our principal sources of liquidity. We had cash and cash equivalents of Won 1,505.2 billion as of December 31, 2016 and Won 768.9 billion as of December 31, 2015. We believe that we have a variety of alternatives available to us to satisfy our financial requirements to the extent that they are not met by funds generated by operations, including the issuance of debt securities and bank borrowings.

 

    Year Ended December 31,     Change  
    2016     2015     2014     2016 to 2015     2015 to 2014  
    (In billions of Won, except percentages)  

Net Cash Provided by Operating Activities

  4,243.2     3,778.1     3,677.4     465.1       12.3   100.7       2.7

Net Cash Used in Investing Activities

    (2,462.2     (2,880.5     (3,683.2     418.3       (14.5     802.7       (21.8

Net Cash Used in Financing Activities

    (1,044.8     (964.6     (559.4     (80.2     8.3       (405.2     72.4  

Effect of Exchange Rate Changes on Cash and Cash Equivalents Held in Foreign Currencies

    0.2       1.5       1.0       (1.3     (86.7     0.5       49.2  

Net Increase (Decrease) in Cash and Cash Equivalents

    736.2       (67.0     (565.2     803.2       (1,198.7     498.2       (88.2

Cash and Cash Equivalents at Beginning of Period

    768.9       834.4       1,398.6       (65.5     (7.8     (564.2     (40.3

Cash and Cash Equivalents at End of Period

    1,505.3       768.9       834.4       736.4       95.8       (65.5     (7.9 )% 

Cash Flows from Operating Activities.    Net cash provided by operating activities was Won 4,243.2 billion in 2016, Won 3,778.1 billion in 2015 and Won 3,677.4 billion in 2014. Profit for the year was Won 1,660.1 billion in 2016, Won 1,515.9 billion in 2015 and Won 1,799.3 billion in 2014. Net cash provided by operating activities in 2016 increased by 12.3% from 2015 primarily due to the fulfillment of certain year-end cash payment obligations on the next business day after December 31, 2016, which was not a business day. Net cash provided by operating activities in 2015 increased slightly by 2.7% from 2014.

Cash Flows from Investing Activities.    Net cash used in investing activities was Won 2,462.2 billion in 2016, Won 2,880.5 billion in 2015 and Won 3,683.2 billion in 2014. Cash inflows from investing activities were Won 1,140.7 billion in 2016, Won 914.5 billion in 2015 and Won 341.4 billion in 2014. Cash inflows in 2016 were primarily attributable to proceeds from disposals of long-term investment securities of Won 555.5 billion, mostly in connection with the disposal of our 15.0% interest in Loen Entertainment for shares of Kakao Corporation and Won 218.0 billion in cash in February 2016 and the disposal of our 1.3% interest in POSCO for Won 305.1 billion in November 2016, collection of short-term loans of Won 239.0 billion and decrease in short-term financial instruments, net of Won 222.3 billion. Cash inflows in 2015 were primarily attributable to collection of short-term loans of Won 398.3 billion and proceeds from disposals of investments in associates and joint ventures of Won 185.1 billion, mostly in connection with the disposal of 27,725,264 shares of KEBHana Card for Won 176.3 billion. Cash inflows in 2014 were primarily attributable to collection of short-term loans of Won 207.4 billion.

 

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Cash outflows for investing activities were Won 3,602.9 billion in 2016, Won 3,795.0 billion in 2015 and Won 4,024.6 billion in 2014. Cash outflows in 2016, 2015 and 2014 were primarily attributable to expenditures related to the acquisition of property and equipment of Won 2,490.5 billion, Won 2,478.8 billion and Won 3,008.0 billion, respectively, primarily in connection with the acquisition of LTE equipment and the expansion of our LTE network.

Cash Flows from Financing Activities.    Net cash used in financing activities was Won 1,044.8 billion in 2016, Won 964.6 billion in 2015 and Won 559.4 billion in 2014. Cash inflows from financing activities were Won 861.6 billion in 2016, Won 1,375.2 billion in 2015 and Won 1,421.0 billion in 2014. Such inflows were primarily driven by the issuance of debentures, which provided cash of Won 776.7 billion in 2016, Won 1,375.0 billion in 2015 and Won 1,255.5 billion in 2014 and proceeds from long-term borrowings, which provided cash of Won 49.0 billion in 2016 and Won 62.6 billion in 2014. In 2014, we had cash inflows of Won 102.9 billion due to proceeds from short-term borrowings.

Cash outflows for financing activities were Won 1,906.5 billion in 2016, Won 2,339.8 billion in 2015 and Won 1,980.5 billion in 2014. Cash outflows for financing activities included payment of dividends, repayments of current portion of long-term debt, repayment of long-term borrowings, repayment of debentures, acquisition of treasury stock and repayment of short-term borrowings, among other items. Payment of dividends were Won 706.1 billion in 2016, Won 668.5 billion in 2015 and Won 666.8 billion in 2014. Repayments of other long-term account payables were Won 122.7 billion in 2016, Won 191.4 billion in 2015 and Won 207.8 billion in 2014. Repayment of long-term borrowings were Won 33.4 billion in 2016, Won 21.9 billion in 2015 and Won 23.3 billion in 2014. Repayment of debentures were Won 770.0 billion in 2016, Won 620.0 billion in 2015 and Won 1,039.9 billion in 2014. Decrease in short-term borrowings, net accounted for Won 257.4 billion and Won 106.6 billion of cash outflows for financing activities in 2016 and 2015, respectively. In 2015, we had cash outflows of Won 490.2 billion due to acquisition of treasury stock and cash outflows of Won 220.4 billion related to equity interest transactions, principally in connection with the Share Exchange.

As of December 31, 2016, we had total long-term debt (excluding current portion) outstanding of Won 6,478.6 billion, which included debentures in the amount of Won 6,338.9 billion and bank and institutional borrowings in the amount of Won 139.7 billion. As of December 31, 2015, we had total long-term debt (excluding current portion) outstanding of Won 6,560.7 billion, which included debentures in the amount of Won 6,439.1 billion and bank and institutional borrowings in the amount of Won 121.6 billion. For a description of our long-term debt, see note 16 of the notes to our consolidated financial statements.

As of December 31, 2016, we had Won 4,549.6 billion aggregate principal amount of Korean Won-denominated debentures outstanding, of which SK Telecom issued Won 3,319.6 billion, SK Broadband issued Won 1,210.0 billion and PS&Marketing issued Won 20 billion, and Won 2,670.5 billion aggregate principal amount of debentures outstanding denominated in foreign currencies, including U.S. dollars, Swiss Francs and Australian Dollars. The interest rates of our debentures range from 1.58% to 6.63% depending on the offering size, maturity, interest rate environment at the time of the offering and currency, among other factors. We have a diversified maturity profile with respect to our debentures. See “— Contractual Obligations and Commitments” for more details.

As of December 31, 2016, a substantial portion of our foreign currency-denominated long-term borrowings, which amounted to approximately 37.1% of our total outstanding long-term debt, including current portion and present value discount as of such date, was denominated in Dollars. However, substantially all of our revenue and operating expenses are denominated in Won. We generally pay for imported capital equipment in Dollars. Appreciation of the Won against the Dollar will result in net foreign currency transaction and translation gains, while depreciation of the Won against the Dollar will result in net foreign currency transaction and translation losses. Changes in foreign currency exchange rates will also affect our liquidity because of the effect of such changes on the amount of funds required for us to make interest and principal payments on our foreign currency-denominated debt. For a description of swap or derivative transactions we have entered into, among other transactions, to mitigate the effects of such losses, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”

 

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Capital Requirements

Historically, capital expenditures, repayment of outstanding debt, frequency usage payments and research and development expenditures have represented our most significant use of funds. In recent years, we have also increasingly dedicated capital resources to develop and invest in new growth engines, including our next-generation growth businesses in IoT solutions, media and e-commerce and other innovative products and services offered through our platform services. In addition, we have used funds for the acquisition of treasury shares, financing of our subscribers’ handset purchases on installment payment plans and payment of retirement and severance benefits.

To fund our scheduled debt repayment and planned capital expenditures over the next several years, we intend to rely primarily on cash flows from operating activities, as well as bank and institutional borrowings, and offerings of debt or equity in the domestic or international markets. We believe that these sources will be sufficient to fund our planned capital expenditures for 2017. Our ability to rely on these alternatives could be affected by the liquidity of the Korean financial markets or by Government policies regarding Won and foreign currency borrowings and the issuance of equity and debt. Our failure to make needed expenditures would adversely affect our ability to sustain subscriber growth and provide quality services and, consequently, our results of operations.

Capital Expenditures.    The following table sets forth our actual capital expenditures for 2016, 2015 and 2014:

 

     Year Ended December 31,  
     2016      2015      2014  
     (In billions of Won)  

LTE Network

   1,104.0      1,022.7      1,357.2  

WCDMA Network

     27.7        90.0        92.3  

Fixed-line Network(1)

     699.6        559.4        601.4  

Other Network(2)

     376.3        332.4        283.2  

Others(3)

     282.9        474.3        673.9  
  

 

 

    

 

 

    

 

 

 

Total

   2,490.5      2,478.8      3,008.0  
  

 

 

    

 

 

    

 

 

 

 

 

(1) Includes all capital expenditures made by SK Broadband.

 

(2) Includes investments in our CDMA, WiBro and Wi-Fi networks as well as other capital expenditures related to our networks.

 

(3) Includes non-network related investments such as capital expenditures for product development and maintenance and upgrades of our information technology systems and equipment.

We set our capital expenditure budget for each upcoming year on an annual basis. Our actual capital expenditures in 2016, 2015 and 2014 were Won 2,490.5 billion, Won 2,478.8 billion and Won 3,008.0 billion, respectively. Of such amounts, we spent approximately 44.3%, 41.3% and 45.1% in 2016, 2015 and 2014, respectively, on capital expenditures related to expanding and enhancing the quality of our LTE network. Our other non-network related capital expenditures in 2016, 2015 and 2014 primarily related to developing new products and maintenance and upgrades to our information technology systems.

In addition, we have been making capital expenditures to build more advanced networks based on LTE technology. We commenced commercial LTE services in July 2011 and expanded our LTE network nationwide and launched our LTE multi-carrier technology in 2012. We launched our LTE-A service in June 2013, our wideband LTE-A service in September 2013 and our tri-band LTE-A service in December 2014. For a more detailed description of our LTE network, see “Item 4.B.

Business Overview — Digital Wireless Network — LTE Network.” We plan to continue to make capital investments in 2017 to further improve and expand our LTE network and develop related technologies.

 

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The following table sets forth our payment obligations relating to our acquisitions of frequency usage rights.

 

Band   Technology (width)     Date of Acquisition  

Initial Payment
Amount

(in billions of Won)

    Initial
Payment Year
   

Annual Payment
Amount

(in billions of
Won)

    Annual
Payment Term
 

 

800MHz

  CDMA(10M)          

 

June 2011

 

 

 

 

208.3

 

 

 

 

 

 

2011

 

 

 

 

 

 

69.4

 

 

 

 

 

 

2013-2015

 

 

  LTE(20M)                  

1.8GHz

 

  LTE(35M)

 

    20M     Dec. 2011     248.8       2011       74.6       2012-2021  
      15M     Sept. 2013     115.3       2013       43.2       2014-2021  

 

2.1GHz

  WCDMA(20M)           May 2010     52.6       2010       17.5       2012-2014  
  LTE(40M)           Dec. 2001     650.0       2001       130.0 (1)       2007-2016
  WCDMA(20M)           Dec. 2016     141.2       2016       85.3       2017-2021  

2.3GHz

  WiBro(30M)           March 2012     8.7       2012       2.9       2014-2016  

2.6GHz

  LTE(40M+20M)           August 2016     332.5       2016       99.8       2017-2026  

 

(1) Denotes the average annual payment amount for years 2007 through 2016. The actual annual payment amounts for years 2007 through 2016 ranged from Won 90 billion to Won 170 billion.

For more information, see notes 15 and 17 of the notes to our consolidated financial statements.

We expect that our capital expenditure amount in 2017 will be similar to that of 2016. Our expenditures will be for a range of projects, including investments to improve and expand our LTE network and LTE-A services, investments to improve and expand our Wi-Fi network, investments to develop our platform business portfolio and funding for mid-to long-term research and development projects, as well as other initiatives, primarily related to the development of new growth businesses, as well as initiatives related to our ongoing businesses in the ordinary course. However, our overall expenditure levels and our allocation among projects remain subject to many uncertainties. We may increase, reduce or suspend our planned capital expenditures for 2017 or change the timing and area of our capital expenditure spending from the estimates described above in response to market conditions or for other reasons. We may also make additional capital expenditure investments as opportunities arise, including in connection with building out our networks on any new bandwidths we may choose to acquire in any frequency bandwidth auctions held by the MSIP in 2017. Accordingly, we periodically review the amount of our capital expenditures and may make adjustments based on the current progress of capital expenditure projects and market conditions. No assurance can be given that we will be able to meet any such increased expenditure requirements or obtain adequate financing for such requirements, on terms acceptable to us, or at all.

Repayment of Outstanding Debt.    As of December 31, 2016, our principal repayment obligations with respect to long-term borrowings, bonds and obligations under capital leases outstanding were as follows for the periods indicated:

 

Year Ending December 31,

   Total  
     (In billions of Won)  

2017

   889.6  

2018

     1,671.7  

2019

     928.4  

2020 and thereafter

     3,904.8  

We note that no commercial bank in Korea may extend credit (including loans, guarantees and purchase of bonds) in excess of 20.0% of its shareholders’ equity to any one borrower. In addition, no commercial bank in Korea may extend credit exceeding 25.0% of the bank’s shareholders’ equity to any one borrower and to any person with whom the borrower shares a credit risk.

Investments in New Growth Businesses.    We may also require capital for investments to support our development of new growth businesses.

In April 2014, we acquired a controlling interest in Neosnetworks, a provider of residential and small business electronic security and other related alarm monitoring services, for an aggregate purchase price of approximately

 

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Won 24.0 billion. We acquired additional interests in Neosnetworks in April 2015 for Won 40.0 billion, resulting in an increase in our ownership of Neosnetworks to 83.9%. In October 2016, we acquired the remaining 16.1% interest in Neosnetworks through SK Telink. In August 2014, we acquired a 39.3% equity interest of Iriver, a manufacturer of digital audio players and other portable media devices, which we increased to 49.0% in December 2014, for an aggregate purchase price of approximately Won 54.5 billion.

We also acquired Won 5.0 billion of convertible bonds issued by Iriver, which may be converted into additional equity interests of Iriver when certain conditions are met. In October 2014, SK Planet acquired a 100.0% ownership interest through its less than wholly-owned subsidiary of Shopkick, a developer of a shopping app for mobile devices that provides benefits to customers for visiting stores, in order to penetrate the commerce business in the United States for an aggregate purchase price of Won 230.9 billion and the assumption of Won 18.7 billion in current liabilities.

From time to time, we may make other investments in telecommunications or other businesses, in Korea or abroad, where we perceive attractive opportunities for investment. From time to time, we may also dispose of existing investments when we believe that doing so would be in our best interest.

Severance Payments.    The defined benefit obligation, which is the total accrued and unpaid retirement and severance benefits for our employees, as of December 31, 2016 was Won 70.7 billion. This amount was reflected in our consolidated financial statements as a liability, which is net of deposits with insurance companies totaling Won 555.2 billion to fund a portion of the employees’ severance indemnities.

Also see “Item 6.D. Employees — Employee Benefits” and note 20 of the notes to our consolidated financial statements.

Dividends.    Total cash outflows for payments of dividends amounted to Won 706.1 billion in 2016, Won 668.5 billion in 2015 and Won 666.8 billion in 2014.

In April 2017, we distributed annual dividends at Won 9,000 per share (exclusive of an interim dividend of Won 1,000 per share) to our shareholders for an aggregate payout amount of Won 635.5 billion.

Contractual Obligations and Commitments

The following summarizes our contractual cash obligations at December 31, 2016, and the effect such obligations are expected to have on liquidity and cash flow in future periods:

 

     Payments Due by  Period(1)  
    
Total
     Less Than
1 Year
     1-3 Years      4-5 Years      After
5 Years
 
     (In billions of Won)  

Bonds

              

Principal

   7,220.1      856.0      2,518.5      1,402.6      2,443.0  

Interest

     1,263.3        227.9        304.8        210.2        520.4  

Long-term borrowings

              

Principal

     174.4        33.6        81.6        52.3        6.9  

Interest

     12.9        6.4        4.7        1.7        0.1  

Capital lease obligations

              

Principal

                                  

Interest

                                  

Operating leases

                                  

Facility deposits

     6.3        0.4                      5.9  

Derivatives

     88.4        88.2               0.2         

Other long-term payables(2)

              

Principal

     2,013.1        302.9        605.7        605.7        498.8  

Interest

     117.3        24.8        48.6        27.2        16.7  

Short-term borrowings

     2.6        2.6                       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   10,898.4      1,542.8      3,563.9      2,299.9      3,491.8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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(1) We are contractually obligated to make severance payments to eligible employees we have employed for more than one year, upon termination of their employment, regardless of whether such termination is voluntary or involuntary. Accruals for severance indemnities are recorded based on the amount we would be required to pay in the event the employment of all our employees were to terminate at the balance date. However, we have not yet estimated cash flows for future periods. Accordingly, payments due in connection with severance indemnities have been excluded from this table.

 

(2) Related to acquisition of frequency licenses. See note 17 of the notes to our consolidated financial statements.

See note 35 of the notes to our consolidated financial statements for details related to our other commitments and contingencies.

Critical Accounting Policies, Estimates And Judgments

Our consolidated financial statements are prepared in accordance with IFRS. The preparation of the consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. We continually evaluate our estimates and judgments including those related to allowances for doubtful accounts, fair value measurements of financial instruments, estimated useful lives and impairment of long-lived assets, impairment of goodwill, provisions, retirement benefit plans and income taxes. We base our estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that of our significant accounting policies, the following may involve a higher degree of judgment or complexity:

Allowances for Doubtful Accounts

An allowance for doubtful accounts is provided based on a review of the status of individual receivable accounts at the end of the year. We maintain allowances for doubtful accounts for estimated losses that result from the inability of our customers to make required payments. We base our allowances on the likelihood of recoverability of accounts receivable based on the aging of accounts receivables at the end of the period, past customer default experience and their credit status, and economic and industrial factors. Allowance for doubtful accounts amounted to Won 369.3 billion in 2016 and Won 344.0 billion in 2015. As there was no significant change in our assumptions and judgments including on the aging of accounts receivables, past customer default experience and credit status, and economic and industrial factors, there was no significant change in the percentage of allowance for doubtful accounts as of December 31, 2016 compared to the prior year. If economic or specific industry trends worsen beyond our estimates, the allowances for doubtful accounts we have recorded may be materially adjusted in the future.

Fair Value Measurement of Financial Instruments

Subsequent to initial recognition, available-for-sale financial assets and derivative financial assets are stated at fair value with any gains or losses arising on remeasurement recognized in profit for the period or other comprehensive income. When measuring fair value, we use quoted prices in active markets to the extent such prices exist. The fair values of financial instruments, including derivative instruments, that are not traded in an active market are determined using valuation techniques that require management’s estimates of future cash flows and discount rates. Our management uses its judgment to select a variety of methods and makes assumptions that are mainly based on market conditions existing at the end of each reporting period. See note 2 of the notes to our consolidated financial statements.

Impairment of Long-lived Assets Including the Frequency Usage Rights

Long-lived assets generally consist of property, plant and equipment and intangible assets. We review our depreciation and amortization methods, estimated useful lives and residual values of long-lived assets at the end of each annual reporting period. An impairment loss is recognized when the asset’s recoverable amount is less than its carrying amount. The recoverable amount of a long-lived asset is the greater of an asset’s fair value less costs to sell

 

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and its value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). The recoverable amounts of cash-generating units are determined based on value-in-use calculations, which require the use of estimates. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the estimated recovery value.

Our intangible assets include our frequency usage rights, which have contractual lives of 5 to 13.1 years and are amortized from the date commercial service is initiated through the end of their contractual lives. Because the use of frequency usage rights presents risks and challenges to our business, any or all of which, if realized or not properly addressed, may have a material adverse effect on our financial condition, results of operations and cash flows, we review the frequency usage rights for impairment on an annual basis. In connection with our review, we utilize the estimated long-term revenue and cash flow forecasts. The use of different assumptions within our cash flow model could result in different recoverable amounts for our frequency usage rights. The results of our review using the testing method described above resulted in no impairment of our frequency usage rights in 2016. See note 15 of the notes to our consolidated financial statements.

Impairment of Goodwill

Goodwill is measured as the excess of the sum of: (1) the consideration transferred, (2) the amount of any non-controlling interests in the acquiree and (3) the fair value of the acquirer’s previously held equity interest in the acquiree (if any), over the net fair value of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. Goodwill is not depreciated, but tested for impairment at the end of each annual reporting period or whenever there is an indication that the asset may be impaired. Goodwill is carried at cost less accumulated impairment losses and the impairment losses are not reversed. For the purpose of impairment testing, assets are grouped at the lowest levels for which there are separately identifiable cash flows, known as cash-generating units. Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires our management to estimate the future cash flows expected related to the respective cash-generating unit and the determination of an appropriate discount rate in order to calculate present value. See note 14 of the notes to our consolidated financial statements.

Provisions for Handset Subsidy and Restoration

We provide handset subsidies to subscribers who purchase handsets on an installment basis. When the subscribers agree to use our services for a predetermined service period and purchase handsets on an installment basis, the subsidies are paid every month over the installment period and we estimate a provision for handset subsidies to be paid, which is recognized as commissions in operating expenses at the time telecommunication service contracts are made. Our provision for handset subsidies was Won 24.7 billion as of December 31, 2016 and Won 5.7 billion as of December 31, 2015. Our provision for handset subsidies generally decreases as we gradually reduce the amount of handset subsidies provided to subscribers.

We estimate restoration costs required to restore leased premises on which our cell sites and switching equipment are located after termination of the leases. These restoration costs are calculated on the basis of the identified costs for the current financial year, extrapolated into the future based on management’s best estimates of future trends in prices, inflation, and other factors, and are discounted to present value at a risk-adjusted rate specifically applicable to the relevant liability. Forecasts of estimated future provisions are revised in light of future changes in business conditions or technological requirements. See note 18 of the notes to our consolidated financial statements.

Retirement Benefit Plans

We have defined retirement benefit plans. The costs of providing benefits under the plans are determined using actuarial valuation methods that require management assumptions on discount rates, expected rates of salary increases and expected rates of returns on plan assets. These assumptions involve critical uncertainties due to the long-term nature of the retirement benefit plans. Due to changing market and economic conditions, the underlying key assumptions may differ from actual developments and may lead to significant changes in our defined retirement

 

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benefit plans. We immediately recognize all actuarial gains and losses arising from defined retirement benefit plans in retained earnings. If the estimated average discount rates by actuarial assumptions used in these valuations were increased by 0.5%, then the estimated defined benefit obligations would have decreased by Won 24.2 billion, or 4.1% in total. If the expected rates of salary increase were increased by 0.5%, then the estimated defined benefit obligations would have increased by Won 26.4 billion, or 4.4% in total. Defined benefit liabilities were Won 70.7 billion in 2016 and Won 98.9 billion in 2015. Defined benefit liabilities in 2016 decreased by Won 28.2 billion compared to 2015 due to a decrease by 0.49% of the estimated average discount rate despite an increase by 0.02% of the average expected rates of salary increase. See note 20 of the notes to our consolidated financial statements.

Income Taxes

We are required to estimate the amount of tax payable or refundable for the current year and the deferred income tax liabilities and assets for the future tax consequences of events that have been reflected in our financial statements or tax returns. This process requires management to make assessments regarding the timing and probability of the tax impact. Actual income taxes could vary from these estimates due to future changes in income tax law or unpredicted results from the final determination of each year’s liability by taxing authorities. We believe that the accounting estimate related to assessment of deferred tax assets for recoverability is a “critical accounting estimate” because (1) it requires management to make assessments about the timing of future events, including the probability of expected future taxable income and available tax planning opportunities and (2) the impact that changes in actual performance versus these estimates could have on the realization of tax benefits as reported in our results of operations could be material. Management’s assumptions require significant judgment because actual performance has fluctuated in the past and may continue to do so. As of December 31, 2016 and 2015, unused tax loss carryforwards of Won 755.1 billion and Won 1,034.0 billion, respectively, were not recognized as deferred tax assets because we did not believe that their realization would be probable. The decrease of Won 278.9 billion in unrecognized tax loss carryforwards in 2016 compared to 2015 was primarily related to changes in the interpretation of certain tax regulations allowing for the use in 2016 of tax loss carryforwards incurred by SK Planet relating to its loss on disposal of shares of SK Communications. See note 29 of the notes to our consolidated financial statements.

 

Item 5.C. Research and Development, Patents and Licenses, etc.

We maintain a high level of spending on our research and development activity. We also donate funds to several Korean research institutes and educational organizations that focus on research and development activity. We believe that we must maintain a substantial in-house technology capability to achieve our strategic goals.

In 2016, 2015 and 2014, our annual research and development expenses were Won 351.1 billion, Won 322.7 billion and Won 397.8 billion, respectively. Such expenses consist of research and development costs that are expensed and costs that are amortized during the respective period.

Our total research and development expenses were approximately 2.0% in 2016, 1.9% in 2015 and 2.3% in 2014, respectively, of operating revenue and other income.

The main focus of our research and development activity is the development of new wireless technologies and services and value-added technologies and services for our LTE network, such as wireless data communications, as well as development of new technologies that reflect the growing convergence between telecommunications and other industries. Our research and development activity is centered at a research center with state-of-the-art facilities and equipment established in January 1999 in Bundang-gu, Seongnam-si, Gyeonggi-do, Korea. To more efficiently manage our research and development resources, our research and development center is organized into the following core areas:

 

   

Network Technology R&D Center, through which we research and develop 5G-related technologies as well as technologies for access network, core network, broadband Internet, wireless devices and next-generation open source software;

 

   

Future Technology R&D Center, through which we research and develop technologies for human machine interface, artificial intelligence, video, big data and other business solutions;

 

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Platform Technology R&D Center, through which we research and develop technologies for our IoT solutions, media and commerce and other innovative products and services offered through our platform services and quantum technologies; and

 

   

Network IT Convergence R&D Center, through which we research and develop technologies that converge network technology and information technology in the ICT area.

Each business unit also has its own research team that can concentrate on specific short-term research needs. Such research teams permit our research center to concentrate on long-term, technology-intensive research projects. We aim to establish strategic alliances with selected domestic and foreign companies with a view to exchanging or jointly developing technologies, products and services.

 

Item 5.D. Trend Information

These matters are discussed under Item 5.A. and Item 5.B. above where relevant.

 

Item 5.E. Off-Balance Sheet Arrangements

None.

 

Item 5.F. Tabular Disclosure of Contractual Obligations

These matters are discussed under Item 5.B. above where relevant.

 

Item 5.G. Safe Harbor

These matters are discussed under “Forward-Looking Statements.”

 

Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

Item 6.A. Directors and Senior Management

Our board of directors has ultimate responsibility for the management of our affairs. Under our articles of incorporation, our board is to consist of at least three but no more than twelve directors, more than half of whom must be independent non-executive directors. We currently have a total of six directors, four of whom are independent non-executive directors. We elect our directors at a general meeting of shareholders with the approval of at least a majority of those shares present or represented at such meeting. Such majority must represent at least one-fourth of our total issued and outstanding shares with voting rights.

As required under relevant Korean laws and our articles of incorporation, we have a committee for recommendation of independent non-executive directors within the board of directors, the Independent Director Nomination Committee. Independent non-executive directors are appointed from among those candidates recommended by the Independent Director Nomination Committee.

The term of offices for directors is until the close of the third annual general shareholders meeting convened after he or she commences his or her term. Our directors may serve consecutive terms. Our shareholders may remove them from office by a resolution at a general meeting of shareholders adopted by the holders of at least two-thirds of the voting shares present or represented at the meeting, and such affirmative votes also represent at least one-third of our total voting shares then issued and outstanding.

Representative directors are directors elected by the board of directors with the statutory power to represent our company.

The following are the names and positions of our standing and non-standing directors. The business address of all of our directors is the address of our registered office at SK T-Tower, 65, Eulji-ro, Jung-gu, Seoul 100-999, Korea.

 

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Standing directors are our full-time employees and executive officers, and they also comprise the senior management, or the key personnel who manage us. Their names, dates of birth and positions at our company and other positions are set forth below:

 

Name

  Date of Birth      Director
Since
     Expiration
of Term
    

Position

  

Other Principal
Directorships and
Positions

  

Business Experience

Jung Ho Park

    May 27, 1963        2017        2020      Executive Director    President and Chief Executive Officer    Chief Executive Officer, SK Holdings; Head of Corporate Development Office, SK C&C Co., Ltd.; Head of Business Development Office, SK Telecom Co., Ltd.

Our current non-standing directors are as set forth below:

 

Name

  Date of Birth      Director
Since
     Expiration
of Term
   

Position

 

Other Positions

  

Business Experience

Dae Sik Cho

    Nov. 27, 1960        2017        2020     Non-executive Director   Chairman, SK SUPEX Council    Chief Executive Officer, SK Holdings; Chief Finance Officer, Head of Finance Division and Risk Management & Corporate Auditing Office, SK Holdings; Head of Business Management Office, SK Holdings

Dae Shick Oh

    Nov. 28, 1954        2013        2019     Independent Non-executive Director   Advisor, Bae, Kim & Lee LLC    Outside Director, CJ Corporation, Head of Seoul Regional Tax Office; Head of Investigation Department, Korea National Tax Service

Jae Hoon Lee

    Sep. 26, 1955        2017        2020     Independent Non-executive Director   President, Association of Future Strategy Forum on Energy & Resources Development    Vice Minister, Ministry of Knowledge Economy; Vice Minister, Ministry of Commerce, Industry and Energy; Assistant Minister, Ministry of Commerce, Industry and Energy

Jae Hyeon Ahn

    Feb. 2, 1961        2017        2020     Independent Non-executive Director   Professor, Advanced Innovative Management Program, KAIST    Vice President, College of Business, KAIST; Dean, College of Information and Media Management, KAIST; President, Korea Media Management Association; Senior Technical Staff Member, AT&T Bell Labs

Jung Ho Ahn

    Feb. 11, 1978        2017        2020     Independent Non-executive Director   Associate Professor, Graduate School of Convergence Science and Technology, Seoul National University    Visiting Scholar, Google Inc.; Senior Research Scientist, Exascale Computing Lab, HP Labs

 

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Item 6.B. Compensation

The aggregate of the remuneration paid and in-kind benefits granted to the directors (all standing directors, who also serve as our executive officers, and non-standing directors) during the year ended December 31, 2016 totaled approximately Won 2.1 billion. This amount included Won 570.0 million in salary and Won 757.0 million in bonus paid to our former director, president and chief executive officer, Mr. Dong Hyun Jang, who has since resigned.

Remuneration for the directors is determined by shareholder resolution. Severance allowances for directors are determined by the board of directors in accordance with our regulation on severance allowances for officers, which was adopted by shareholder resolution. The regulation provides for monthly salary, performance bonus, severance payment and fringe benefits. The amount of performance bonuses is independently decided by a resolution of the board of directors.

In March 2002, pursuant to resolutions of the shareholders, and in accordance with our articles of incorporation, certain of our directors and officers were granted options to purchase our common shares, which have all expired without being exercised. On March 24, 2017, pursuant to resolutions of the shareholders, and in accordance with our articles of incorporation, Mr. Jung Ho Park, our President and Chief Executive Officer, was granted options to purchase 66,504 shares of our common stock. The following table summarizes the stock options granted to Mr. Jung Ho Park on March 24, 2017:

 

Exercise period

  

Exercise price
(per share)(1)

   Number of
shares issuable
 

From

  

To

     

March 25, 2019

   March 24, 2022    Exercise Price      22,168  

March 25, 2020

   March 24, 2023    Exercise Price times 1.08      22,168  

March 25, 2021

   March 24, 2024    Exercise Price times (1.08)2      22,168  

 

(1) “Exercise Price” is defined as the arithmetic mean of volume-weighted average closing prices from the following periods prior to the grant date: two months, one month and one week.

 

Item 6.C. Board Practices

For information regarding the expiration of each director’s term of appointment, as well as the period from which each director has served in such capacity, see the table set out under “Item 6.A. Directors and Senior Management” above.

Termination of Directors, Services

Directors are given a retirement and severance payment upon termination of employment in accordance with our internal regulations on severance payments. Upon retirement, directors who have made significant contributions to our company during their term may be appointed to serve either as an advisor to us or as an officer of an affiliate company.

Audit Committee

Under relevant Korean laws and our articles of incorporation, we are required to have an audit committee under the board of directors. The committee is composed of at least three members, two-thirds of whom must be independent non-executive directors in accordance with applicable rules. The members of the audit committee are appointed annually by a resolution of the general meeting of shareholders. They are required to:

 

   

examine the agenda for the general meeting of shareholders;

 

   

examine financial statements and other reports to be submitted by the board of directors to the general meeting of shareholders;

 

   

review the administration by the board of directors of our affairs; and

 

   

examine the operations and asset status of us and our subsidiaries.

 

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In addition, the audit committee must appoint independent auditors to examine our financial statements. An audit and review of our financial statements by independent auditors is required for the purposes of a securities report. Listed companies must provide such report on an annual, semi-annual and quarterly basis to the FSC and the KRX KOSPI Market.

Our audit committee is composed of three independent non-executive directors: Dae Shick Oh, Jae Hoon Lee and Jae Hyeon Ahn, each of whom is financially literate and independent under the rules of the NYSE as applicable. The board of directors has determined that Dae Shick Oh is an “audit committee financial expert” as defined under the applicable rules of the SEC. See “Item 16A. Audit Committee Financial Expert.”

Independent Director Nomination Committee

This committee is devoted to recommending independent non-executive directors for the board of directors. The objective of the committee is to help promote fairness and transparency in the nomination of candidates for these positions. The board of directors decides from time to time who will comprise the members of this committee. The committee is comprised of one executive director, Jung Ho Park, and two independent directors, Dae Shick Oh and Jae Hyeon Ahn.

Capex Review Committee

This committee is responsible for reviewing our business plan (including the budget). It also examines major capital expenditure revisions, and routinely monitors capital expenditure decisions that have already been executed. The committee is comprised of four independent directors, Dae Shick Oh, Jae Hoon Lee, Jae Hyeon Ahn and Jung Ho Ahn.

Compensation Review Committee

This committee oversees our overall compensation scheme for top-level executives and directors. It is responsible for reviewing both the criteria for and level of compensation. It is comprised of three independent directors, Dae Shick Oh, Jae Hoon Lee and Jung Ho Ahn.

Corporate Citizenship Committee

This committee was established to help us achieve world-class sustainable growth and to help us fulfill our corporate social responsibilities. It is comprised of three independent directors, Jae Hoon Lee, Jae Hyeon Ahn and Jung Ho Ahn.

 

Item 6.D. Employees

The following table sets forth the numbers of our regular employees, temporary employees and total employees as of the dates indicated:

 

     Regular
Employees
     Temporary
Employees
     Total  

December 31, 2014

     24,404        1,285        25,689  

December 31, 2015

     24,479        1,513        25,992  

December 31, 2016

     24,569        1,275        25,844  

Labor Relations

As of December 31, 2016, SK Telecom had a company union consisting of 2,164 regular employees out of 4,229 total regular employees. We have never experienced a work stoppage of a serious nature. Every two years, the union and management negotiate and enter into a new collective bargaining agreement that has a two-year duration, which is focused on employee benefits and welfare. Employee wages are separately negotiated on an annual basis. Our wage negotiations for 2014 were completed in May 2014 and resulted in no change to the average wage of SK Telecom employees. Our wage negotiations for 2015 were completed in November 2015 and resulted in an average monthly wage increase of Won 80,000 for SK Telecom employees. Our wage negotiations for 2016 were completed in September 2016 and resulted in no change to the average monthly wage of SK Telecom employees. Our wage negotiations for 2017 have not commenced yet We consider our relations with our employees to be good.

 

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Employee Benefits

Since April 1999, we have been required to contribute an amount equal to 4.5% of employee wages toward a national pension plan. Employees are eligible to participate in an employee stock ownership association. We are not required to, and we do not, make any contributions to the employee stock ownership association, although we subsidize the employee stock ownership association through the Employee Welfare Fund by providing low interest rate loans to employees who desire to purchase our stock through the plan in the event of a capitalization by the association.

We are required to pay a severance amount to eligible employees who voluntarily or involuntarily cease employment with us, including through retirement. This severance amount is based upon the employee’s length of service with us and the employee’s salary level at the time of severance. As of December 31, 2016, the defined benefit obligation, which is the accrued and unpaid retirement and severance benefits, of Won 595.7 billion for all of our employees are reflected in our consolidated financial statements as a liability, of which a total of Won 555.2 billion was funded. Under Korean laws and regulations, we are prevented from involuntarily terminating a full-time employee except under certain limited circumstances. In September 2002, we entered into an employment stabilization agreement with the union. Among other things, in the event that we reorganize a department into a separate entity or we outsource an employee to a separate entity where the wage is lower, this agreement provides for a guarantee of the same wage level for the year that such an event occurs.

Under the Basic Labor Welfare Act, we may also contribute up to 5.0% of our annual earnings before tax for employee welfare. Contribution amounts are determined annually following negotiation with the union. The contribution amount for 2016 was set at 2.24% of SK Telecom’s profit before income tax on a separate basis, or Won 350 billion. The contribution amount for 2015 was set at 2.04% of SK Telecom’s profit before income tax on a separate basis, or Won 30.0 billion. The contribution amount for 2014 was set at 1.51% of SK Telecom’s profit before income tax on a separate basis, or Won 20.0 billion.

In addition, we provide our employees with miscellaneous other fringe benefits including medical cost subsidies, family camp programs and sabbatical programs for long-term employees.

 

Item 6.E. Share Ownership

The following table sets forth the share ownership by our standing and non-standing directors as of March 31, 2017:

 

Name

  

Position

   Number of
Shares
Owned
     Percentage of
Total Shares
Outstanding
   

Special
Voting
Rights

  

Options

Standing Director:

             

Jung Ho Park

   President & Chief Executive Officer      0        0.0   None    66,504

Non-Standing Directors:

             

Dae Sik Cho

   Non-executive Director      0        0     None    None

Dae Shick Oh

   Independent Non-executive Director      0        0     None    None

Jae Hoon Lee

   Independent Non-executive Director      0        0     None    None

Jae Hyeon Ahn

   Independent Non-executive Director      0        0     None    None

Jung Ho Ahn

   Independent Non-executive Director      0        0     None    None

 

Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

Item 7.A. Major Shareholders

As of the close of our shareholders’ registry on December 31, 2016, approximately 59.22% of our issued shares were held in Korea by approximately 54,585 shareholders. According to Citibank, N.A. (“Citibank”),

 

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depositary for our ADRs, as of December 31, 2016, there were approximately 28,056 record holders of our ADRs evidencing ADSs resident in the United States to the best of Citibank’s knowledge, and 8,809,104 shares of our common stock were held in the form of ADSs. As of such date, outstanding ADSs represented approximately 10.9% of our outstanding common shares.

The following table sets forth certain information as of December 31, 2016 with respect to any person known to us to be the beneficial owner of more than 5.0% of our common shares and with respect to the total amount of such shares owned by our officers and directors, as a group:

 

Shareholder/Category

   Number of
Shares
     Percentage
Total Shares
Issued
    Percentage
Total Shares
Outstanding
 

Domestic Shareholders

       

SK Holdings

     20,363,452        25.22     28.84

Treasury shares(1)

     10,136,551        12.55        

Officers and Directors

     251        0.00       0.00  

National Pension Service

     7,159,704        8.87       10.14  

Other Domestic Shareholders

     10,160,010        12.58       14.39  

Foreign Shareholders(2)

       

Shareholders holding ADRs

     8,809,104        10.91       12.48  

Shareholders holding common stock

     24,116,639        29.87       34.16  

Total Issued Shares

     80,745,711        100      

Total Outstanding Shares(3)

     70,609,160              100

 

 

(1) Treasury shares do not have any voting rights. Pursuant to the Share Exchange in June 2015, we exchanged 1,692,824 treasury shares for the common shares of SK Broadband. In the fourth quarter of 2015, we acquired 2,020,000 treasury shares on the market through a share buy-back program.

 

(2) Based on the data collected by the KRX KOSPI Market under the Foreign Exchange Transaction Laws.

 

(3) Represents total issued shares excluding treasury shares.

The following table sets forth significant changes in the percentage ownership held by our major shareholders during the past three years:

 

      As of December 31,  

Shareholder

   2016     2015     2014  
     (As a percentage of total
issued shares)(1)
 

SK Group(2)

     25.22     25.22     25.22

SK Holdings

     25.22       25.22       25.22  

National Pension Service

     8.87       8.62       7.09  

 

 

(1) Includes 10,136,551, 10,136,551 and 9,809,375 shares held in treasury as of December 31, 2016, 2015 and 2014, respectively. Pursuant to the Share Exchange in June 2015, we exchanged 1,692,824 treasury shares for the common shares of SK Broadband. In the fourth quarter of 2015, we acquired 2,020,000 treasury shares on the market through a share buy-back program.

 

(2) SK Group’s ownership interest as of December 31, 2016, 2015 and 2014 consisted of the ownership interest of SK Holdings only.

Except as described above, other than companies in the SK Group, no other persons or entities known by us to be acting in concert, directly or indirectly, jointly or severally, own in excess of 5.0% of our total shares outstanding or exercise control or could exercise control over our business.

On July 1, 2007, the company formerly known as SK Corporation underwent a corporate reorganization, pursuant to which SK Corporation spun off substantially all of its operating business divisions into a newly established corporation named SK Energy Co., Ltd. The surviving company currently operates as a holding

 

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company, renamed SK Holdings. Ownership of all our shares held by SK Corporation immediately preceding the reorganization passed to SK Holdings as of July 1, 2007. On August 1, 2015, SK Holdings merged with and into SK C&C and the merged entity was renamed SK Holdings.

As of March 31, 2017, SK Holdings held 25.22% of our shares of common stock. For a description of our foreign ownership limitation, see “Item 3.D. Risk Factors — Risks Relating to Securities — If SK Holdings causes us to breach the foreign ownership limitations on our common shares, we may experience a change of control” and “Item 4.B. Business Overview — Law and Regulation — Foreign Ownership and Investment Restrictions and Requirements.” In the event that SK Holdings announces plans of a sale of our shares, we expect to be able to discuss the details of such sale with them in advance and will endeavor to minimize any adverse effects on our share prices as a result of such sale.

As of March 31, 2017, the total number of our common shares outstanding was 70,609,160.

Other than as disclosed herein, there are no other arrangements, to the best of our knowledge, which would result in a material change in the control of us. Our major shareholders do not have different voting rights.

 

Item 7.B. Related Party Transactions

We are part of the SK Group of affiliated companies. See “Item 7.A. Major Shareholders.” As disclosed in note 34 of the notes to our consolidated financial statements, we had related party transactions with a number of affiliated companies of the SK Group during the year ended December 31, 2016.

SK Networks

In September 2009, we acquired the leased-line business and related ancillary businesses from SK Networks for Won 892.8 billion and assumed Won 611.4 billion of debt as part of the transaction. Prior to such acquisition, KT and SK Networks provided a substantial majority of our leased lines. For a more detailed discussion of the lines we lease from fixed-line operators, see “Item 4.B. Business Overview — Cellular Services — Network Infrastructure.” In addition, PS&Marketing acquired the retail distribution business of SK Networks in April 2014.

As of December 31, 2016, we had Won 3.3 billion of accounts receivable from SK Networks. As of the same date, we had Won 247.7 billion of accounts payable to SK Networks, mainly relating to payments for wireless devices by PS&M. The aggregate fees we paid to SK Networks for dealer commissions amounted to Won 1,131.6 billion, Won 1,258.0 billion and Won 1,509.0 billion in 2016, 2015 and 2014.

SK Holdings

We enter into agreements with SK Holdings from time to time for specific information technology-related projects. The aggregate fees we paid to SK Holdings for information technology services amounted to Won 652.9 billion in 2016, Won 324.1 billion in 2015 and Won 360.8 billion in 2014. We also purchase various information technology-related equipment from SK Holdings from time to time. The total amount of such purchases was Won 235.5 billion in 2016, Won 236.4 billion in 2015 and Won 168.8 billion in 2014. We are a party to several service agreements with SK Holdings relating to the development and maintenance of our information technologies systems. We also pay SK Holdings for use of the SK brand.

 

Item 7.C. Interests of Experts and Counsel

Not applicable.

 

Item 8. FINANCIAL INFORMATION

 

Item 8.A. Consolidated Statements and Other Financial Information

See “Item 18. Financial Statements” and pages F-1 through G-72.

Legal Proceedings

FTC Proceedings

In March 2012, the FTC fined us Won 21.9 billion for allegedly colluding with KT, LG U+, Samsung Electronics, LG Electronics and Pantech (which were also assessed separate fines) to inflate the prices of handsets

 

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while advertising that the handsets are offered at a discount through subsidy plans. We paid such fine in September 2012 and filed an appeal at the Seoul High Court, which ruled against us in October 2014. We appealed the decision to the Supreme Court of Korea, where the case is currently pending.

In July 2012, the FTC fined us Won 25.0 billion for alleged violation of Article 23 of the Fair Trade Act relating to the payment of system management and operation fees. We paid such fine in November 2012 and filed an appeal at the Seoul High Court, which ruled in favor of us in May 2014. The FTC appealed the decision to the Supreme Court of Korea, which ruled in favor of us in March 2016.

KCC and MSIP Proceedings

Prior to the implementation of the MDDIA, the KCC and the MSIP imposed suspensions on acquiring new subscribers and fines on us for providing subsidies to subscribers which were not universally available. In 2013, the KCC imposed fines on us of Won 96.3 billion in aggregate. In 2014, the KCC and the MSIP suspended us from acquiring new subscribers for an aggregate of 52 days and imposed fines on us of Won 54.6 billion in aggregate.

On March 26, 2015, the KCC imposed a fine of Won 23.5 billion on us and imposed a suspension on acquiring new subscribers for a period of seven days for providing subsidies to subscribers in excess of the amounts permitted under the MDDIA. We suspended acquisition of new customers during the period from October 1, 2015 to October 7, 2015. On May 13, 2015, the KCC imposed a fine of Won 3.6 billion on us and issued a correctional order for violating its obligations to protect personal information. We paid such fine in July 2015 and reported to the KCC on the implementation of actions pursuant to the correctional order in September 2015. On May 28, 2015 and December 10, 2015, the KCC imposed a fine of Won 350 million and Won 560 million, respectively, on us and issued a correctional order for misleading and exaggerated advertisement of bundled wireless and fixed-line telecommunications products. On January 14, 2016, the KCC imposed a fine of Won 15 million on us and issued a correctional order for failure to comply with the retention period for our subscribers’ personal information. On December 6, 2016, the KCC imposed a fine of Won 3.75 billion on us for unfair marketing practices in connection with our bundled wireless and fixed-line telecommunications services. On December 21, 2016, the KCC imposed fines of Won 100 million and Won 30 million on us for engaging in certain prohibited sales activities and violating certain subscriber location data protection regulations, respectively. On March 22, 2017, the KCC imposed a fine of Won 794 million on us for providing subsidies to foreign subscribers in excess of the amounts permitted under the MDDIA.

KT Interconnection Fee Litigation

In December 2010, we filed a lawsuit in the Seoul Central District Court against KT alleging that they paid us lower interconnection fees for intentionally bypassing our WCDMA spectrum and using our CDMA network rather than our WCDMA network. In response, KT filed a counterclaim against us, alleging that we failed to respond to their request for information and that we intentionally delayed the interconnection for calls from fixed-line KT users to our wireless subscribers and seeking damages of Won 33.7 billion. In September 2012, the Seoul Central District Court dismissed our lawsuit against KT and rendered a judgment that accepted KT’s claims in part. We filed an appeal at the Seoul High Court in February 2013, and in January 2014, the Seoul High Court overturned the District Court’s decision and rendered a judgment that accepted our claims in part, ordering KT to pay us damages of Won 49.2 billion. We and KT each filed an appeal at the Supreme Court of Korea in March 2014, which the Supreme Court of Korea dismissed in February 2017, finalizing the judgment of the Seoul High Court.

SK Communications Litigation

In July 2011, there was a leak of personal information of subscribers of NATE and Cyworld websites operated by SK Communications, our consolidated subsidiary. Various lawsuits have been filed against SK Communications alleging that the leak was caused by its poor management of subscribers’ personal information. With respect to three of the lawsuits for which final judgments have been rendered, the relevant courts have rendered judgments in favor of SK Communications. As of December 31, 2016, twelve of the lawsuits, seeking damages of approximately Won 0.8 billion in aggregate, were pending at various district courts, various high courts and the Supreme Court of Korea.

 

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Except as described above, neither we nor any of our subsidiaries are involved in any litigation, arbitration or administrative proceedings relating to claims which may have, or have had during the twelve months preceding the date hereof, a significant effect on our financial position or the financial position of our subsidiaries taken as a whole, and, so far as we are aware, no such litigation, arbitration or administrative proceedings are pending or threatened.

Dividends

Annual dividends, if any, on our outstanding shares must be approved at the annual general meeting of shareholders. This meeting is generally held in March of the following year, and the annual dividend is generally paid shortly after the meeting. Since our shareholders have discretion to declare annual dividends, we cannot give any assurance as to the amount of dividends per share or that any dividends will be declared at all. Interim dividends, if any, can be approved by a resolution of our board of directors. Once declared, dividends must be claimed within five years, after which the right to receive the dividends is extinguished and reverted to us.

We pay cash dividends to the ADR depositary in Won. Under the terms of the deposit agreement, cash dividends received by the ADR depositary generally are to be converted by the ADR depositary into Dollars and distributed to the holders of the ADSs, less withholding tax, other governmental charges and the ADR depositary’s fees and expenses. The ADR depositary’s designated bank in Korea must approve this conversion and remittance of cash dividends. See “Item 10.B. Memorandum and Articles of Association — Description of American Depositary Shares” and “Item 10.D. Exchange Controls — Korean Foreign Exchange Controls and Securities Regulations.”

The following table sets forth the dividend per share and the aggregate total amount of dividends declared (including any interim dividends), as well as the number of outstanding shares entitled to dividends, with respect to the years indicated. The dividends set out for each of the years below were paid in the immediately following year.

 

Year Ended December 31,

   Dividend
per Share
     Total Amount
of Dividends
     Number of
Shares Entitled
to Dividend
 
     (In Won)      (In billions of Won)         

2012

   9,400      655.1        69,694,999  

2013

     9,400        666.4        70,936,336  

2014

     9,400        666.8        70,936,336  

2015

     10,000        708.1        70,609,160  

2016

     10,000        706.1        70,609,160 (1) 

 

(1) The number of shares entitled to the interim dividend was 70,609,160.

We distribute dividends to our shareholders in proportion to the number of shares owned by each shareholder. Our common shares represented by the ADSs have the same dividend rights as other outstanding common shares.

Holders of non-voting shares are entitled to receive dividends in priority to the holders of common shares. The dividend on the non-voting shares is between 9.0% and 25.0% of the par value as determined by the board of directors at the time of their issuance. If the dividends for common shares exceed the dividends for non-voting shares, the holders of non-voting shares will be entitled to participate in the distribution of such excess amount with the holders of common shares. If the amount available for dividends is less than the aggregate amount of the minimum required dividend, holders of non-voting shares will be entitled to receive such accumulated unpaid dividend from dividends payable in the next fiscal year before holders of common shares. There are no non-voting shares issued or outstanding.

We declare dividends annually at the annual general meeting of shareholders which is generally held within three months after the end of the fiscal year. We pay the annual dividend shortly after the annual general meeting to the shareholders of record or registered pledges as of the end of the preceding fiscal year. We may distribute the annual dividend in cash or in shares. However, a dividend of shares must be distributed at par value. Dividends in shares may not exceed one-half of the annual dividend. Our obligation to pay dividend expires if no claim to dividend is made for five years from the payment date.

Under the Korean Commercial Code, we may pay an annual dividend only out of the excess of our net assets, on a non-consolidated basis, over the sum of (1) our stated capital, (2) the total amount of our capital surplus

 

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reserve, (3) legal reserve accumulated up to the end of the relevant dividend period and (4) the increase in our net asset value resulting from the evaluation of our assets and liabilities that has not been offset against unrealized losses. In addition, we may not pay an annual dividend unless we have set aside as a legal reserve an amount equal to at least 10.0% of the cash portion of the annual dividend or until we have accumulated a legal reserve of not less than one-half of our stated capital. We may not use our legal reserve to pay cash dividends but may transfer amounts from our legal reserve to capital stock or use our legal reserve to reduce an accumulated deficit.

In addition, the Korean Commercial Code and our articles of incorporation provide that, in addition to annual dividends, we may pay interim dividends once during each fiscal year. Unlike annual dividends, the decision to pay interim dividends can be made by a resolution of the board of directors and is not subject to shareholder approval. Any interim dividends must be paid in cash to the shareholders of record as of June 30 of the relevant fiscal year. In July 2014, we distributed such interim dividends at Won 1,000 per share to our shareholders for a total amount of approximately Won 71.0 billion.

Under the Korean Commercial Code, the total amount of interim dividends payable in a fiscal year shall not be more than the net assets on the balance sheet of the immediately preceding fiscal year, after deducting (1) a company’s capital in the immediately preceding fiscal year, (2) the aggregate amount of its capital reserves and legal reserves accumulated up to the immediately preceding fiscal year, (3) the amount of earnings for dividend payments confirmed at the general shareholders’ meeting with respect to the immediately preceding fiscal year and (4) the amount of legal reserve that should be set aside for the current fiscal year following the interim dividend payment. Furthermore, the rate of interim dividends for non-voting shares must be the same as that for our common shares.

Our obligation to pay interim dividends expires if no claims to such dividends are made for a period of five years from the payment date.

 

Item 8.B. Significant Changes

Not applicable.

 

Item 9. THE OFFER AND LISTING

 

Item 9.A. Offering and Listing Details

These matters are described under Item 9.C. below where relevant.

 

Item 9.B. Plan of Distribution

Not applicable.

 

Item 9.C. Markets

The principal trading market for our common shares is the KRX KOSPI Market. As of March 31, 2017, 70,609,160 shares of our common stock were outstanding.

The ADSs are traded on the NYSE and the London Stock Exchange. The ADSs have been issued by the ADR depositary and are traded on the NYSE under the ticker symbol “SKM”. Each ADS represents one-ninth of one share of our common stock. As of March 31, 2017, ADSs representing 9,106,281 shares of our common stock were outstanding.

 

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Shares of Common Stock

The following table sets forth the high, low and closing prices and the average daily trading volume of our common shares on the KRX KOSPI Market since January 1, 2012:

 

     Prices      Average  Daily
Trading
Volume
 

Calendar Year

   High(1)      Low(1)      Close     
     (Won per shares)      (Number of shares)  

2012

     161,000        120,500        152,500        216,031  

First Quarter

     146,000        134,500        139,500        193,924  

Second Quarter

     142,500        120,500        125,000        284,712  

Third Quarter

     153,000        125,000        147,000        208,276  

Fourth Quarter

     161,000        145,500        152,500        177,955  

2013

     238,500        150,000        230,000        212,769  

First Quarter

     185,500        150,000        180,500        234,684  

Second Quarter

     225,500        172,000        210,000        245,151  

Third Quarter

     226,500        202,000        218,500        175,670  

Fourth Quarter

     238,500        211,500        230,000        195,925  

2014

     298,500        196,500        268,000        170,709  

First Quarter

     229,000        196,500        215,500        184,185  

Second Quarter

     243,500        198,000        236,500        180,743  

Third Quarter

     298,500        236,000        290,000        152,740  

Fourth Quarter

     298,500        259,000        268,000        165,710  

2015

     301,000        215,000        215,500        185,999  

First Quarter

     301,000        264,000        272,500        151,786  

Second Quarter

     293,500        240,500        250,000        209,931  

Third Quarter

     263,000        237,000        263,000        185,542  

Fourth Quarter

     261,500        215,000        215,500        195,488  

2016

     233,500        193,000        224,000        157,834  

First Quarter

     233,500        193,000        208,500        212,966  

Second Quarter

     222,000        201,500        215,500        152,755  

Third Quarter

     232,000        214,500        226,000        120,700  

Fourth Quarter

     232,500        216,000        224,000        146,790  

2017 (through April 21)

     262,500        218,000        251,500        161,941  

First Quarter

     262,500        218,000        252,000        170,277  

January

     229,000        219,000        223,000        129,406  

February

     232,000        218,000        231,500        146,082  

March

     262,500        229,500        252,000        229,426  

Second Quarter (through April 21)

     257,000        242,500        251,500        127,488  

April (through April 21)

     257,000        242,500        251,500        127,488  

 

Source: Korea Exchange

 

(1) Both high and low prices are based on the daily closing prices for the period.

 

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American Depositary Shares

The following table sets forth the high, low and closing prices and the average daily trading volume of the ADSs on the NYSE since January 1, 2012:

 

     Prices      Average  Daily
Trading
Volume
 

Calendar Year

   High      Low      Close     
     (US$ per ADS)      (Number of ADSs)  

2012

     16.48        11.14        15.83        1,756,344  

First Quarter

     14.60        12.90        13.91        1,644,382  

Second Quarter

     14.13        11.14        12.10        2,127,012  

Third Quarter

     15.06        12.23        14.54        1,837,010  

Fourth Quarter

     16.48        14.48        15.83        1,409,691  

2013

     25.16        15.69        24.62        1,407,958  

First Quarter

     18.69        15.69        17.87        1,884,190  

Second Quarter

     22.37        17.05        20.33        1,724,433  

Third Quarter

     22.70        19.47        22.70        848,082  

Fourth Quarter

     25.16        22.16        24.62        1,204,890  

2014

     31.75        20.76        27.01        905,341  

First Quarter

     24.07        20.76        22.57        952,847  

Second Quarter

     26.50        20.76        25.94        903,143  

Third Quarter

     31.75        25.54        30.34        963,636  

Fourth Quarter

     30.62        27.01        27.01        803,932  

2015

     30.07        20.15        20.15        598,527  

First Quarter

     29.76        26.22        27.21        787,402  

Second Quarter

     30.07        23.96        24.79        598,632  

Third Quarter

     25.22        22.08        24.40        510,694  

Fourth Quarter

     25.49        20.15        20.15        506,235  

2016

     23.17        17.89        20.90        621,501  

First Quarter

     20.98        17.89        20.17        674,708  

Second Quarter

     21.08        19.27        20.92        745,167  

Third Quarter

     23.17        20.48        22.60        485,527  

Fourth Quarter

     22.60        20.71        20.90        582,486  

2017 (through April 21)

     25.85        20.64        24.33        637,028  

First Quarter

     25.85        20.64        25.18        658,365  

January

     21.60        20.64        21.50        612,453  

February

     22.74        21.32        22.60        588,355  

March

     25.85        22.22        25.18        756,122  

Second Quarter (through April 21)

     25.31        23.74        24.33        542,536  

April (through April 21)

     25.31        23.74        24.33        542,536  

The Korean Securities Market

The Korea Exchange Inc.

With the enactment of the Korea Stock and Futures Exchange Act, which came into effect on January 27, 2005, the three existing spot and futures exchanges (which were the Korea Stock Exchange, Korean Futures Exchange, and KOSDAQ) and KOSDAQ Committee, a sub-organization of Korea Securities Dealers Association, were merged and integrated into the Korea Exchange as a joint stock company. There are four different markets run by the Korea Exchange: the KRX KOSPI Market, the KRX KOSDAQ Market, the KRX KONEX Market and the KRX Derivatives Market. The Korea Exchange has three trading floors located in Seoul, one for the KRX KOSPI Market, one for the KRX KOSDAQ Market and one for the KRX KONEX Market, and one trading floor in Busan for the KRX Derivatives Market. The Korea Exchange is a limited liability company, the shares of which are held by (1) securities companies and futures companies that were formerly members of the Korea Stock Exchange or the

 

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Korea Futures Exchange, (2) the Small & Medium Business Corporation, (3) the Korea Securities Finance Corporation and (4) the Korea Financial Investment Association. Currently, the Korea Exchange is the only stock exchange in Korea and is run by membership, having most of Korean securities companies and some Korean branches of foreign securities companies as its members.

As of December 31, 2016, the aggregate market value of equity securities listed on the KRX KOSPI Market was approximately Won 1,308.4 trillion. For the year ended December 31, 2016, the average daily trading volume of equity securities was approximately 376.8 million shares with an average trading value of Won 4,523.0 billion. For the year ended December 31, 2015, the average daily trading volume of equity securities was approximately 455.3 million shares with an average trading value of Won 5,351.7 billion. For the year ended December 31, 2014, the average daily trading volume of equity securities was approximately 278.1 million shares with an average trading value of Won 3,983.6 billion.

The Korea Exchange has the power in some circumstances to suspend trading in the shares of a given company or to de-list a security. The Korea Exchange also restricts share price movements. All listed companies are required to file accounting reports annually, semi-annually and quarterly and to release immediately all information that may affect trading in a security.

The Government has in the past exerted, and continues to exert, substantial influence over many aspects of the private sector business community that can have the intention or effect of depressing or boosting the market. In the past, the Government has informally both encouraged and restricted the declaration and payment of dividends, induced mergers to reduce what it considers an excess capacity in a particular industry and induced private companies to publicly offer their securities.

The Korea Exchange publishes the KOSPI, every ten seconds, which is an index of all equity securities listed on the KRX KOSPI Market. On January 1, 1983, the method of computing KOSPI was changed from the Dow Jones method to the aggregate value method. In the new method, the market capitalizations of all listed companies are aggregated, subject to certain adjustments, and this aggregate is expressed as a percentage of the aggregate market capitalization of all listed companies as of the base date, January 4, 1980.

 

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Movements in KOSPI are set out in the following table together with the associated dividend yields and price to earnings ratios:

 

                                 Period Average  

Year

   Opening      High      Low      Closing      Dividend
Yield(1)
(%)
     Price to
Earnings(2)
 

1980

     100.00        119.36        100.00        106.87        20.9        2.6  

1981

     97.95        165.95        93.14        131.37        13.2        3.1  

1982

     123.60        134.49        106.00        127.31        10.5        3.4  

1983

     122.52        134.46        115.59        121.21        6.9        3.8  

1984

     116.73        142.46        114.37        142.46        5.1        4.5  

1985

     139.53        163.37        131.40        163.37        5.3        5.2  

1986

     161.40        279.67        153.85        272.61        4.3        7.6  

1987

     264.82        525.11        264.82        525.11        2.6        10.9  

1988

     532.04        922.56        527.89        907.20        2.4        11.2  

1989

     919.61        1,007.77        844.75        909.72        2.0        13.9  

1990

     908.59        928.77        566.27        696.11        2.2        12.8  

1991

     679.75        763.10        586.51        610.92        2.6        11.2  

1992

     624.23        691.48        459.07        678.44        2.2        10.9  

1993

     697.41        874.10        605.93        866.18        1.6        12.7  

1994

     879.32        1,138.75        860.47        1,027.37        1.2        16.2  

1995

     1,013.57        1,016.77        847.09        882.94        1.2        16.4  

1996

     888.85        986.84        651.22        651.22        1.3        17.8  

1997

     653.79        792.29        350.68        376.31        1.5        17.0  

1998

     385.49        579.86        280.00        562.46        1.9        10.8  

1999

     587.57        1,028.07        498.42        1,028.07        1.1        13.5  

2000

     1,059.04        1,059.04        500.60        504.62        2.4        15.3  

2001

     520.95        704.50        468.76        693.70        1.7        29.3  

2002

     724.95        937.61        584.04        829.44        1.8        15.6  

2003

     635.17        822.16        515.24        810.71        2.1        10.1  

2004

     821.26        936.06        719.59        895.92        2.1        15.8  

2005

     893.71        1,379.37        870.84        1,379.37        1.7        11.0  

2006

     1,389.27        1,464.70        1,192.09        1,434.46        1.7        11.4  

2007

     1,435.26        2,064.85        1,355.79        1,897.13        1.4        16.8  

2008

     1,853.45        1,888.88        938.75        1,124.47        2.6        9.0  

2009

     1,157.4        1,718.88        1,018.81        1,682.77        1.2        23.7  

2010

     1,696.14        2,052.97        1,532.68        2,051.00        1.1        17.8  

2011

     2,070.08        2,228.96        1,652.71        1,825.74        1.6        10.9  

2012

     1,826.37        2,049.28        1,769.31        1,997.05        1.3        12.9  

2013

     2,031.10        2,059.58        1,780.63        2,011.34        1.2        13.5  

2014

     2,013.11        2,093.08        1,881.73        1,915.59        1.1        15.3  

2015

     1,926.44        2,173.41        1,829.81        1,961.31        1.2        16.1  

2016

     1,918.76        2,068.72        1,835.28        2,026.46        1.5        14.3  

2017 (through April 21)

     2,026.16        2,178.38        2,026.16        2,165.04        1.4        14.6  

 

Source: Korea Exchange

 

(1) Dividend yields are based on daily figures. Before 1983, dividend yields were calculated at the end of each month. Dividend yields after January 3, 1984 include cash dividends only.

 

(2) The price to earnings ratio is based on figures for companies that record a profit in the preceding year.

KOSPI closed at 2,165.04 on April 21, 2017.

 

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Shares are quoted “ex-dividend” on the first trading day of the relevant company’s accounting period. Since the calendar year is the accounting period for the majority of listed companies, this may account for the drop in KOSPI between its closing level at the end of one calendar year and its opening level at the beginning of the following calendar year.

With certain exceptions, principally to take account of a share being quoted “ex-dividend” and “ex-rights,” upward and downward movements in share prices of any category of shares on any day are limited under the rules of the Korea Exchange to 15.0% of the previous day’s closing price of the shares, rounded down as set out below:

 

Previous Day’s Closing Price 

   Rounded Down to   

Less than 5,000

   5  

5,000 to less than 10,000

     10  

10,000 to less than 50,000

     50  

50,000 to less than 100,000

     100  

100,000 to less than 500,000

     500  

500,000 or more

     1,000  

As a consequence, if a particular closing price is the same as the price set by the fluctuation limit, the closing price may not reflect the price at which persons would have been prepared, or would be prepared to continue, if so permitted, to buy and sell shares. Orders are executed on an auction system with priority rules to deal with competing bids and offers.

The brokerage commission rate on equity securities transactions may be determined by the parties, subject to commission schedules being filed with the Korea Exchange by the securities companies. In addition, a securities transaction tax of 0.15% of the sales price will generally be imposed on the transfer of shares or certain securities representing rights to subscribe for shares. A special agricultural and fishery tax of 0.15% of the sales prices will also be imposed on transfer of these shares and securities on the KRX KOSPI Market. See “Item 10.E. Taxation —Korean Taxation.”

 

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The following table sets forth the number of companies listed on the KRX KOSPI Market, the corresponding total market capitalization and the average daily trading volume at the end of the periods indicated:

 

     Market Capitalization on  the
Last Day of Each Period
     Average Daily Trading Volume, Value  

Year

   Number of
Listed
Companies
     (Billions of
Won)
     (Millions of
US$)(1)
     Thousands of
Shares
     (Millions of
Won)
     (Thousands  of
US$)(1)
 

1981

     343      2,959      US$ 4,223        10,565      8,708      US$ 12,427  

1982

     334        3,001        4,012        9,704        6,667        8,914  

1983

     328        3,490        4,361        9,325        5,941        7,425  

1984

     336        5,149        6,207        14,847        10,642        12,829  

1985

     342        6,570        7,362        18,925        12,315        13,798  

1986

     355        11,994        13,863        31,755        32,870        37,991  

1987

     389        26,172        32,884        20,353        70,185        88,183  

1988

     502        64,544        93,895        10,367        198,364        288,571  

1989

     626        95,477        140,119        11,757        280,967        412,338  

1990

     669        79,020        109,872        10,866        183,692        255,412  

1991

     686        73,118        95,541        14,022        214,263        279,973  

1992

     688        84,712        107,027        24,028        308,246        389,445  

1993

     693        112,665        138,870        35,130        574,048        707,566  

1994

     699        151,217        190,762        36,862        776,257        979,257  

1995

     721        141,151        181,943        26,130        487,762        628,721  

1996

     760        117,370        138,490        26,571        486,834        928,418  

1997

     776        70,989        41,881        41,525        555,759        327,881  

1998

     748        137,799        114,261        97,716        660,429        547,619  

1999

     725        349,504        307,662        278,551        3,481,620        3,064,806  

2000

     704        188,042        148,415        306,163        2,602,211        2,053,837  

2001

     689        255,850        194,785        473,241        1,997,420        1,520,685  

2002

     683        258,681        216,071        857,245        3,041,598        2,540,590  

2003

     684        355,363        298,624        542,010        2,216,636        1,862,719  

2004

     683        412,588        398,597        372,895        2,232,109        2,156,419  

2005

     702        655,075        648,589        467,629        3,157,662        3,126,398  

2006

     731        704,588        757,622        279,096        3,435,180        3,693,742  

2007

     746        951,900        1,017,205        363,732        5,539,588        5,919,697  

2008

     765        576,888        457,122        355,205        5,189,644        4,112,238  

2009

     770        887,316        762,528        485,657        5,795,552        4,980,494  

2010

     777        1,114,882        1,260,486        379,171        5,607,749        6,340,121  

2011

     791        1,041,999        899,438        353,759        6,863,146        5,924,166  

2012

     784        1,154,294        1,085,679        486,734        4,824,610        4,537,819  

2013

     777        1,185,974        1,123,826        328,325        3,993,422        3,784,158  

2014

     773        1,192,253        1,092,908        278,082        3,983,580        3,651,646  

2015

     770        1,242,832        1,062,885        455,256        5,351,734        4,576,870  

2016

     779        1,308,440        1,086,988        376,772        4,523,044        3,757,524  

2017 (through April 21)

     774        1,401,852        1,235,961        395,452        4,507,039        3,973,690  

 

Source: Korea Exchange

 

(1) Converted at the noon buying rate on the last business day of the period indicated.

The Korean securities markets are principally regulated by the FSC and became subject to the FSCMA beginning in February 2009. The law imposes restrictions on insider trading and price manipulation, requires specified information to be made available by listed companies to investors and establishes rules regarding margin trading, proxy solicitation, takeover bids, acquisition of treasury shares and reporting requirements for shareholders holding substantial interests.

 

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Further Opening of the Korean Securities Market

Stock index futures market was opened on May 3, 1996 and a stock index option market was opened on July 7, 1997, in each case at the Korea Stock Exchange. Remittance and repatriation of funds in connection with investment in stock index futures and options are subject to regulations similar to those that govern remittance and repatriation in the context of foreign investment in Korean stocks.

In addition, the Korea Stock Exchange opened new option markets for stocks of seven companies including our shares of common stock and common stock of six other companies on January 28, 2002. Foreigners will be permitted to invest in such options for individual stocks subject to certain procedural requirements.

Starting from May 1, 1996, foreign investors were permitted to invest in warrants representing the right to subscribe for shares of a company listed on the Korea Stock Exchange or registered on the KOSDAQ, subject to certain investment limitations. A foreign investor may not acquire such warrants with respect to shares of a class of a company for which the ceiling on aggregate investment by foreigners has been reached or exceeded.

As of December 30, 1997, foreign investors were permitted to invest in all types of corporate bonds, bonds issued by national or local governments and bonds issued in accordance with certain special laws without being subject to any aggregate or individual investment ceiling. The FSC sets forth procedural requirements for such investments. The Government announced on February 8, 1998 its plans for the liberalization of the money market with respect to investment in money market instruments by foreigners in 1998. According to the plan, foreigners have been permitted to invest in money market instruments issued by corporations, including commercial paper, starting February 16, 1998 with no restrictions as to the amount. Starting May 25, 1998, foreigners have been permitted to invest in certificates of deposit and repurchase agreements.

Currently, foreigners are permitted to invest in securities including shares of most Korean companies that are not listed on the KRX KOSPI Market or the KRX KOSDAQ Market and in bonds that are not listed.

Protection of Customer’s Interest in Case of Insolvency of Financial Investment Companies with a Brokerage License

Under Korean law, the relationship between a customer and a financial investment company with a brokerage license in connection with a securities sell or buy order is deemed to be consignment and the securities acquired by a consignment agent (i.e., the financial investment company with a brokerage license) through such sell or buy order are regarded as belonging to the customer in so far as the customer and the consignment agent’s creditors are concerned. Therefore, in the event of a bankruptcy or rehabilitation procedure involving a financial investment company with a brokerage license, the customer of such financial investment company is entitled to the proceeds of the securities sold by such financial investment company.

When a customer places a sell order with a financial investment company with a brokerage license which is not a member of the Korea Exchange and this financial investment company places a sell order with another financial investment company with a brokerage license which is a member of the Korea Exchange, the customer is still entitled to the proceeds of the securities sold received by the non-member company from the member company regardless of the bankruptcy or rehabilitation of the non-member company.

Under the FSCMA, the Korea Exchange is obliged to indemnify any loss or damage incurred by a counterparty as a result of a breach by its members. If a financial investment company with a brokerage license which is a member of the Korea Exchange breaches its obligation in connection with a buy order, the Korea Exchange is obliged to pay the purchase price on behalf of the breaching member.

When a customer places a buy order with a non-member company and the non-member company places a buy order with a member company, the customer has the legal right to the securities received by the non-member company from the member company because the purchased securities are regarded as belonging to the customer in so far as the customer and the non-member company’s creditors are concerned.

As the cash deposited with a financial investment company with a brokerage license is regarded as belonging to such financial investment company, which is liable to return the same at the request of its customer, the customer cannot take back deposited cash from the financial investment company with a brokerage license if a bankruptcy or

 

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rehabilitation procedure is instituted against such financial investment company and, therefore, can suffer from loss or damage as a result. However, the Depositor Protection Act provides that Korea Deposit Insurance Corporation will, upon the request of the investors, pay investors up to Won 50 million per investor in case of such financial investment company’s bankruptcy, liquidation, cancellation of securities business license or other insolvency events. Pursuant to the FSCMA, subject to certain exceptions, financial investment companies with a brokerage license are required to deposit the cash received from their customers with the Korea Securities Finance Corporation, a special entity established pursuant to the FSCMA. Set-off or attachment of cash deposits by financial investment companies with a brokerage license is prohibited. The premiums related to this insurance under the Depositor Protection Act are paid by financial investment companies with a brokerage license.

 

Item 9.D. Selling Shareholders

Not Applicable.

 

Item 9.E. Dilution

Not Applicable.

 

Item 9.F. Expenses of the Issue

Not Applicable.

 

Item 10. ADDITIONAL INFORMATION

 

Item 10.A. Share Capital

Not Applicable.

Description of Capital Stock

This section provides information relating to our capital stock, including brief summaries of material provisions of our articles of incorporation, the FSCMA, the Korean Commercial Code, the Telecommunications Business Act and related laws of Korea, all as currently in effect. The following summaries are subject to, and are qualified in their entirety by reference to, our articles of incorporation and the applicable provisions of the FSCMA, the Korean Commercial Code and the Telecommunications Business Act. We have filed copies of our articles of incorporation and the Telecommunications Business Act as exhibits to our annual reports on Form 20-F.

General

The name of our company is SK Telecom Co., Ltd. We are registered under the laws of Korea under the commercial registry number of 110111-0371346. As specified in Article 2 (Objectives) of our articles of incorporation, as amended and approved at our general shareholders meeting held on March 24, 2017, our objectives are the rational management of the telecommunications business, development of telecommunications technology, and contribution to public welfare and convenience. In order to achieve these objectives, we are engaged in the following:

 

   

information and communication business;

 

   

sale and lease of subscriber handsets;

 

   

new media business;

 

   

advertising business;

 

   

mail order sales business;

 

   

real estate business (development, management and leasing, etc.) and chattel leasing business;

 

   

research and technology development relating to the first four items above;

 

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overseas and import/export business relating to the first four items above;

 

   

manufacture and distribution business relating to the first four items above;

 

   

travel business;

 

   

electronic financial services business;

 

   

film business (production, import, distribution and screening);

 

   

lifetime education and management of lifetime educational facilities;

 

   

electric engineering business;

 

   

information- and communication-related engineering business;

 

   

ubiquitous city construction and related service business;

 

   

any related business through investment, management and operation of our Korean or offshore subsidiaries and investment companies;

 

   

construction business, including the machine and equipment business;

 

   

export/import business and export/import intermediation/agency business;

 

   

electrical business such as intelligent electrical grid business; and

 

   

any business or undertaking incidental or conducive to the attainment of the objectives stated above.

Currently, our authorized share capital is 220,000,000 shares, which consists of shares of common stock, par value Won 500 per share, and shares of non-voting stock, par value Won 500 per share (common shares and non-voting shares together are referred to as “shares”). Under our articles of incorporation, we are authorized to issue up to 5,500,000 non-voting preferred shares. As of March 31, 2017, 80,745,711 common shares were issued, of which 10,136,551 shares were held by us in treasury. Pursuant to the Share Exchange in June 2015, we exchanged 1,692,824 treasury shares for the common shares of SK Broadband. In the fourth quarter of 2015, we acquired 2,020,000 treasury shares on the market through a share buy-back program to further increase shareholder value. We have never issued any non-voting preferred shares. All of the issued and outstanding common shares are fully-paid and non-assessable and are in registered form. We issue share certificates in denominations of 1, 5, 10, 50, 100, 500, 1,000 and 10,000 shares.

Board of Directors

Meetings of the board of directors are convened by the representative director as he or she deems necessary or upon the request of three or more directors. The board of directors determines all important matters relating to our business. In addition, the prior approval of the majority of the independent non-executive directors is required for certain matters, which include:

 

   

investment by us or any of our subsidiaries in a foreign company in equity or acquisition of such foreign company’s other overseas assets in an amount equal to 5.0% or more of our equity under our most recent balance sheet; and

 

   

contribution of capital, loans or guarantees, acquisition of our subsidiaries’ assets or similar transactions with our affiliated companies in excess of Won 10.0 billion through one or a series of transactions.

Resolutions of the board are adopted in the presence of a majority of the directors in office and by the affirmative vote of a majority of the directors present. No director who has an interest in a matter for resolution may exercise his or her vote upon such matter.

There are no specific shareholding requirements for director’s qualification. Directors are elected at a general meeting of shareholders if the approval of the holders of the majority of the voting shares present at such meeting is obtained and if such majority also represents at least one-fourth of the total number of shares outstanding. Under the Korean Commercial Code, unless otherwise stated in the articles of incorporation, holders of an aggregate of 1.0% or more of the outstanding shares with voting rights may request cumulative voting in any election for two or more directors. Our articles of incorporation permit cumulative voting for the election of directors.

 

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The term of office for directors is until the close of the third annual general shareholders meeting convened after he or she commences his or her term. Our directors may serve consecutive terms and our shareholders may remove them from office at any time by a special resolution adopted at a general meeting of shareholders.

Dividends

We distribute dividends to our shareholders in proportion to the number of shares owned by each shareholder. Our common shares represented by the ADSs have the same dividend rights as other outstanding common shares. For a detailed discussion of our dividend policy, see “Item 8.A. Consolidated Statements and Other Financial Information — Dividends.”

Distribution of Free Shares

In addition to paying dividends in shares out of our retained or current earnings, we may also distribute to our shareholders an amount transferred from our capital surplus or legal reserve to our stated capital in the form of free shares. We must distribute such free shares to all our shareholders in proportion to their existing shareholdings.

Preemptive Rights and Issuance of Additional Shares

We may at times issue authorized but unissued shares, unless otherwise provided in the Korean Commercial Code, on terms determined by our board of directors. All our shareholders are generally entitled to subscribe to any newly-issued shares in proportion to their existing shareholdings. We must offer new shares on uniform terms to all shareholders who have preemptive rights and are listed on our shareholders’ registry as of the relevant record date. We must give public notice of the preemptive rights regarding new shares and their transferability at least two weeks before the relevant record date. Our board of directors may determine how to distribute shares for which preemptive rights have not been exercised or where fractions of shares occur.

Under the Korean Commercial Code and our articles of incorporation, we may issue new shares pursuant to a board resolution to persons other than existing shareholders only if (1) the new shares are issued for the purpose of issuing depositary receipts in accordance with the relevant regulations or through an offering to public investors and (2) the purpose of such issuance is deemed necessary by us to achieve a business purpose, including, but not limited to, the introduction of new technology or the improvement of our financial condition. If we make an allotment of new shares to persons other than our existing shareholders, we are required by the Korean Commercial Code to notify our existing shareholders of (a) the class and number of new shares, (b) the issuance price of new shares and the date set for the payment thereof, (c) in cases of no par value shares, the amount to be included in the paid-up capital out of the issuance price of new shares and (d) the method of subscription to new shares by no later than two weeks before the date of payment of the subscription price, or publicly announce such information. Under our articles of incorporation, only our board of directors is authorized to set the terms and conditions with respect to such issuance of new shares.

In addition, under our articles of incorporation, we may issue convertible bonds or bonds with warrants, each up to an aggregate principal amount of Won 400.0 billion, to persons other than existing shareholders, where such issuance is deemed necessary by us to achieve a business purpose, including, but not limited to, the introduction of new technology or the improvement of our financial condition.

Members of our employee stock ownership association, whether or not they are our shareholders, generally have a preemptive right to subscribe for up to 20.0% of the shares publicly offered pursuant to the FSCMA. This right is exercisable only to the extent that the total number of shares so acquired and held by members of our employee stock ownership association does not exceed 20.0% of the sum of the number of shares then outstanding and the number of newly-issued shares.

General Meeting of Shareholders

We generally hold the annual general meeting of shareholders within three months after the end of each fiscal year. Subject to a board resolution or court approval, we may hold an extraordinary general meeting of shareholders:

 

   

as necessary;

 

   

at the request of holders of an aggregate of 3.0% or more of our outstanding common shares;

 

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at the request of shareholders holding an aggregate of 1.5% or more of our outstanding shares and preferred shares for at least six months; or

 

   

at the request of our audit committee.

Holders of non-voting preferred shares may request a general meeting of shareholders only after the non-voting shares become entitled to vote or “enfranchised,” as described under “— Voting Rights” below.

We must give shareholders written notice setting out the date, place and agenda of the meeting at least two weeks before the date of the general meeting of shareholders. However, for holders of less than 1.0% of the total number of issued and outstanding voting shares, we may give notice by placing at least two public notices in at least two daily newspapers at least two weeks in advance of the meeting. Currently, we use The Korea Economic Daily News and Maeil Business Newspaper, both published in Seoul, for this purpose, but we may give notice in the future through electronic means. Shareholders who are not on the shareholders’ registry as of the record date are not entitled to receive notice of the general meeting of shareholders or attend or vote at the meeting. Holders of non-voting preferred shares, unless enfranchised, are not entitled to receive notice of or vote at general meetings of shareholders.

Our general meetings of shareholders have historically been held in or near Seoul.

Voting Rights

Holders of our common shares are entitled to one vote for each common share, except that voting rights of common shares held by us (including treasury shares and shares held by bank trust funds controlled by us), or by a corporate shareholder in which we own more than 10.0% equity interest, either directly or indirectly, may not be exercised. The Korean Commercial Code, unless otherwise stated in the articles of incorporation, permits cumulative voting, which would allow each shareholder to have multiple voting rights corresponding to the number of directors to be appointed in the voting and to exercise all voting rights cumulatively to elect one director. Our articles of incorporation permit cumulative voting for the election of directors.

Our shareholders may adopt resolutions at a general meeting by an affirmative majority vote of the voting shares present or represented at the meeting if such affirmative votes also represent at least one-fourth of our total voting shares then issued and outstanding. However, under the Korean Commercial Code and our articles of incorporation, the following matters, among others, require approval by the holders of at least two-thirds of the voting shares present or represented at a meeting, and such affirmative votes must also represent at least one-third of our total voting shares then issued and outstanding:

 

   

amending our articles of incorporation;

 

   

removing a director;

 

   

effecting any dissolution, merger or consolidation of us;

 

   

transferring the whole or any significant part of our business;

 

   

effecting our acquisition of all of the business of any other company or a part of the business of any other company having a material effect on our business;

 

   

reducing our capital; or

 

   

issuing any new shares at a price lower than their par value.

In general, holders of non-voting preferred shares are not entitled to vote on any resolution or receive notice of any general meeting of shareholders.

However, in case of amendments to our articles of incorporation, or any merger or consolidation of us, or in some other cases which affect the rights or interests of the non-voting preferred shares, approval of the holders of non-voting preferred shares is required. We may obtain the approval by a resolution of holders of at least two-thirds of the non-voting preferred shares present or represented at a class meeting of the holders of non-voting preferred shares, where the affirmative votes also represent at least one-third of our total issued and outstanding non-voting shares. In addition, if we are unable to pay dividends on non-voting preferred shares as provided in our articles of

 

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incorporation, the holders of non-voting shares will become enfranchised and will be entitled to exercise voting rights beginning at the next general meeting of shareholders to be held after the declaration of non-payment of dividends is made until such dividends are paid. The holders of enfranchised non-voting preferred shares will have the same rights as holders of common shares to request, receive notice of, attend and vote at a general meeting of shareholders.

Shareholders may exercise their voting rights by proxy. A shareholder may give proxies only to another shareholder, except that a corporate shareholder may give proxies to its officers or employees.

Holders of ADRs exercise their voting rights through the ADR depositary, an agent of which is the record holder of the underlying common shares. Subject to the provisions of the deposit agreement, ADR holders are entitled to instruct the ADR depositary how to vote our common shares underlying their ADSs.

Limitation on Shareholdings

The Telecommunications Business Act prohibits foreign governments, individuals, and entities (including Korean entities that are deemed foreigners, as discussed below) from owning more than 49.0% of our voting stock. Korean entities whose largest shareholder is a foreign government or a foreigner (together with any of its related parties) that owns 15.0% or more of such Korean entities’ outstanding voting stock are deemed foreigners. A foreigner who has acquired shares of our voting stock in excess of such limitation may not exercise the voting rights with respect to the shares exceeding such limitation and may be subject to the MSIP’s corrective orders.

Rights of Dissenting Shareholders

Under Financial Investment Services and Capital Market Act, in some limited circumstances, including the transfer of all or a significant part of our business or our merger or consolidation with another company (with certain exceptions), dissenting shareholders have the right to require us to purchase their shares. To exercise this right, shareholders, including holders of non-voting shares, must submit to us a written notice of their intention to dissent before the general meeting of shareholders. Then, within 20 days after the relevant resolution is passed at a meeting, the dissenting shareholders must request us in writing to purchase their shares. We are obligated to purchase the shares of such dissenting shareholders within one month after the expiration of the 20-day period. The purchase price for the shares is required to be determined through negotiation between the dissenting shareholders and us. If we cannot agree on a price through negotiation, the purchase price will be the average of (1) the weighted average of the daily share prices on the KRX KOSPI Market for the two-month period before the date of the adoption of the relevant board resolution, (2) the weighted average of the daily share price on the KRX KOSPI Market for the one month period before the date of the adoption of the relevant resolution and (3) the weighted average of the daily share price on the KRX KOSPI Market for the one week period before the date of the adoption of the relevant resolution. However, a court may determine the purchase price if we or dissenting shareholders do not accept the purchase price.

Registry of Shareholders and Record Dates

Our transfer agent, Kookmin Bank, maintains the register of our shareholders at its office in Seoul, Korea. It records and registers transfers of shares on the register of shareholders upon presentation of the share certificates.

The record date for annual dividends is December 31. For the purpose of determining the shareholders entitled to annual dividends, the registry of shareholders is closed for the period from January 1 to January 31 of the following year. Further, for the purpose of determining the shareholders entitled to some other rights pertaining to the shares, we may, on at least two weeks’ public notice, set a record date and/or close the register of shareholders for not more than three months. The trading of shares and the delivery of share certificates may continue while the register of shareholders is closed.

Annual Report

At least one week before the annual general meeting of shareholders, we must make our annual reports and audited non-consolidated financial statements available for inspection at our principal office and at all of our branch offices. In addition, copies of annual reports, the audited non-consolidated financial statements and any resolutions adopted at the general meeting of shareholders will be available to our shareholders.

 

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Under the FSCMA, we must file with the FSC and the Korea Exchange (1) an annual securities report within 90 days after the end of our fiscal year, (2) a mid-year report within 45 days after the end of the first six months of our fiscal year, and (3) quarterly reports within 45 days after the end of the third month and the ninth month of our fiscal year. Copies of these reports are or will be available for public inspection at the FSC and the Korea Exchange.

Transfer of Shares

Under the Korean Commercial Code, the transfer of shares is effected by the delivery of share certificates. However, to assert shareholders’ rights against us, the transferee must have his or her name, seal and address registered on our registry of shareholders, maintained by our transfer agent. A non-Korean shareholder may file a sample signature in place of a seal, unless he or she is a citizen of a country with a sealing system similar to that of Korea. In addition, a non-resident shareholder must appoint an agent in Korea authorized to receive notices on his or her behalf and file his or her mailing address in Korea.

Under current Korean regulations, the Korea Securities Depository, foreign exchange banks (including domestic branches of foreign banks), financial investment companies with a dealing, brokerage or collective investment license and internationally recognized custodians may act as agents and provide related services for foreign shareholders. Certain foreign exchange controls and securities regulations apply to the transfer of shares by non-residents or non-Korean citizens. See “Item 10.D. Exchange Controls — Korean Foreign Exchange Controls and Securities Regulations.”

Our transfer agent is Kookmin Bank, located at 24, Gukjegeumyung-ro, Yeongdeungpo-gu, Seoul, Korea.

Restrictions Applicable to Shares

Pursuant to the Telecommunications Business Act, the maximum aggregate foreign shareholding in us is limited to 49.0%. See “Item 4.B. Business Overview — Law and Regulation — Foreign Ownership and Investment Restrictions and Requirements.” In addition, certain foreign exchange controls and securities regulations apply to the acquisition of securities by non-residents or non-Korean citizens. See “Item 10.D. Exchange Controls — Korean Foreign Exchange Controls and Securities Regulations.”

Acquisition of Shares by Us

We may acquire our own shares pursuant to an approval at the general meeting of shareholders, through purchases on the Korea Exchange or a tender offer, or by acquiring the interests in a trust account holding our own shares through agreements with trust companies and asset management companies. The aggregate purchase price for the shares may not exceed the total amount available for distribution as dividends as of the end of the preceding fiscal year less the amount of dividends and mandatory reserves required to be set aside for that fiscal year, subject to certain procedural requirements.

Under the Korean Commercial Code, we may resell or transfer any shares acquired by us to a third party pursuant to an approval by the Board of Directors. In general, corporate entities in which we own a 50.0% or more equity interest may not acquire our common stock. Under the FSCMA, we are subject to certain selling restrictions with respect to the shares acquired by us.

Liquidation Rights

In the event of our liquidation, remaining assets after payment of all debts, liquidation expenses and taxes will be distributed among shareholders in proportion to their shareholdings. Holders of non-voting preferred shares have no preference in liquidation. Holders of debt securities have no preference over other creditors in the event of liquidation.

Description of American Depositary Shares

The following is a summary of the deposit agreement dated as of May 31, 1996, as amended by amendment no. 1 dated as of March 15, 1999, amendment no. 2 dated as of April 24, 2000 and amendment no. 3 dated as of

 

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July 24, 2002, among us, Citibank, as ADR depositary, and all holders and beneficial owners of ADSs, as supplemented by side letters dated as of July 25, 2002, October 1, 2002 and October 1, 2007. The deposit agreement is governed by the laws of the State of New York. Because it is a summary, this description does not contain all the information that may be important to you. For more complete information, you should read the entire deposit agreement and the ADR. The deposit agreement has been filed as an exhibit to our Annual Report on Form 20-F filed with the SEC on June 30, 2006. Copies of the deposit agreement are available for inspection at the principal New York office of the ADR depositary, currently located at 388 Greenwich Street, 14th Floor, New York, New York 10013, United States of America, and at the principal London office of the ADR depositary, currently located at Canada Square, Canary Wharf, London, E14 5LB, England.

American Depositary Receipts

The ADR depositary may execute and deliver ADRs evidencing the ADSs. Each ADR evidences a specified number of ADSs, each ADS representing one-ninth of one share of our common stock to be deposited with the ADR depositary’s custodian in Seoul. Korea Securities Depository is the institution authorized under applicable law to effect book-entry transfers of our common shares, known as the “Custodian”. The Custodian is located at 358-8, Hosu-ro, Ilsandong-gu, Goyang-si, Gyeonggi-do 411-770, Korea. An ADR may represent any number of ADSs. We and the ADR depositary will treat only persons in whose names ADRs are registered on the books of the registrar as holders of ADRs.

Deposit and Withdrawal of Shares of Common Stock

Notwithstanding the provisions described below, under the terms of the deposit agreement, the deposit of shares and issuance of ADSs may only be made if the total number of shares represented by ADSs after such deposit does not exceed a specified maximum, 24,321,893 shares as of March 31, 2017. This limit will be adjusted in certain circumstances, including (1) upon the cancellation of existing ADSs, (2) upon future offerings of ADSs by us or our shareholders, (3) rights offerings and (4) adjustments for share reclassifications. The limit also may be decreased in certain circumstances. As of March 31, 2017, the outstanding ADSs represented 9,106,281 shares of our common stock. Notwithstanding the foregoing, the ADR depositary and the Custodian may not accept deposits of shares of common stock for issuance of ADSs if it has been notified by us in writing that we block deposits to prevent a violation of applicable Korean laws or regulations or a violation of our articles of incorporation. In addition, the ADR depositary may not accept deposits of shares of common stock for issuance of ADSs from a person who identifies him-, her- or itself to the depositary, and has been identified in writing by us, as a holder of at least 3.0% of our shares of common stock.

The shares of common stock underlying the ADSs are delivered to the ADR depositary’s Custodian in book-entry form. Accordingly, no share certificates will be issued but the ADR depositary will hold the shares of common stock through the book-entry settlement system of the Custodian. The delivery of the shares of common stock pursuant to the deposit agreement will take place through the facilities of the Custodian in accordance with its applicable settlement procedures. The ADR depositary will execute and deliver ADSs if you or your broker deposit shares or evidence of rights to receive shares of common stock with the Custodian. Upon payment of fees and expenses and any taxes or charges, such as stamp taxes or stock transfer taxes, the ADR depositary will register the appropriate number of ADSs in the names you designate. The ADR depositary and the ADR depositary’s Custodian will refuse to accept shares of common stock for deposit whenever we restrict transfer of shares of common stock to comply with ownership restrictions under applicable law or our articles of incorporation or whenever the deposit would cause the total number of shares of common stock deposited to exceed a level we determine from time to time. We may instruct the ADR depositary to take certain actions with respect to a holder of ADSs who holds in excess of the ownership limitation set forth in the deposit agreement, including the mandatory sale or disposition of the shares represented by the ADSs in excess of such ownership limitations if, and to the extent, permitted by applicable law.

You may surrender your ADRs to the ADR depositary to withdraw the underlying shares of our common stock. Upon payment of the fees and any governmental charges and taxes provided in the deposit agreement, and subject to applicable laws and regulations of Korea and our articles of incorporation, you will be entitled to physical delivery or electronic delivery to an account in Korea or, if permissible under applicable Korean law, outside the

 

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United States, of the shares of common stock evidenced by the ADRs and any other property at the time represented by ADR you surrendered. If you surrender an ADR evidencing a number of ADSs not evenly divisible by nine, the ADR depositary will deliver the appropriate whole number of shares of common stock represented by the surrendered ADSs and will execute and deliver to you a new ADR evidencing ADSs representing any remaining fractional shares of common stock.

If you request withdrawal of shares of common stock, you must deliver to the ADR depositary a written order directing the ADR depositary to cause the shares of common stock being withdrawn to be delivered or to cause such delivery upon the written order of the person designated in your order, subject to applicable Korean laws and the provisions of the deposit agreement.

Under the provisions of the deposit agreement, the ADR depositary may not lend shares of common stock or ADSs. However, subject to the provisions of the deposit agreement and limitations established by the ADR depositary, the ADR depositary may execute and deliver ADSs before deposit of the underlying shares of common stock. This is called a pre-release of the ADS. The ADR depositary may also deliver shares of common stock upon cancellation of pre-released ADSs (even if the cancellation occurs before the termination of the pre-release). The ADR depositary may pre-release ADSs only under the following circumstances:

 

   

before or at the time of the pre-release, the person to whom the pre-release is being made must represent to the ADR depositary in writing that the person, or, in case of an institution its customer, owns the shares of common stock or ADSs to be deposited and show evidence of the ownership to the ADR depositary’s satisfaction;

 

   

before or at the time of such pre-release, the person to whom the pre-release is being made must agree in writing that he or she will hold the shares of common stock or ADSs in trust for the ADR depositary until their delivery to the ADR depositary or Custodian, reflect on his or her records the ADR depositary as owner of such shares of common stock or ADSs and deliver such shares of common stock upon the ADR depositary’s request;

 

   

the pre-release must be fully collateralized with cash or U.S. government securities;

 

   

the ADR depositary must be able to terminate the pre-release on not more than five business days’ notice; and

 

   

the pre-release is subject to further indemnities and credit regulations as the ADR depositary deems appropriate.

The ADR depositary may retain for its own account any compensation received by it in connection with the pre-release, such as earnings on the collateral.

If you want to withdraw the shares of common stock from the depositary facility, you must register your identity with the Financial Supervisory Service of Korea (the “FSS”) before you acquire the shares of common stock unless you intend to sell the shares of common stock within three months. See “Item 10.D. Exchange Controls — Korean Foreign Exchange Controls and Securities Regulations — Restrictions Applicable to Shares.”

Dividends, Other Distributions and Rights

If the ADR depositary can, in its judgment and pursuant to applicable law, convert Won (or any other foreign currency) into Dollars on a reasonable basis and transfer the resulting Dollars to the United States, the ADR depositary will as promptly as practicable convert all cash dividends and other cash distributions received by it on the deposited shares of common stock into Dollars and distribute the Dollars to you in proportion to the number of ADSs representing shares of common stock held by you, after deduction of the fees and expenses of the ADR depositary. If the ADR depositary determines that in its judgment any currency other than Dollars it receives from us cannot be converted and distributed on a reasonable basis, the ADR depositary may distribute the currency it receives to the extent permitted under applicable law or hold the currency for your account if you are entitled to receive the distribution. The ADR depositary will not be liable for any interest. Before making a distribution, the ADR depositary will deduct any withholding taxes that must be paid.

 

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In the event that the ADR depositary or the ADR depositary’s Custodian receives any distribution upon any deposited shares of common stock in property or securities (other than shares of common stock, non-voting preferred stock or rights to receive shares of common stock or non-voting preferred stock), the ADR depositary will distribute the property or securities to you in proportion to your holdings in any manner that the ADR depositary deems, after consultation with us, equitable and practicable. If the ADR depositary determines that any distribution of property or securities (other than shares of common stock, non-voting preferred stock or rights to receive shares of common stock or non-voting preferred stock) cannot be made proportionally, or if for any other reason the ADR depositary deems the distribution not to be feasible, the ADR depositary may, after consultation with us, dispose of all or a portion of the property or securities in such amounts and in such manner, including by public or private sale, as the ADR depositary deems equitable or practicable. The ADR depositary will distribute to you the net proceeds of any such sale, or the balance of the property or securities, after the deduction of the fees and expenses of the ADR depositary.

If a distribution by us consists of a dividend in, or free distribution of, our shares of common stock, the ADR depositary may, with our approval, and will, if we request, deposit the shares of common stock and either (1) distribute to you, in proportion to your holdings, additional ADSs representing those shares of common stock, or (2) reflect on the records of the ADR depositary the increase in the aggregate number of ADSs representing those number of shares of common stock, in both cases, after the deduction of the fees and expenses of the ADR depositary. If the ADR depositary deems that such distribution for any reason is not feasible, the ADR depositary may adopt, after consultation with us, any method as it may deem equitable and practicable, including by public or private sale of all or part of the shares of common stock received. The ADR depositary will distribute to you the net proceeds of any such sale in the same way as it does with cash. The ADR depositary will only distribute whole ADSs. If the ADR depositary does not distribute additional ADSs, then each outstanding ADS will also represent the new shares so distributed.

If a distribution by us consists of a dividend in, or free distribution of, shares of non-voting preferred stock, the ADR depositary will deposit such shares of non-voting preferred stock under a non-voting preferred stock deposit agreement to be entered into among us, the ADR depositary and all holders and beneficial owners of depositary shares. The ADR depositary will deliver to you, in proportion to your holdings of ADSs, depositary shares issued under the non-voting preferred stock deposit agreement representing the number of non-voting shares received as such dividend or distribution. If the ADR depositary deems such distribution for any reason is not feasible, the ADR depositary may adopt, after consultation with us, any method as it may deem equitable and practicable, including by public or private sale of all or part of the nonvoting shares received. The ADR depositary will distribute to you the net proceeds of any such sale in the same way as it does with cash. The ADR depositary will only distribute whole depositary shares. We are not obligated to list depositary shares representing non-voting shares on any exchange.

If we offer holders of our securities any rights to subscribe for additional shares of common stock or any other rights, the ADR depositary may make these rights available to you. The ADR depositary must first determine whether it is lawful and feasible to do so. If the ADR depositary determines that it is not lawful or feasible to make these rights available to you, then upon our request, the ADR depositary will sell the rights and distribute the proceeds in the same way as it would do with cash. The ADR depositary may allow these rights that are not distributed or sold to lapse. In that case, you will receive no value for these rights.

If we issue any rights with respect to non-voting shares, the securities issuable upon any exercise of such rights by holders or beneficial owners will be depositary shares representing those non-voting shares issued under the provisions of a non-voting preferred stock deposit agreement.

If a registration statement under the Securities Act is required with respect to the securities to which any rights relate in order for us to offer the rights to you and to sell the securities represented by these rights, the ADR depositary will not offer such rights to you until such a registration is in effect, or unless the offering and sale of such securities and such rights to you are exempt from the registration requirements of the Securities Act or any required filing, report, approval or consent has been submitted, obtained or granted. We or the ADR depositary will not be obligated to register the rights or securities under the Securities Act or to submit, obtain or request any filing, report, approval or consent.

 

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The ADR depositary may not be able to convert any currency or to sell or dispose of any distributed or offered property or rights in a timely manner or at a specified price, or at all.

Record Dates

The ADR depositary will fix a record date, after consultation with us, in each of the following situations:

 

   

any cash dividend or other cash distribution becomes payable;

 

   

any distribution other than cash is made;

 

   

rights are issued with respect to deposited shares of common stock;

 

   

the ADR depositary causes a change in the number of shares of common stock that are represented by each ADS; or

 

   

the ADR depositary receives notice of any shareholders’ meeting.

The record date will, to the extent practicable, be as near as the record date fixed by us for the shares of common stock. The record date will determine (1) the ADR holders who are entitled to receive the dividend, distribution or rights, or the net proceeds of the sale of the rights; or (2) the ADR holders who are entitled to receive notices or exercise rights.

Voting of the Underlying Shares of Common Stock

We will give the ADR depositary a notice of any meeting or solicitation of shareholder proxies immediately after we finalize the form and substance of such notice but not less than 14 days before the meeting. As soon as practicable after it receives our notice, the ADR depositary will fix a record date, and upon our written request, the ADR depositary will mail to you a notice that will contain the following:

 

   

the information contained in our notice to the ADR depositary including an English translation, or, if requested by us, a summary of the information provided by us;

 

   

a statement that the ADR holders as of the close of business on a specified record date will be entitled to instruct the ADR depositary as to how to exercise their voting rights for the number of shares of deposited shares of common stock, subject to the provisions of applicable Korean law and our articles of incorporation, which provisions, if any, will be summarized in the notice to the extent that they are material; and

 

   

a statement as to the manner in which the ADR holders may give their instructions.

Upon your written request received on or before the date set by the ADR depositary for this purpose, the ADR depositary will endeavor, in so far as practicable, to vote or cause to be voted the deposited shares of common stock in accordance with the instructions set forth in your written requests. The ADR depositary may not itself exercise any voting discretion over any deposited shares of common stock. You may only exercise the voting rights in respect of nine ADSs or multiples of nine ADSs. ADR holders may not be entitled to give instruction to vote the shares represented by the ADSs if, and to the extent, the total number of shares represented by the ADSs of an ADR holder exceeds the limit set under applicable law. We can give no assurance to you, however, that we will notify the ADR depositary sufficiently in advance of the scheduled date of a meeting or solicitation of consents or proxies to enable the ADR depositary to make a timely mailing of notices to you, or that you will receive the notices sufficiently in advance of a meeting or solicitation of consents or proxies to give instructions to the ADR depositary.

Inspection of Transfer Books

The ADR depositary will keep books at its principal New York office, which is currently located at 388 Greenwich Street, 14th Floor, New York, New York 10013, for the registration and transfer of ADRs. You may inspect the books of the ADR depositary as long as the inspection is not for the purpose of communicating with holders in the interest of a business or object other than our business or a matter related to the deposit agreement or the ADRs.

 

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Reports and Notices

On or before the first date on which we give notice, by publication or otherwise, of any meeting of shareholders, or of any adjourned meeting of shareholders, or of the taking of any action in respect of any cash or other distributions or the offering of any rights in respect of the shares of common stock, we will transmit to the Custodian and the ADR depositary sufficient copies of the notice in English in the form given or to be given to shareholders. We will furnish to the ADR depositary English language versions of any reports, notices and other communications that we generally transmit to holders of our common stock, including our annual reports, with annual audited consolidated financial statements prepared in conformity with IFRS and unaudited non-consolidated semiannual financial statements prepared in conformity with IFRS. The ADR depositary will arrange for the prompt mailing of copies of these documents, or, if we request, a summary of any such notice provided by us to you or, at our request, make notices, reports (other than the annual reports and semiannual financial statements) and other communications available to you on a basis similar to that for the holders of our common stock or on such other basis as we may advise the ADR depositary according to any applicable law, regulation or stock exchange requirement.

Notices to you under the deposit agreement will be deemed to have been duly given if personally delivered or sent by mail or cable, telegraph or facsimile transmission, confirmed by letter, addressed to you at your address as it appears on the transfer books of the ADR depositary or at such other address as you have notified the ADR depositary.

In addition, the ADR depositary will make available for inspection by holders at its principal New York office and its principal London office any notices, reports or communications, including any proxy soliciting materials, received from us that we generally transmit to the holders of our common stock or other deposited securities, including the ADR depositary. The ADR depositary will also send to you copies of reports and communications we will provide as provided in the deposit agreement.

Changes Affecting Deposited Shares of Common Stock

In case of a change in the par value, or a split-up, consolidation or any other reclassification of our common shares or upon any recapitalization, reorganization, merger or consolidation or sale of assets affecting us, any securities received by the ADR depositary or the Custodian in exchange for, in conversion of or in respect of deposited shares of our common stock will be treated as new deposited shares of common stock under the deposit agreement. In that case, ADSs will, subject to the terms of the deposit agreement and applicable laws and regulations, including any registration requirements under the Securities Act, represent the right to receive the new deposited shares of common stock, unless additional ADRs are issued, as in the case of a stock dividend, or unless the ADR depositary calls for the surrender of outstanding ADRs to be exchanged for new ADRs.

Amendment and Termination of the Deposit Agreement

We may agree with the ADR depositary to amend the deposit agreement and the ADSs without your consent for any reason. If the amendment adds or increases fees or charges, except for taxes and other governmental charges or certain expenses of the ADR depositary, or prejudices any substantial existing right of ADR holders, it will only become effective 30 days after the ADR depositary notifies you of the amendment. If you continue to hold your ADSs at the time an amendment becomes effective, you will be considered to have agreed to the amendment and to be bound by the deposit agreement as amended. Except as otherwise required by any mandatory provisions of applicable law, no amendment may impair your right to surrender your ADSs and to receive the underlying deposited securities.

The ADR depositary will terminate the deposit agreement if we ask it to do so with 90 days’ prior written notice. The ADR depositary may also terminate the deposit agreement if the ADR depositary has notified us at least 90 days in advance that it would like to resign and we have not appointed a new depositary. In both cases, the ADR depositary must notify you at least 30 days before the termination date.

If any ADRs remain outstanding after the date of termination, the ADR depositary will stop performing any further acts under the deposit agreement, except:

 

   

to collect dividends and other distributions pertaining to the deposited shares of common stock;

 

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to sell property and rights and the conversion of deposited shares of common stock into cash as provided in the deposit agreement; and

 

   

to deliver deposited shares of common stock, together with any dividends or other distributions received with respect to the deposited shares of common stock and the net proceeds of the sale of any rights or other property represented by those ADSs in exchange for surrendered ADRs.

At any time after the expiration of six months from the date of termination, the ADR depositary may sell any remaining deposited shares of common stock and hold uninvested the net proceeds in an unsegregated account, together with any other cash or property then held, without liability for interest, for the pro rata benefit of the holders of ADSs that have not been surrendered by then.

Charges of ADR Depositary

The fees and expenses of the ADR depositary as agreed between us and the ADR depositary include:

 

   

taxes and other governmental charges;

 

   

registration fees applicable to transfers of shares of common stock on our shareholders’ register, or that of any entity acting as registrar for the shares, to the name of the ADR depositary or its nominee, or the Custodian or its nominee, when making deposits or withdrawals under the deposit agreement;

 

   

cable, telegraph and facsimile transmission expenses that are expressly provided in the deposit agreement;

 

   

expenses incurred by the ADR depositary in the conversion of foreign currency into Dollars under the deposit agreement;

 

   

a fee of up to US$5.00 per 100 ADSs, or portion thereof, for execution and delivery of ADSs and the surrender of ADRs under the deposit agreement; and

 

   

a fee of up to US$0.02 per ADS held for cash distributions, a sale or exercise of rights or the taking of any other corporate action involving distributions to shareholders.

For a detailed description of fees and charges payable by the holders of ADSs under the deposit agreement, see “Item 12.D. American Depositary Shares — Fees and Charges under Deposit Agreement.”

General

Neither we nor the ADR depositary will be liable to you if prevented or delayed by law, governmental authority, any provision of our articles of incorporation or any circumstances beyond our or its control in performing our or its obligations under the deposit agreement. The deposit agreement provides that the ADR depositary will hold the shares of common stock for your sole benefit. Our obligations and those of the ADR depositary under the deposit agreement are expressly limited to performing, in good faith and without negligence, our and its respective duties specified in the deposit agreement.

The ADSs are transferable on the books of the ADR depositary, provided that the ADR depositary may, after consultation with us, close the transfer books at any time or from time to time, when deemed expedient by it in connection with the performance of its duties. As a condition precedent to the execution and delivery of any ADSs, registration of transfer, split-up, combination of any ADR or surrender of any ADS for the purpose of withdrawal of deposited shares of common stock, the ADR depositary or the Custodian may require payment from the depositor of the shares of common stock or a holder of ADSs of a sum sufficient to reimburse the ADR depositary for any tax or other governmental charge and any stock transfer or registration fee and payment of any applicable fees payable by the holders of ADSs.

Any person depositing shares of common stock, any holder of an ADS or any beneficial owner may be required from time to time to file with the ADR depositary or the Custodian a proof of citizenship, residence, exchange control approval, payment of applicable Korean or other taxes or governmental charges, or legal or beneficial ownership and the nature of their interest, to provide information relating to the registration on our shareholders’ register (or our appointed agent for the transfer and registration of shares of common stock) of the

 

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shares of common stock presented for deposit or other information, to execute certificates and to make representations and warranties as we or the ADR depositary may deem necessary or proper or to enable us or the ADR depositary to perform our and its obligations under the deposit agreement. The ADR depositary may withhold the execution or delivery or registration of transfer of all or part of any ADR or the distribution or sale of any dividend or other distribution of rights or of the proceeds from their sale or the delivery of any shares deposited under the deposit agreement and any other securities, property and cash received by the ADR depositary or the Custodian until the proof or other information is filed or the certificates are executed or the representations and warranties are made. The ADR depositary shall provide us, unless otherwise instructed by us, in a timely manner, with copies of any of these proofs and certificates and these written representations and warranties.

The delivery and surrender of ADSs and transfer of ADSs generally may be suspended during any period when our or the ADR depositary’s transfer books are closed or, if that action is deemed necessary or advisable by us or the ADR depositary, at any time or from time to time in accordance with the deposit agreement. We may restrict, in a manner as we deem appropriate, transfers of shares of common stock where the transfers may result in ownership of shares of common stock in excess of limits under applicable law. Except as described in “Deposit and Withdrawal of Shares of Common Stock” above, notwithstanding any other provision of the deposit agreement, the surrender of outstanding ADRs and withdrawal of Deposited Securities (as defined in the deposit agreement) represented by the ADRs may be suspended, but only as required in connection with (1) temporary delays caused by closing the transfer books of the ADR depositary or the issuer of any Deposited Securities (or the appointed agent or agents for such issuer for the transfer and registration of such Deposited Securities) in connection with voting at a shareholders’ meeting or the payment of dividends, (2) payment of fees, taxes and similar charges, or (3) compliance with any United States or foreign laws or governmental regulations relating to the ADRs or to the withdrawal of the Deposited Securities.

Governing Law

The deposit agreement and the ADRs will be interpreted under, and all rights under the deposit agreement or the ADRs are governed by, the laws of the State of New York.

We have irrevocably submitted to the non-exclusive jurisdiction of New York State or United States Federal Courts located in New York City and waived any objection to legal actions or proceedings in these courts whether on the ground of venue or on the ground that the proceedings have been brought in an inconvenient forum.

This submission was made for the benefit of the ADR depositary and the holders and will not limit the right of any of them to take legal actions or proceedings in any other court of competent jurisdiction nor will the taking of legal actions or proceedings in one or more jurisdictions preclude the taking of legal actions or proceedings in any other jurisdiction (whether concurrently or not), to the extent permitted under applicable law.

Information Relating to the ADR Depositary

Citibank has been appointed as ADR depositary pursuant to the deposit agreement. Citibank is an indirect wholly-owned subsidiary of Citigroup Inc., a Delaware corporation whose principal office is located in New York, New York. Citibank is a global financial services organization serving individuals, businesses, governments and financial institutions in approximately 100 countries around the world.

Citibank was originally organized on June 16, 1812, and now is a national banking association organized under the National Bank Act of 1864 of the United States of America. Citibank is primarily regulated by the United States Office of the Comptroller of the Currency. Its principal office is at 399 Park Avenue, New York, NY 10022.

The consolidated balance sheets of Citibank are set forth in Citigroup’s most recent annual report on Form 10-K and quarterly report on Form 10-Q, each on file with the SEC.

Citibank’s Articles of Association and By-laws, each as currently in effect, together with Citigroup’s most recent annual and quarterly reports will be available for inspection at the Depositary Receipt office of Citibank, N.A., 388 Greenwich Street, 14th Floor, New York, New York 10013.

 

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Item 10.B. Material Contracts

We have not entered into any material contracts since January 1, 2016, other than in the ordinary course of our business. For information regarding our agreements and transactions with entities affiliated with the SK Group, see “Item 7.B. Related Party Transactions” and note 34 of the notes to our consolidated financial statements. For a description of certain agreements entered into during the past three years related to our capital commitments and obligations, see “Item 5B. Liquidity and Capital Resources.”

 

Item 10.C. Exchange Controls

Korean Foreign Exchange Controls and Securities Regulations

General

The Foreign Exchange Transaction Act and the Presidential Decree and regulations under that Act and Decree, collectively referred to as the Foreign Exchange Transaction Laws, regulate investment in Korean securities by non-residents and issuance of securities outside Korea by Korean companies. Non-residents may invest in Korean securities pursuant to the Foreign Exchange Transaction Laws. The FSC has also adopted, pursuant to its authority under the FSCMA, regulations that restrict investment by foreigners in Korean securities and regulate issuance of securities outside Korea by Korean companies.

Subject to certain limitations, the MOSF has authority to take the following actions under the Foreign Exchange Transaction Laws:

 

   

if the Government deems it necessary on account of war, armed conflict, natural disaster or grave and sudden and significant changes in domestic or foreign economic circumstances or similar events or circumstances, the MOSF may temporarily suspend performance under any or all foreign exchange transactions, in whole or in part, to which the Foreign Exchange Transaction Laws apply (including suspension of payment and receipt of foreign exchange) or impose an obligation to deposit, safe-keep or sell any means of payment to The Bank of Korea, a foreign exchange stabilization fund, certain other governmental agencies or financial companies; and

 

   

if the Government concludes that the international balance of payments and international financial markets are experiencing or are likely to experience significant disruption or that the movement of capital between Korea and other countries are likely to adversely affect the Won, exchange rate or other macroeconomic policies, the MOSF may take action to require any person who intends to effect or effects a capital transaction to deposit all or a portion of the means of payment acquired in such transactions with The Bank of Korea, a foreign exchange stabilization fund, certain other governmental agencies or financial companies.

Under the regulations of the FSC amended on February 4, 2009, (1) if a company listed on the KRX KOSPI Market or a company listed on the KRX KOSDAQ Market has submitted a public disclosure of material matters to a foreign financial investment supervisory authority pursuant to the laws of the foreign jurisdiction, then it must submit a copy of the public disclosure and a Korean translation thereof to the FSC and the Korea Exchange, and (2) if a KRX KOSPI Market-listed company or KRX KOSDAQ Market-listed company is approved for listing on a foreign stock market or determined to be de-listed from the foreign stock market or actually listed on, or de-listed from a foreign stock market, then it must submit a copy of any document, which it submitted to or received from the relevant foreign government, foreign financial investment supervisory authority or the foreign stock market, and a Korean translation thereof to the FSC and the Korea Exchange.

Government Review of Issuances of ADSs

In order for us to issue ADSs in excess of US$30 million, we are required to submit a report to the MOSF with respect to the issuance of the ADSs prior to and after such issuance; provided that such US$30 million threshold amount would be reduced by the aggregate principal amount of any foreign currency loans borrowed, and any securities offered and issued, outside Korea during the one-year period immediately preceding the report’s submission date. The MOSF may at its discretion direct us to take necessary measures to avoid exchange rate fluctuation in connection with its acceptance of report of the issuance of the ADSs.

 

   

Under current Korean laws and regulations, the depositary is required to obtain our prior consent for any proposed deposit of common shares if the number of shares to be deposited in such proposed deposit

 

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exceeds the number of common shares initially deposited by us for the issuance of ADSs (including deposits in connection with the initial and all subsequent issuances of ADSs by us or with our consent and stock dividends or other distributions related to the ADSs).

 

   

In addition to such restrictions under Korean laws and regulations, there are also restrictions on the deposits of our common shares for issuance of ADSs. See “Item 10.B. Memorandum and Articles of Incorporation — Description of American Depositary Shares.” Therefore, a holder of ADRs who surrenders ADRs and withdraws shares may not be permitted subsequently to deposit those shares and obtain ADRs.

We submitted a report to and obtained acceptance thereof by the MOSF for the issuance of ADSs up to an amount corresponding to 24,321,893 common shares. No additional Korean governmental approval is necessary for the issuance of ADSs except that if the total number of our common shares on deposit for conversion into ADSs exceeds 24,321,893 common shares, we may be required to file a report to and obtain acceptance thereof by the MOSF with respect to the increase of such limit and the issuance of additional ADSs.

Reporting Requirements for Holders of Substantial Interests

Under the FSCMA, any person whose direct or beneficial ownership of shares with voting rights, certificates representing the rights to subscribe for shares and equity-related debt securities including convertible bonds and bonds with warrants (collectively referred to as “equity securities”), together with the equity securities beneficially owned by certain related persons or by any person acting in concert with the person, accounts for 5.0% or more of the total outstanding equity securities is required to report the status and purpose (in terms of whether the purpose of shareholding is to affect control over management of the issuer) of the holdings to the FSC and the Korea Exchange within five business days after reaching the 5.0% ownership interest threshold and promptly deliver a copy of such report to the issuer. In addition, any change (1) in the ownership interest subsequent to the report which equals or exceeds 1.0% of the total outstanding equity securities, or (2) in the shareholding purpose is required to be reported to the FSC and the Korea Exchange within five business days from the date of the change. However, reporting deadline of such reporting requirement is extended to (1) certain professional investors, as specified under the FSCMA, or (2) persons who hold shares for purposes other than management control by the tenth day of the month immediately following the month of share acquisition or change in their shareholding. Those who reported the purpose of shareholding is to affect control over management of the issuer are prohibited from exercising their voting rights and acquiring additional shares for five days subsequent to the report under the FSCMA.

Violation of these reporting requirements may subject a person to criminal sanctions such as fines or imprisonment and may result in a loss of voting rights with respect to the ownership of unreported equity securities exceeding 5.0%. Furthermore, the FSC may issue an order to dispose of such non-reported equity securities.

In addition to the reporting requirements described above, any person whose direct or beneficial ownership of our common shares accounts for 10.0% or more of the total issued and outstanding shares with voting rights (a “major shareholder”) must report the status of his or her shareholding to the Securities and Futures Commission and the Korea Exchange within five business days after he or she becomes a major shareholder. In addition, any change in the ownership interest subsequent to the report must be reported to the Securities and Futures Commission and the Korea Exchange by the fifth business day of any changes in his or her shareholding. Violations of these reporting requirements may subject a person to criminal sanctions, such as fines or imprisonment.

Restrictions Applicable to ADSs

No Korean governmental approval is necessary for the sale and purchase of ADSs in the secondary market outside Korea or for the withdrawal of shares underlying ADSs and the delivery of shares in Korea in connection with the withdrawal, provided that a foreigner who intends to acquire the shares must obtain an investment registration card from the FSS, as described below. The acquisition of the shares by a foreigner must be reported by the foreigner or his or her standing proxy in Korea immediately to the Governor of the FSS (the “Governor”).

Persons who have acquired shares as a result of the withdrawal of shares underlying the ADSs may exercise their preemptive rights for new shares, participate in free distributions and receive dividends on shares without any further governmental approval.

 

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In addition, we are required to file a securities registration statement with the FSC and such securities registration statement has to become effective pursuant to the FSCMA in order for us to issue shares represented by ADSs, except in certain limited circumstances.

Restrictions Applicable to Shares

As a result of amendments to the Foreign Exchange Transaction Laws and the regulations of the FSC, together referred to as the Investment Rules, adopted in connection with the stock market opening from January 1992 and after that date, foreigners may invest, with limited exceptions and subject to procedural requirements, in all shares of Korean companies, whether listed on the KRX KOSPI Market or the KRX KOSDAQ Market, unless prohibited by specific laws. Foreign investors may trade shares listed on the KRX KOSPI Market or the KRX KOSDAQ Market only through the KRX KOSPI Market or the KRX KOSDAQ Market, except in limited circumstances, including, among others:

 

   

odd-lot trading of shares;

 

   

acquisition of shares by a foreign company as a result of a merger;

 

   

acquisition or disposal of shares in connection with a tender offer;

 

   

acquisition of shares by exercise of warrant, conversion right under convertible bonds, exchange right under exchangeable bonds or withdrawal right under depositary receipts issued outside of Korea by a Korean company (“converted shares”);

 

   

acquisition of shares through exercise of rights under securities issued outside of Korea;

 

   

acquisition of shares as a result of inheritance, donation, bequest or exercise of shareholders’ rights, including preemptive rights or rights to participate in free distributions and receive dividends;

 

   

over-the-counter transactions between foreigners of a class of shares for which the ceiling on aggregate acquisition by foreigners, as explained below, has been reached or exceeded;

 

   

acquisition of shares by direct investment under the Foreign Investment Promotion Law;

 

   

acquisition and disposal of shares on an overseas stock exchange market, if such shares are simultaneously listed on the KRX KOSPI Market or KRX KOSDAQ Market and such overseas stock exchange;

 

   

arm’s length transactions between foreigners in the event all such foreigners belong to an investment group managed by the same person; and

 

   

acquisition and disposal of shares through alternative trading systems.

For over-the-counter transactions of shares between foreigners outside the KRX KOSPI Market or the KRX KOSDAQ Market for shares with respect to which the limit on aggregate foreign ownership has been reached or exceeded, a financial investment company with a brokerage license in Korea must act as an intermediary. Odd-lot trading of shares outside the KRX KOSPI Market or the KRX KOSDAQ Market must involve a financial investment company with a dealing license in Korea as the other party. Foreign investors are prohibited from engaging in margin transactions through borrowing shares from financial investment companies with respect to shares which are subject to a foreign ownership limit.

The Investment Rules require a foreign investor who wishes to invest in shares for the first time on the KRX KOSPI Market or the KRX KOSDAQ Market (including converted shares) and shares being publicly offered for initial listing on the KRX KOSPI Market or the KRX KOSDAQ Market to register its identity with the FSS prior to making any such investment; however, the registration requirement does not apply to foreign investors who acquire converted shares with the intention of selling such converted shares within three months from the date of acquisition of the converted shares or who acquire the shares in an over-the-counter transaction or dispose of shares where such acquisition or disposal is deemed to be a foreign direct investment pursuant to the Foreign Investment Promotion Law. Upon registration, the FSS will issue to the foreign investor an investment registration card which must be presented each time the foreign investor opens a brokerage account with a financial investment company or financial institution in Korea. Foreigners eligible to obtain an investment registration card include foreign nationals who have not been residing in Korea for a consecutive period of six months or longer, foreign governments, foreign

 

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municipal authorities, foreign public institutions, international financial institutions or similar international organizations, corporations incorporated under foreign laws and any person in any additional category designated by decree promulgated under the FSCMA. All Korean offices of a foreign corporation as a group are treated as a separate foreigner from the offices of the corporation outside Korea for the purpose of investment registration. However, a foreign corporation or depositary issuing depositary receipts may obtain one or more investment registration cards in its name in certain circumstances as described in the relevant regulations.

Upon a foreign investor’s purchase of shares through the KRX KOSPI Market or the KRX KOSDAQ Market, no separate report by the investor is required because the investment registration card system is designed to control and oversee foreign investment through a computer system. However, where a foreign investor acquires or sells shares outside the KRX KOSPI Market and the KRX KOSDAQ Market, such acquisition or sale of shares must be reported by the foreign investor or such foreign investor’s standing proxy to the Governor at the time of each such acquisition or sale; provided, however, that a foreign investor must ensure that any acquisition or sale of shares outside the KRX KOSPI Market or the KRX KOSDAQ Market in the case of trades in connection with a tender offer, odd-lot trading of shares or trades of a class of shares for which the aggregate foreign ownership limit has been reached or exceeded, is reported to the Governor by the Korea Securities Depository, financial investment companies with a dealing or brokerage license or securities finance companies engaged to facilitate such transaction. In the event a foreign investor desires to acquire or sell shares outside the KRX KOSPI Market or the KRX KOSDAQ Market and the circumstances in connection with such sale or acquisition do not fall within the exceptions made for certain limited circumstances described above, then the foreign investor must obtain the prior approval of the Governor. In addition, in the event a foreign investor acquires or sells shares outside the KRX KOSPI Market or the KRX KOSDAQ Market, a prior report to the Bank of Korea may also be required in certain circumstances. A foreign investor must appoint one or more standing proxies among the Korea Securities Depository, foreign exchange banks (including domestic branches of foreign banks), financial investment companies with a dealing, brokerage or collective investment license and certain eligible foreign custodians which will act as a standing proxy to exercise shareholders’ rights, or perform any matters related to the foregoing activities if the foreign investor does not perform these activities himself. Generally, a foreign investor may not permit any person, other than his, her or its standing proxy, to exercise rights relating to its shares or perform any tasks related thereto on his, her or its behalf. However, a foreign investor may be exempted from complying with these standing proxy rules with the approval of the Governor in cases deemed inevitable by reason of conflict between laws of Korea and the home country of the foreign investor.

Certificates evidencing shares of Korean companies must be kept in custody with an eligible custodian in Korea. The Korea Securities Depository, foreign exchange banks (including domestic branches of foreign banks), financial investment companies with a dealing, brokerage or collective investment license and certain eligible foreign custodians are eligible to act as a custodian of shares for a non-resident or foreign investor. A foreign investor must ensure that his, her or its custodian deposits the shares with the Korea Securities Depository. However, a foreign investor may be exempted from complying with this deposit requirement with the approval of the Governor in circumstances where compliance with that requirement is made impracticable, including cases where compliance would contravene the laws of the home country of such foreign investor.

Under the Investment Rules, with certain exceptions, foreign investors may acquire shares of a Korean company without being subject to any foreign investment ceiling. As one such exception, designated public corporations are subject to a 40.0% ceiling on the acquisition of shares by foreigners in the aggregate. Designated public corporations may set a ceiling on the acquisition of shares by a single person within 3.0% of the total number of shares in their articles of incorporation. Currently, Korea Electric Power Corporation is the only designated public corporation which has set such a ceiling. Furthermore, an investment by a foreign investor of not less than 10.0% of the outstanding shares with voting rights of a Korean company is defined as a direct foreign investment under the Foreign Investment Promotion Law, which is, in general, subject to the report to, and acceptance by, the Ministry of Trade, Industry and Energy of Korea, which delegates its authority to foreign exchange banks or the Korea Trade-Investment Promotion Agency under the relevant regulations. The acquisition of our shares by a foreign investor is also subject to the restrictions prescribed in the Telecommunications Business Act. The Telecommunications Business Act generally limits the maximum aggregate foreign shareholdings in us to 49.0% of the outstanding shares. A foreigner who has acquired shares in excess of such restriction described above may not exercise the voting rights with respect to the shares exceeding such limitations and may be subject to corrective orders.

 

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Under the Foreign Exchange Transaction Laws, a foreign investor who intends to make a portfolio investment in shares of a Korean company listed on the KRX KOSPI Market or the KRX KOSDAQ Market must designate a foreign exchange bank at which he, she or it must open a foreign currency account and a Won account exclusively for stock investments. No approval is required for remittance into Korea and deposit of foreign currency funds in the foreign currency account. Foreign currency funds may be transferred from the foreign currency account at the time required to place a deposit for, or settle the purchase price of, a stock purchase transaction to a Won account opened at a securities company. Funds in the foreign currency account may be remitted abroad without any governmental approval.

Dividends on shares are paid in Won. No governmental approval is required for foreign investors to receive dividends on, or the Won proceeds of the sale of, any such shares to be paid, received and retained in Korea. Dividends paid on, and the Won proceeds of the sale of, any such shares held by a non-resident of Korea must be deposited either in a Won account with the investor’s financial investment companies with a securities dealing, brokerage or collective investment license or the investor’s Won account. Funds in the investor’s Won account may be transferred to such investor’s foreign currency account or withdrawn for local living expenses, provided that any withdrawal of local living expenses in excess of a certain amount is reported to the tax authorities by the foreign exchange bank at which the Won account is maintained. Funds in the investor’s Won account may also be used for future investment in shares or for payment of the subscription price of new shares obtained through the exercise of preemptive rights.

Financial investment companies with a securities dealing, brokerage or collective investment license are allowed to open foreign currency accounts with foreign exchange banks exclusively for accommodating foreign investors’ stock investments in Korea. Through these accounts, these financial investment companies may enter into foreign exchange transactions on a limited basis, such as conversion of foreign currency funds and Won funds, either as a counterparty to or on behalf of foreign investors, without the investors having to open their own accounts with foreign exchange banks.

 

Item 10.D. Taxation

United States Taxation

This summary describes certain material U.S. federal income tax consequences for a U.S. holder (as defined below) of acquiring, owning, and disposing of common shares or ADSs. This summary applies to you only if you hold our common shares or ADSs as capital assets for tax purposes. This summary does not apply to you if you are a member of a class of holders subject to special rules, such as:

 

   

a dealer in securities or currencies;

 

   

a trader in securities that elects to use a mark-to-market method of accounting for securities holdings;

 

   

a bank;

 

   

a life insurance company;

 

   

a tax-exempt organization;

 

   

a person that holds common shares or ADSs that are a hedge or that are hedged against interest rate or currency risks;

 

   

a person that holds common shares or ADSs as part of a straddle or conversion transaction for tax purposes;

 

   

a person whose functional currency for tax purposes is not the U.S. dollar; or

 

   

a person that owns or is deemed to own 10.0% or more of any class of our stock.

This summary is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations promulgated thereunder, and published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis.

Please consult your own tax advisers concerning the U.S. federal, state, local, and other tax consequences of purchasing, owning, and disposing of common shares or ADSs in your particular circumstances.

 

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For purposes of this summary, you are a “U.S. holder” if you are the beneficial owner of a common share or an ADS and are:

 

   

a citizen or resident of the United States;

 

   

a U.S. domestic corporation; or

 

   

otherwise subject to U.S. federal income tax on a net income basis with respect to income from the common share or ADS.

In general, if you are the beneficial owner of ADSs, you will be treated as the beneficial owner of the common shares represented by those ADSs for U.S. federal income tax purposes, and no gain or loss will be recognized if you exchange an ADS for the common share represented by that ADS.

Dividends

The gross amount of cash dividends that you receive (prior to deduction of Korean taxes) generally will be subject to U.S. federal income taxation as foreign source “passive income” dividend income and will not be eligible for the dividends received deduction. Dividends paid in Won will be included in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of your receipt of the dividend, in the case of common shares, or the depositary’s receipt, in the case of ADSs, regardless of whether the payment is in fact converted into U.S. dollars. If such a dividend is converted into U.S. dollars on the date of receipt, you generally should not be required to recognize foreign currency gain or loss in respect of the dividend income.

Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual with respect to the ADSs will be subject to taxation at a maximum rate of 20.0% if the dividends are “qualified dividends”. Dividends paid on the ADSs will be treated as qualified dividends if (1) the ADSs are readily tradable on an established securities market in the United States and (2) we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign investment company as defined for U.S. federal income tax purposes (“PFIC”). The ADSs are listed on the NYSE, and will qualify as readily tradable on an established securities market in the United States so long as they are so listed. Based on our audited financial statements, as well as relevant market and shareholder data, we believe that we were not a PFIC with respect to our 2016 taxable year. In addition, based on our audited financial statements and current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market and shareholder data, we do not anticipate becoming a PFIC for our 2017 taxable year.

Distributions of additional shares in respect of common shares or ADSs that are made as part of a pro-rata distribution to all of our stockholders generally will not be subject to U.S. federal income tax.

Sale or Other Disposition

For U.S. federal income tax purposes, gain or loss you realize on a sale or other disposition of common shares or ADSs generally will be treated as U.S. source capital gain or loss, and will be long-term capital gain or loss if the common shares or ADSs were held for more than one year. Your ability to offset capital losses against ordinary income is limited. Long-term capital gain recognized by an individual U.S. holder generally is subject to taxation at reduced rates.

Foreign Tax Credit Considerations

You should consult your own tax advisers to determine whether you are subject to any special rules that limit your ability to make effective use of foreign tax credits, including the possible adverse impact of failing to take advantage of benefits under the income tax treaty between the United States and Korea. If no such rules apply, you may claim a credit against your U.S. federal income tax liability for Korean taxes withheld from dividends on the common shares or ADSs, so long as you have owned our common shares or ADSs (and not entered into specified kinds of hedging transactions) for at least a 16-day period that includes the ex-dividend date. Instead of claiming a credit, you may, if you so elect, deduct such Korean taxes in computing your taxable income, subject to generally applicable limitations under U.S. tax law. Korean taxes withheld from a distribution of additional shares that is not subject to U.S. tax may be treated for U.S. federal income tax purposes as imposed on “general category” income. Such treatment could affect your ability to utilize any available foreign tax credit in respect of such taxes.

 

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Any Korean securities transaction tax or agricultural and fishery special surtax that you pay will not be creditable for foreign tax credit purposes.

Foreign tax credits will not be allowed for withholding taxes imposed in respect of certain short-term or hedged positions in securities and may not be allowed in respect of arrangements in which a U.S. holder’s expected economic profit is insubstantial.

The calculation of foreign tax credits and, in the case of a U.S. holder that elects to deduct foreign taxes, the availability of deductions involve the application of complex rules that depend on a U.S. holder’s particular circumstances. You should consult your own tax advisers regarding the creditability or deductibility of such taxes.

Specified Foreign Financial Assets

Certain U.S. holders that own “specified foreign financial assets” with an aggregate value in excess of US$50,000 are generally required to file an information statement along with their tax returns, currently on Form 8938, with respect to such assets. “Specified foreign financial assets” include any financial accounts held at a non-U.S. financial institution, as well as securities issued by a non-U.S. issuer (which would include the common shares or ADSs) that are not held in accounts maintained by financial institutions. Higher reporting thresholds apply to certain individuals living abroad and to certain married individuals. Regulations extend this reporting requirement to certain entities that are treated as formed or availed of to hold direct or indirect interests in specified foreign financial assets based on certain objective criteria. U.S. holders who fail to report the required information could be subject to substantial penalties. Prospective investors should consult their own tax advisers concerning the application of these rules to their investment in the common shares or ADSs, including the application of the rules to their particular circumstances.

U.S. Information Reporting and Backup Withholding Rules

Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries are subject to information reporting and may be subject to backup withholding unless the holder (1) is a corporation or other exempt recipient and demonstrates this when required or (2) provides a taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. Holders that are not U.S. persons generally are not subject to information reporting or backup withholding. However, such a holder may be required to provide a certification of its non-U.S. status in connection with payments received within the United States or through a U.S.-related financial intermediary.

Korean Taxation

The following is a summary of the principal Korean tax consequences to owners of the common shares or ADSs, as the case may be, who are non-resident individuals or non-Korean corporations without a permanent establishment in Korea to which the relevant income is attributable or with which the relevant income is effectively connected (“Non-resident Holders”). The statements regarding Korean tax laws set forth below are based on the laws in force and as interpreted by the Korean taxation authorities as of the date hereof. This summary is not exhaustive of all possible tax considerations which may apply to a particular investor and potential investors are advised to satisfy themselves as to the overall tax consequences of the acquisition, ownership and disposition of the common shares or ADSs, including specifically the tax consequences under Korean law, the laws of the jurisdiction of which they are resident, and any tax treaty between Korea and their country of residence, by consulting their own tax advisors.

Tax on Dividends

Dividends on the common shares or ADSs paid (whether in cash or in shares) to a Non-resident Holder will be subject to Korean withholding taxes at the rate of 22.0% (including local income tax) or such lower rate as is applicable under a treaty between Korea and such Non-resident Holder’s country of tax residence. Free distributions of shares representing a capitalization of certain capital surplus reserves may be subject to Korean withholding taxes.

 

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The tax is withheld by the payer of the dividend. Since the payer is required to withhold the tax, Korean law does not entitle the person who was subject to the withholding of Korean tax to recover from the Government any part of the Korean tax withheld, even if it subsequently produces evidence that it was entitled to have tax withheld at a lower rate, except in certain limited circumstances.

Tax on Capital Gains

As a general rule, capital gains earned by Non-resident Holders upon transfer of the common shares or ADSs are subject to Korean withholding tax at the lower of (1) 11.0% (including local income tax) of the gross proceeds realized or (2) 22.0% (including local income tax) of the net realized gains (subject to the production of satisfactory evidence of the acquisition costs and certain direct transaction costs), unless exempt from Korean income taxation under the effective Korean tax treaty with the Non-resident Holder’s country of tax residence.

However, a Non-resident Holder will not be subject to Korean income taxation on capital gains realized upon the sale of the common shares through the KRX KOSPI Market if the Non-resident Holder (1) has no permanent establishment in Korea and (2) did not or has not owned (together with any shares owned by any entity with certain special relationship with such Non-resident Holder) 25.0% or more of the total issued and outstanding shares of us at any time during the calendar year in which the sale occurs and during the five calendar years prior to the calendar year in which the sale occurs.

It should be noted that capital gains earned by you (regardless of whether you have a permanent establishment in Korea) from a transfer of ADSs outside Korea will generally be exempt from Korean income taxation, provided that the ADSs are deemed to have been issued overseas. If and when an owner of the underlying common shares transfers the ADSs following the conversion of the underlying shares for ADSs, such person will not be exempt from Korean income taxation.

Inheritance Tax and Gift Tax

Korean inheritance tax is imposed upon (1) all assets (wherever located) of the deceased if at the time of his death he was domiciled in Korea and (2) all property located in Korea which passes on death (irrespective of the domicile of the deceased). Gift tax is imposed in similar circumstances to the above. The taxes are imposed if the value of the relevant property is above a certain limit and vary according to the identity of the parties involved.

Under Korean inheritance and gift tax laws, securities issued by a Korean corporation are deemed to be located in Korea irrespective of where they are physically located or by whom they are owned.

Securities Transaction Tax

Securities transaction tax is imposed on the transfer of shares issued by a Korean corporation or the right to subscribe for such shares generally at the rate of 0.5% of the sales price. In the case of the transfer of shares listed on the KRX KOSPI Market (such as our common shares), the securities transaction tax is imposed generally at the rate of (1) 0.3% of the sales price of such shares (including agricultural and fishery special surtax thereon) if traded on the KRX KOSPI Market or (2) subject to certain exceptions, 0.5% of the sales price of such shares if traded outside the KRX KOSPI Market.

Securities transaction tax or the agricultural and fishery special surtax is not applicable if (1) the shares or rights to subscribe for shares are listed on a designated foreign stock exchange and (2) the sale of the shares takes place on such exchange.

Securities transaction tax, if applicable, must be paid by the transferor of the shares or rights, in principle. When the transfer is effected through a securities settlement company, such settlement company is generally required to withhold and pay (to the tax authority) the tax, and when such transfer is made through a financial investment company with a brokerage license only, such company is required to withhold and pay the tax. Where the transfer is effected by a Non-resident Holder without a permanent establishment in Korea, other than through a securities settlement company or a financial investment company with a brokerage license, the transferee is required to withhold the securities transaction tax. Failure to do so will result in the imposition of penalties equal to the sum of (1) between 10.0% to 40.0% of the tax amount due, depending on the nature of the improper reporting, and (2) 10.95% per annum on the tax amount due for the default period.

 

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Tax Treaties

Currently, Korea has income tax treaties with a number of countries, inter alia, Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, Luxembourg, Ireland, the Netherlands, New Zealand, Norway, Singapore, Sweden, Switzerland, the United Kingdom and the United States under which the rate of withholding tax on dividend and interest is reduced, generally to between 5.0% and 16.5% (including local income tax), and the tax on capital gains derived by a non-resident from the transfer of securities issued by a Korean company is often eliminated.

Each Non-resident Holder of common shares should inquire for itself whether it is entitled to the benefits of a tax treaty with Korea. It is the responsibility of the party claiming the benefits of a tax treaty in respect of interest, dividend, capital gains or “other income” to submit to us (or our agent), the purchaser or the financial investment company with a brokerage license, as the case may be, prior to or at the time of payment, such evidence of tax residence of the party claiming the treaty benefit as the Korean tax authorities may require in support of its claim for treaty protection. In the absence of sufficient proof, we (or our agent), the purchaser or the financial investment company with a brokerage license, as the case may be, must withhold tax at the normal rates.

Furthermore, in order for a non-resident of Korea to obtain the benefits of tax exemption on certain Korean source income (e.g., capital gains and interest) under an applicable tax treaty, Korean tax law requires such non-resident (or its agent) to submit to the payer of such Korean source income an application for a tax exemption along with a certificate of tax residency of such non-resident issued by a competent authority of the non-resident’s country of tax residence, subject to certain exceptions. The payer of such Korean source income, in turn, is required to submit such application to the relevant district tax office by the ninth day of the month following the date of the first payment of such income.

For a non-resident of Korea to obtain the benefits of treaty-reduced tax rates on certain Korean source income (e.g., capital gains and interest) under an applicable tax treaty, Korean tax law requires such non-resident (or its agents) to submit to the payer of such Korean source income an application for treaty-reduced tax rates prior to receipt of such Korean source income; provided, however, that an owner of ADSs who is a non-resident of Korea is not required to submit such application, if the Korean source income on the ADSs is paid through an account opened at the Korea Securities Depository by a foreign depository.

At present, Korea has not entered into any tax treaty relating to inheritance or gift tax.

 

Item 10.E. Dividends and Paying Agents

Not applicable.

 

Item 10.F. Statements by Experts

Not applicable.

 

Item 10.G. Documents on Display

We file reports, including annual reports on Form 20-F, and other information with the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers. You may read and copy any materials filed with the SEC at the Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Any filings we make electronically will be available to the public over the Internet at the SEC’s Website at http://www.sec.gov.

Documents filed with annual reports and documents filed or submitted to the SEC are also available for inspection at our principal business office during normal business hours. Our principal business office is located at SK T-Tower, 65, Eulji-ro, Jung-gu, Seoul 04539, Korea.

 

Item 10.H. Subsidiary Information

Not applicable.

 

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Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to foreign exchange rate and interest rate risk primarily associated with underlying liabilities and to equity price risk as a result of our investment in equity instruments.

We have entered into a floating-to-fixed cross currency swap contract to hedge foreign currency and interest rate risks with respect to long-term borrowings of US$300 million of bonds issued in March 2013. In addition, we have entered into fixed-to-fixed cross currency swap contracts to hedge the foreign currency risks of US$400 million of bonds issued in July 2007, CHF 300 million of bonds issued in June 2012, US$700 million of bonds issued in November 2012, AUD 300 million of bonds issued in January 2013, US$300 million of bonds issued in October 2013 and US$63.3 million of borrowings from December 2013. We also entered into floating-to-fixed interest rate swap contracts to hedge interest rate risks with respect to Won 49.0 billion of borrowings from December 2016 and Won 44.9 billion of borrowings from January 2017. See note 21 of the notes to our consolidated financial statements. We may consider in the future entering into other such transactions solely for hedging purposes.

The following discussion and tables, which constitute “forward looking statements” that involve risks and uncertainties, summarize our market-sensitive financial instruments including fair value, maturity and contract terms. These tables address market risk only and do not present other risks which we face in the normal course of business, including country risk, credit risk and legal risk.

Exchange Rate Risk

Korea is our main market and, therefore, substantially all of our cash flow is denominated in Won. We are exposed to foreign exchange risk related to foreign currency denominated liabilities. These liabilities relate primarily to foreign currency denominated debt, primarily in Dollars, Franc and Australian Dollars. A 10.0% increase in the exchange rate between the Won and all foreign currencies would result in an increase in profit before income tax of approximately 0.4%, or Won 8.6 billion, with a decrease of 10.0% in the exchange rate having the opposite effect, as of December 31, 2016. For a further discussion of our exchange rate risk exposures, see note 33(1) of the notes to our consolidated financial statements.

Interest Rate Risk

We are also subject to market risk exposure arising from changing interest rates. The following table summarizes the carrying amounts and fair values, maturity and contract terms of our exchange rate and interest sensitive short-term and long-term liabilities as of December 31, 2016:

 

    Maturities  
    2017     2018     2019     2020     2021     Thereafter     Total     Fair Value  
    (In billions of Won, except for percentage data)  

Local currency:

             

Fixed-rate

    ₩258.8       ₩ 434.2       ₩900.2       ₩428.8       ₩608.1       ₩1,953.5       ₩4,583.6       ₩4,771.9  

Average weighted rate(1)

    3.93     3.49     2.79     2.38     2.76     2.86    

Sub-total

    258.8       434.2       900.2       428.8       608.1       1,953.5       4,583.6       4,771.9  

Foreign currency:

             

Fixed-rate

    13.9       629.3       1,217.8       13.9       13.9       484.1       2,372.9       2,618.9  

Average weighted rate(1)

    1.70     3.00     2.36     1.70     1.70     6.64    

Variable rate

                            361.7             361.7       361.7  

Average weighted rate(1)

                            1.88          

Sub-total

    13.9       629.3       1,217.8       13.9       375.6       484.1       2,734.6       2,980.6  

Total

    ₩272.7       ₩1,063.5       ₩2,118.0       ₩442.7       ₩983.7       ₩2,437.6       ₩7,318.2       ₩7,752.5  

 

 

(1) Weighted average rates of the portfolio at the period end.

 

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A 1.0% point increase in interest rates would result in a decrease in profit before income tax of approximately Won 0.04 billion with a 1.0% point decrease in interest rates having the opposite effect, as of December 31, 2016. For a further discussion of our interest rate risk exposures, see note 33(1) of the notes to our consolidated financial statements.

Equity Price Risk

We are also subject to market risk exposure arising from changes in the equity securities market, which affect the fair value of our equity portfolio. As of December 31, 2016, 2015 and 2014, a 10.0% increase in the equity indices where our available-for-sale equity instruments are listed, with all other variables held constant, would have increased our total equity by Won 52.6 billion, Won 89.8 billion and Won 54.2 billion, respectively, with a 10.0% decrease in the equity index having the opposite effect. The foregoing sensitivity analysis assumes that all variables other than changes in the equity index are held constant, and that our available-for-sale equity instruments had moved according to the historical correlation to the index, and as such, does not reflect any correlation between the equity index and other variables. For a further discussion of our equity price risk exposures, see note 33(1) of the notes to our consolidated financial statements.

 

Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

Item 12.A. Debt Securities

Not applicable.

 

Item 12.B. Warrants and Rights

Not applicable.

 

Item 12.C. Other Securities

Not applicable.

 

Item 12.D. American Depositary Shares

Fees and Charges under Deposit Agreement

The ADR depositary will charge the party receiving ADSs up to US$5.00 per 100 ADSs (or fraction thereof), provided that the ADR depositary has agreed to waive such fee as would have been payable by us in the case of (1) an offering of ADSs by us or (2) any distribution of shares of common stock or any rights to subscribe for additional shares of common stock. The ADR depositary will not charge the party to whom ADSs are delivered against deposits. The ADR depositary will charge the party surrendering ADSs for delivery of deposited securities up to US$5.00 per 100 ADSs (or fraction thereof) surrendered. The ADR depositary will also charge the party to whom any cash distribution, or for whom the sale or exercise of rights or other corporate action involving distributions to shareholders, is made with respect to ADSs up to US$0.02 per ADS held plus the expenses of the ADR depositary on a per-ADS basis. We will pay the expenses of the ADR depositary and any entity acting as registrar for the shares only as specified in the deposit agreement. The ADR depositary will pay any other charges and expenses of the ADR depositary and the entity acting as registrar for the shares.

Holders of ADRs must pay (1) taxes and other governmental charges, (2) share transfer registration fees on deposits of shares of common stock, (3) such cable, telex, facsimile transmission and delivery expenses as are expressly provided in the deposit agreement to be at the expense of persons depositing shares of common stock or holders of ADRs and (4) such reasonable expenses as are incurred by the ADR depositary in the conversion of foreign currency into United States dollars.

Notwithstanding any other provision of the deposit agreement, in the event that the ADR depositary determines that any distribution in property (including shares or rights to subscribe therefor or other securities) is subject to any tax or governmental charges which the ADR depositary is obligated to withhold, the ADR depositary may dispose of all or a portion of such property (including shares and rights to subscribe therefor) in such amounts and in such

 

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manner as the ADR depositary deems necessary and practicable to pay such taxes or governmental charges, including by public or private sale, and the ADR depositary will distribute the net proceeds of any such sale or the balance of any such property after deduction of such taxes or governmental charges to the holders of ADSs entitled thereto in proportion to the number of ADSs held by them respectively.

All such charges may be changed by agreement between the ADR depositary and us at any time and from time to time, subject to the deposit agreement. The right of the ADR depositary to receive payment of fees, charges and expenses shall survive the termination of this deposit agreement and, as to any depositary, the resignation or removal of such depositary pursuant to the deposit agreement.

For a detailed summary of the deposit agreement, see “Item 10.B. Memorandum and Articles of Association — Description of American Depositary Shares.”

Payments made by ADS Depositary

The depositary reimburses us for certain expenses we incur in connection with our ADR program, subject to certain ceilings. These reimbursable expenses currently include expenses relating to the preparation of SEC filings and submissions, listing fees, education and training fees, corporate action expenses and other miscellaneous fees. In the fiscal year 2016, we received approximately US$1,293,630 from the depositary in connection with such reimbursements.

PART II

 

Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

 

Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

 

Item 15. CONTROLS AND PROCEDURES

Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2016. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as of December 31, 2016. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our consolidated financial statements would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may

 

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deteriorate. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS as issued by the IASB. Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2016.

Report of the Independent Registered Public Accounting Firm on the Effectiveness of Our Internal Control Over Financial Reporting

The report of our independent registered public accounting firm, KPMG Samjong Accounting Corp. (“KPMG Samjong”), on the effectiveness of our internal control over financial reporting as of December 31, 2016 is included in Item 18 of this Form 20-F.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 16. RESERVED

 

Item 16.A. AUDIT COMMITTEE FINANCIAL EXPERT

Dae Shick Oh is the chairman of our audit committee and was elected and designated an “audit committee financial expert” within the meaning of this Item 16A at a meeting of the board of directors in April 2014. The board of directors have further determined that Dae Shick Oh is independent within the meaning of applicable SEC rules and the listing standards of the NYSE. See “Item 6.C. Board Practices — Audit Committee” for additional information regarding our audit committee.

 

Item 16.B. CODE OF ETHICS

Code of Ethics for Chief Executive Officer, Chief Financial Officer and Controller

We have a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer, senior accounting officers and employees. We also have internal control and disclosure policy designed to promote full, fair, accurate, timely and understandable disclosure in all of our reports and publicly filed documents. A copy of our code of ethics is available on our website at www.sktelecom.com. If we amend the provisions of our code of ethics that apply to our Chief Executive Officer, Chief Financial Officer and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our website.

 

Item 16.C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The table sets forth the fees we paid to our independent registered public accounting firm KPMG Samjong and its affiliates for the years ended December 31, 2016 and 2015:

 

     Year Ended December 31,  
     2016      2015  
     (In millions of Won)  

Audit Fees

   3,029      3,325  

Audit-Related Fees

   14      36  

Tax Fees

   273      289  

All Other Fees

   0      0  
  

 

 

    

 

 

 

Total

   3,316      3,650  
  

 

 

    

 

 

 

“Audit Fees” are the aggregate fees billed by KPMG Samjong for the audit of our consolidated annual financial statements, reviews of interim financial statements and attestation services that are provided in connection with statutory and regulatory filings or engagements.

 

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“Audit-Related Fees” are fees charged by KPMG Samjong for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees.” This category comprises fees billed for advisory services associated with our financial reporting.

“Tax Fees” are fees for professional services rendered by KPMG Samjong for tax compliance, tax advice on actual or contemplated transactions and tax planning services.

Pre-Approval of Audit and Non-Audit Services Provided by Independent Registered Public Accounting Firm

Our audit committee pre-approves all audit services to be provided by KPMG Samjong, our independent registered public accounting firm. Our audit committee’s policy regarding the pre-approval of non-audit services to be provided to us by our independent auditors is that all such services shall be pre-approved by our audit committee. Non-audit services that are prohibited to be provided to us by our independent auditors under the rules of the SEC and applicable law may not be pre-approved. In addition, prior to the granting of any pre-approval, our audit committee must be satisfied that the performance of the services in question will not compromise the independence of our independent registered public accounting firm.

Our audit committee did not pre-approve any non-audit services under the de minimis exception of Rule 2-01 (c)(7)(i)(C) of Regulation S-X as promulgated by the SEC.

 

Item 16.D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

 

Item 16.E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Neither we nor any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, purchased any of our equity securities during the period covered by this annual report.

 

Item 16.F. CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT

Not applicable.

 

Item 16.G. CORPORATE GOVERNANCE

The following is a summary of the significant differences between the NYSE’s corporate governance standards and those that we follow under Korean law.

 

NYSE Corporate Governance Standards

  

Our Corporate Governance Practice

Director Independence

  
Listed companies must have a majority of independent directors.    Of the six members of our board of directors, four are independent directors.

Executive Session

  
Non-management directors must meet in regularly scheduled executive sessions without management. Independent directors should meet alone in an executive session at least once a year.    Our audit committee, which is comprised solely of three independent directors, holds meetings whenever there are matters related to management directors, and such meetings are generally held once every month.

Nomination/Corporate Governance Committee

  
Listed companies must have a nomination/corporate governance committee composed entirely of independent directors. The committee must have a charter that addresses the purpose, responsibilities (including development of corporate governance guidelines) and annual performance evaluation of the committee.    Although we do not have a separate nomination/ corporate governance committee, we maintain an independent director nomination committee composed of two independent directors and one management director.

 

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NYSE Corporate Governance Standards

  

Our Corporate Governance Practice

Compensation Committee

  
Listed companies must have a compensation committee composed entirely of independent directors. The committee must have a charter that addresses the purpose, responsibilities and annual performance evaluation of the committee. The charter must be made available on the company’s website. In addition, in accordance with the U.S. Securities and Exchange Commission rules adopted pursuant to Section 952 of the Dodd-Frank Act, the New York Stock Exchange listing standards were amended to expand the factors relevant in determining whether a committee member has a relationship with the company that will materially affect that member’s duties to the compensation committee.    We maintain a compensation review committee comprised of three independent directors.

Audit Committee

  
Listed companies must have an audit committee that satisfies the independence and other requirements of Rule 10A 3 under the Exchange Act. All members must be independent. The committee must have a charter addressing the committee’s purpose, an annual performance evaluation of the committee, and the duties and responsibilities of the committee. The charter must be made available on the company’s website.    We maintain an audit committee comprised solely of three independent directors.

Audit Committee Additional Requirements

  
Listed companies must have an audit committee that is composed of at least three directors.    Our audit committee has three independent directors.
Shareholder Approval of Equity Compensation Plan   
Listed companies must allow its shareholders to exercise their voting rights with respect to any material revision to the company’s equity compensation plan.    We currently have two equity compensation plans: a stock option plan for officers and directors and employee stock ownership plan for employees (“ESOP”). We manage such compensation plans in compliance with the applicable laws and our articles of incorporation, provided that, under certain limited circumstances, the grant of stock options or matters relating to ESOP are not subject to shareholders’ approval under Korean law.

Corporate Governance Guidelines

  
Listed companies must adopt and disclose corporate governance guidelines.    Although we do not maintain separate corporate governance guidelines, we are in compliance with the Korean Commercial Code in connection with such matters, including the governance of the board of directors.

Code of Business Conduct and Ethics

  
Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees and promptly disclose any waivers of the code for directors or executive officers.    We have adopted a Code of Business Conduct and Ethics for all of our directors, officers and employees, and such code is also available on our website at www.sktelecom.com.

 

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Item 16.H. MINE SAFETY DISCLOSURE

Not applicable.

PART III

 

Item 17. FINANCIAL STATEMENTS

Not applicable.

 

Item 18. FINANCIAL STATEMENTS

 

Index of Financial Statements

     F-1  

Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements

     F-2  

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

     F-3  

Consolidated Statements of Financial Position as of December 31, 2016 and 2015

     F-4  

Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014

     F-6  

Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014

     F-7  

Consolidated Statements of Changes in Equity for the years ended December 31, 2016, 2015 and 2014

     F-8  

Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014

     F-10  

Notes to the Consolidated Financial Statements for the years ended December 31, 2016, 2015 and 2014

     F-12  

Financial Statements of SK Hynix

  

Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements

     G-1  

Consolidated Statements of Financial Position as of December 31, 2016 and 2015

     G-2  

Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014

     G-4  

Consolidated Statements of Changes in Equity for the years ended December 31, 2016, 2015 and 2014

     G-5  

Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014

     G-7  

Notes to the Consolidated Financial Statements for the years ended December 31, 2016, 2015 and 2014

     G-8  

 

Item 19. EXHIBITS

 

Number

  

Description

  1.1    Articles of Incorporation
  2.1    Deposit Agreement dated as of May 31, 1996, as amended by Amendment No. 1 dated as of March 15, 1999, Amendment No. 2 dated as of April 24, 2000 and Amendment No. 3 dated as of July 24, 2002, entered into among SK Telecom Co., Ltd., Citibank, N.A., as Depositary, and all Holders and Beneficial Owners of American Depositary Shares (incorporated by reference to Exhibit 2.1 to the Registrant’s Annual Report on Form 20-F filed on June 30, 2006)
  8.1    List of Subsidiaries of SK Telecom Co., Ltd.
12.1    Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2    Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1    Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2    Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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INDEX TO FINANCIAL STATEMENTS

 

     Page  

Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements

     F-2  

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

     F-3  

Consolidated Statements of Financial Position as of December 31, 2016 and 2015

     F-4  

Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014

     F-6  

Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014

     F-7  

Consolidated Statements of Changes in Equity for the years ended December 31, 2016, 2015 and 2014

     F-8  

Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014

     F-10  

Notes to the Consolidated Financial Statements for the years ended December 31, 2016, 2015 and 2014

     F-12  

Financial Statements of SK Hynix

  

Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements

     G-1  

Consolidated Statements of Financial Position as of December 31, 2016 and 2015

     G-2  

Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014

     G-4  

Consolidated Statements of Changes in Equity for the years ended December 31, 2016, 2015 and 2014

     G-5  

Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014

     G-7  

Notes to the Consolidated Financial Statements for the years ended December 31, 2016, 2015 and 2014

     G-8  

 

F-1


Table of Contents

Report of Independent Registered Public Accounting Firm

To The Board of Directors and Shareholders

SK Telecom Co., Ltd.:

We have audited the accompanying consolidated statements of financial position of SK Telecom Co., Ltd. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2016. These consolidated financial statements are the responsibility of SK Telecom Co., Ltd.’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SK Telecom Co., Ltd. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of SK Telecom Co., Ltd.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 27, 2017, expressed an unqualified opinion on SK Telecom Co., Ltd.’s internal control over financial reporting.

/s/ KPMG Samjong Accounting Corp.

Seoul, Korea

April 27, 2017

 

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Table of Contents

Report of Independent Registered Public Accounting Firm

To The Board of Directors and Shareholders

SK Telecom Co., Ltd.:

We have audited the internal control over financial reporting of SK Telecom Co., Ltd. as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. SK Telecom Co., Ltd.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on SK Telecom Co., Ltd.’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, SK Telecom Co., Ltd. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), consolidated statements of financial position of SK Telecom Co., Ltd. and its subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2016, and our report dated April 27, 2017, expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG Samjong Accounting Corp.

Seoul, Korea

April 27, 2017

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Financial Position

As of December 31, 2016 and 2015

 

(In millions of won)    Note      December 31,
2016
     December 31,
2015
 

Assets

        

Current Assets:

        

Cash and cash equivalents

     32,33      1,505,242        768,922  

Short-term financial instruments

     5,32,33,34,35        468,768        691,090  

Short-term investment securities

     8,32,33        107,364        92,262  

Accounts receivable — trade, net

     6,32,33,34        2,240,926        2,344,867  

Short-term loans, net

     6,32,33,34        58,979        53,895  

Accounts receivable — other, net

     6,32,33,34,35        1,121,444        673,739  

Prepaid expenses

        169,173        151,978  

Inventories, net

     7        259,846        273,556  

Advanced payments and other

     6,8,32,33,34        64,886        109,933  
     

 

 

    

 

 

 

Total Current Assets

        5,996,628        5,160,242  
     

 

 

    

 

 

 

Non-Current Assets:

        

Long-term financial instruments

     5,32,33,35        937        10,623  

Long-term investment securities

     8,32,33        828,521        1,207,226  

Investments in associates and joint ventures

     11        7,404,323        6,896,293  

Property and equipment, net

     12,34,35        10,374,212        10,371,256  

Investment property, net

     13               15,071  

Goodwill

     14        1,932,452        1,908,590  

Intangible assets, net

     15        3,776,354        2,304,784  

Long-term loans, net

     6,32,33,34        65,476        62,454  

Long-term accounts receivable — other

     6,32,33,35        149,669        2,420  

Long-term prepaid expenses

        88,130        76,034  

Guarantee deposits

     6,32,33,34        298,964        297,281  

Long-term derivative financial assets

     21,32,33        214,770        166,399  

Defined benefit assets

     20        30,247         

Deferred tax assets

     29        75,111        17,257  

Other non-current assets

     6,32,33        61,869        85,457  
     

 

 

    

 

 

 

Total Non-Current Assets

        25,301,035        23,421,145  
     

 

 

    

 

 

 

Total Assets

      31,297,663        28,581,387  
     

 

 

    

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Financial Position — (Continued)

As of December 31, 2016 and 2015

 

(In millions of won)    Note      December 31,
2016
    December 31,
2015
 

Liabilities and Shareholders’ Equity

       

Current Liabilities:

       

Short-term borrowings

     16,32,33      2,614       260,000  

Current installments of long-term debt, net

     16,32,33        888,467       703,087  

Current installments of finance lease liabilities

     32,33              26  

Current installments of long-term payables — other

     17,32,33        301,773       120,185  

Accounts payable — trade

     32,33,34        402,445       279,782  

Accounts payable — other

     32,33,34        1,767,799       1,323,434  

Withholdings

     32,33,34        964,084       865,327  

Accrued expenses

     32,33        1,125,816       920,739  

Income tax payable

     29        474,931       381,794  

Unearned revenue

        188,403       224,233  

Provisions

     18        66,227       40,988  

Receipts in advance

        174,588       136,844  

Derivative financial liabilities

     21,32,33        86,950        

Other current liabilities

        2       54  
     

 

 

   

 

 

 

Total Current Liabilities

        6,444,099       5,256,493  
     

 

 

   

 

 

 

Non-Current Liabilities:

       

Debentures, excluding current installments, net

     16,32,33        6,338,930       6,439,147  

Long-term borrowings, excluding current installments

     16,32,33        139,716       121,553  

Long-term payables — other

     17,32,33        1,624,590       581,697  

Long-term unearned revenue

        2,389       2,842  

Defined benefit liabilities

     20        70,739       98,856  

Long-term derivative financial liabilities

     21,32,33        203       89,296  

Long-term provisions

     18        31,690       29,217  

Deferred tax liabilities

     29        479,765       538,114  

Other non-current liabilities

     32,33        49,112       50,076  
     

 

 

   

 

 

 

Total Non-Current Liabilities

        8,737,134       7,950,798  
     

 

 

   

 

 

 

Total Liabilities

        15,181,233       13,207,291  
     

 

 

   

 

 

 

Shareholders’ Equity

       

Share capital

     1,22        44,639       44,639  

Capital surplus (deficit) and others

     22,23,24        (198,739     (209,008

Hybrid bonds

     24        398,518       398,518  

Retained earnings

     25        15,953,164       15,007,627  

Reserves

     26        (226,183     9,303  
     

 

 

   

 

 

 

Equity attributable to owners of the Parent Company

        15,971,399       15,251,079  

Non-controlling interests

        145,031       123,017  
     

 

 

   

 

 

 

Total Shareholders’ Equity

        16,116,430       15,374,096  
     

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

      31,297,663       28,581,387  
     

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Income

For the years ended December 31, 2016, 2015 and 2014

 

(In millions of won except for per share data)    Note      2016     2015     2014  

Operating revenue and other income:

     4,34         

Revenue

      17,091,816       17,136,734       17,163,798  

Other income

     27        66,548       30,935       56,471  
     

 

 

   

 

 

   

 

 

 
        17,158,364       17,167,669       17,220,269  
     

 

 

   

 

 

   

 

 

 

Operating expenses:

     34         

Labor

        1,869,763       1,893,745       1,659,777  

Commissions

        5,376,726       5,206,951       5,692,680  

Depreciation and amortization

     4        2,941,886       2,845,295       2,714,730  

Network interconnection

        954,267       957,605       997,319  

Leased line

        394,412       389,819       399,014  

Advertising

        438,453       405,005       415,857  

Rent

        517,305       493,586       460,309  

Cost of products that have been resold

        1,838,368       1,955,861       1,680,110  

Others

     27        1,523,766       1,524,377       1,592,647  
     

 

 

   

 

 

   

 

 

 
        15,854,946       15,672,244       15,612,443  
     

 

 

   

 

 

   

 

 

 

Operating profit

     4        1,303,418       1,495,425       1,607,826  

Finance income

     4,28        575,050       103,900       126,337  

Finance costs

     4,28        (326,830     (350,100     (386,673

Gain relating to investments in subsidiaries, associates and joint ventures, net

     1,4,11        544,501       786,140       906,338  
     

 

 

   

 

 

   

 

 

 

Profit (loss) before income tax

        2,096,139       2,035,365       2,253,828  

Income tax expense

     29        436,038       519,480       454,508  
     

 

 

   

 

 

   

 

 

 

Profit for the year

      1,660,101       1,515,885       1,799,320  
     

 

 

   

 

 

   

 

 

 

Attributable to :

         

Owners of the Parent Company

      1,675,967       1,518,604       1,801,178  

Non-controlling interests

        (15,866     (2,719     (1,858

Earnings per share

     30         

Basic and diluted earnings per share (in won)

      23,497       20,988       25,154  

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Comprehensive Income

For the years ended December 31, 2016, 2015 and 2014

 

(In millions of won)    Note     2016     2015     2014  

Profit for the year

     1,660,101       1,515,885       1,799,320  

Other comprehensive income (loss)

        

Items that will never be reclassified to profit or loss, net of taxes:

        

Remeasurement of defined benefit liabilities

     20       (7,524     (14,489     (32,942

Items that are or may be reclassified subsequently to profit or loss, net of taxes:

        

Net change in unrealized fair value of available-for-sale financial assets

     26,28       (223,981     (3,661     27,267  

Net change in other comprehensive income of investments in associates and joint ventures

     11,26       (9,939     (5,709     8,187  

Net change in unrealized fair value of derivatives

     21,26,28       (13,218     (1,271     (45,942

Foreign currency translation differences for foreign operations

     26       7,331       26,965       14,944  
    

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) for the year, net of taxes

       (247,331     1,835       (28,486
    

 

 

   

 

 

   

 

 

 

Total comprehensive income

     1,412,770       1,517,720       1,770,834  
    

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss) attributable to:

        

Owners of the Parent Company

     1,432,982       1,522,280       1,777,519  

Non-controlling interests

       (20,212     (4,560     (6,685

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Changes in Equity

For the years ended December 31, 2016, 2015 and 2014

 

(In millions of won)       
     Attributable to owners     Non-
controlling
interests
       
     Share capital      Capital surplus
(deficit) and
others
    Hybrid
bonds
     Retained
earnings
    Reserves     Total       Total equity  

Balance at January 1, 2014

   44,639        (81,010     398,518        13,102,495       (12,270     13,452,372       714,185       14,166,557  

Total comprehensive income:

                  

Profit (loss) for the year

                         1,801,178             1,801,178       (1,858     1,799,320  

Other comprehensive income (loss)

                         (31,440     7,781       (23,659     (4,827     (28,486
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                         1,769,738       7,781       1,777,519       (6,685     1,770,834  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions with owners:

                  

Cash dividends

                         (666,802           (666,802     (170     (666,972

Interest on hybrid bonds

                         (16,840           (16,840           (16,840

Changes in consolidation scope

                                           23,667       23,667  

Business combination under common control

            (28,641                        (28,641           (28,641

Changes in ownership in subsidiaries

            (10,869                        (10,869     10,534       (335
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
            (39,510            (683,642           (723,152     34,031       (689,121
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

   44,639        (120,520     398,518        14,188,591       (4,489     14,506,739       741,531       15,248,270  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2015

   44,639        (120,520     398,518        14,188,591       (4,489     14,506,739       741,531       15,248,270  

Total comprehensive income:

                  

Profit (loss) for the year

                         1,518,604             1,518,604       (2,719     1,515,885  

Other comprehensive income (loss)

                         (13,402     17,078       3,676       (1,841     1,835  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                         1,505,202       17,078       1,522,280       (4,560     1,517,720  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions with owners:

                  

Cash dividends

                         (668,494           (668,494     (143     (668,637

Interest on hybrid bonds

                         (16,840           (16,840           (16,840

Acquisition of treasury shares

            (490,192                        (490,192           (490,192

Disposal of treasury shares

            425,744                          425,744             425,744  

Changes in consolidation scope

                                           (5,226     (5,226

Changes in ownership in subsidiaries

            (24,040            (832     (3,286     (28,158     (608,585     (636,743
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
            (88,488            (686,166     (3,286     (777,940     (613,954     (1,391,894
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

   44,639        (209,008     398,518        15,007,627       9,303       15,251,079       123,017       15,374,096  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

F-8


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Changes in Equity — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(In millions of won)       
     Attributable to owners              
     Share capital      Capital surplus
(deficit) and
others
    Hybrid
bonds
     Retained
earnings
    Reserves     Total     Non-
controlling
interests
    Total equity  

Balance at January 1, 2016

   44,639        (209,008     398,518        15,007,627       9,303       15,251,079       123,017       15,374,096  

Total comprehensive income:

                  

Profit (loss) for the year

                         1,675,967             1,675,967       (15,866     1,660,101  

Other comprehensive loss

                         (7,499     (235,486     (242,985     (4,346     (247,331
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                         1,668,468       (235,486     1,432,982       (20,212     1,412,770  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions with owners:

                  

Cash dividends

                         (706,091           (706,091     (300     (706,391

Interest on hybrid bonds

                         (16,840           (16,840           (16,840

Changes in ownership in subsidiaries

            10,269                          10,269       42,526       52,795  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
            10,269              (722,931           (712,662     42,226       (670,436
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

   44,639        (198,739     398,518        15,953,164       (226,183     15,971,399       145,031       16,116,430  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

F-9


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Cash Flows

For the years ended December 31, 2016, 2015 and 2014

 

(In millions of won)    2016     2015     2014  

Cash flows from operating activities:

      

Cash generated from operating activities

      

Profit for the year

   1,660,101       1,515,885       1,799,320  

Adjustments for income and expenses (Note 36)

     3,039,561       3,250,143       2,978,995  

Changes in assets and liabilities related to operating activities (Note 36)

     13,764       (685,734     (707,333
  

 

 

   

 

 

   

 

 

 

Sub-total

     4,713,426       4,080,294       4,070,982  

Interest received

     44,602       43,400       56,706  

Dividends received

     98,267       62,973       13,048  

Interest paid

     (245,236     (275,796     (280,847

Income tax paid

     (367,891     (132,742     (182,504
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     4,243,168       3,778,129       3,677,385  
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Cash inflows from investing activities:

      

Decrease in short-term financial instruments, net

     222,322             5,627  

Decrease in short-term investment securities, net

           105,158        

Collection of short-term loans

     238,980       398,308       207,439  

Decrease in long-term financial instruments

     28       7,424       2,535  

Proceeds from disposals of long-term investment securities

     555,519       149,310       65,287  

Proceeds from disposals of investments in associates and joint ventures

     66,852       185,094       7,333  

Proceeds from disposals of property and equipment

     22,549       36,586       25,143  

Proceeds from disposals of intangible assets

     16,532       3,769       10,917  

Proceeds from disposals of assets held for sale

           1,009       3,667  

Collection of long-term loans

     1,960       2,132       4,454  

Decrease in deposits

     14,894       14,635       8,891  

Proceeds from disposals of other non-current assets

     728       607       94  

Proceeds from disposals of subsidiaries

           155        

Increase in cash due to acquisition of subsidiaries

           10,355        

Receipt of government grants

     300              
  

 

 

   

 

 

   

 

 

 

Sub-total

     1,140,664       914,542       341,387  

Cash outflows for investing activities:

      

Increase in short-term financial instruments, net

           (385,612      

Increase in short-term investment securities, net

     (6,334           (174,209

Increase in short-term loans

     (239,303     (370,378     (202,501

Increase in long-term loans

     (32,287     (16,701     (4,341

Increase in long-term financial instruments

     (342     (10,008     (2,522

Acquisitions of long-term investment securities

     (30,949     (312,261     (41,305

Acquisitions of investments in associates and joint ventures

     (130,388     (65,080     (60,020

Acquisitions of property and equipment

     (2,490,455     (2,478,778     (3,008,026

Acquisitions of intangible assets

     (635,387     (127,948     (130,667

Cash held by disposal group classified as held for sale

                 (552

Increase in deposits

     (12,943     (12,536     (6,903

Increase in other non-current assets

     (763     (2,542     (18,233

Acquisitions of businesses, net of cash acquired

     (4,498     (13,197     (124,486

Acquisitions of subsidiaries, net of cash acquired

     (19,223           (250,787
  

 

 

   

 

 

   

 

 

 

Sub-total

     (3,602,872     (3,795,041     (4,024,552
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

   (2,462,208     (2,880,499     (3,683,165
  

 

 

   

 

 

   

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

F-10


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Cash Flows — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(In millions of won)    2016     2015     2014  

Cash flows from financing activities:

      

Cash inflows from financing activities:

      

Increase in short-term borrowings, net

               102,868  

Proceeds from issuance of debentures

     776,727       1,375,031       1,255,468  

Proceeds from long-term borrowings

     49,000             62,552  

Cash inflows from settlement of derivatives

     251       175       200  

Cash received from transfer of interests in subsidiaries to non-controlling interests

     35,646              
  

 

 

   

 

 

   

 

 

 

Sub-total

     861,624       1,375,206       1,421,088  

Cash outflows for financing activities:

      

Decrease in short-term borrowings, net

     (257,386     (106,600      

Repayments of long-term account payables-other

     (122,723     (191,436     (207,791

Repayments of debentures

     (770,000     (620,000     (1,039,938

Repayments of long-term borrowings

     (33,387     (21,924     (23,284

Cash outflows from settlement of derivatives

           (655     (6,444

Payments of finance lease liabilities

     (26     (3,206     (19,388

Payments of dividends

     (706,091     (668,494     (666,802

Payments of interest on hybrid bonds

     (16,840     (16,840     (16,840

Acquisitions of treasury shares

           (490,192      

Acquisitions of additional interests in subsidiaries

           (220,442      
  

 

 

   

 

 

   

 

 

 

Sub-total

     (1,906,453     (2,339,789     (1,980,487
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (1,044,829     (964,583     (559,399
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     736,131       (66,953     (565,179

Cash and cash equivalents at beginning of the year

     768,922       834,429       1,398,639  

Effects of exchange rate changes on cash and cash equivalents

     189       1,446       969  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of the year

   1,505,242       768,922       834,429  
  

 

 

   

 

 

   

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

F-11


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

For the years ended December 31, 2016, 2015 and 2014

 

1. Reporting Entity

(1)    General

SK Telecom Co., Ltd. (“the Parent Company”) was incorporated in March 1984 under the laws of the Republic of Korea (“Korea”) to provide cellular telephone communication services in Korea. The Parent Company mainly provides wireless telecommunications services in Korea. The head office of the Parent Company is located at 65, Eulji-ro, Jung-gu, Seoul, Korea.

The Parent Company’s common shares and depositary receipts (DRs) are listed on the Stock Market of Korea Exchange, the New York Stock Exchange and the London Stock Exchange. As of December 31, 2016, the Parent Company’s total issued shares are held by the following shareholders:

 

     Number of
shares
     Percentage of
total shares issued
 

SK Holdings Co., Ltd.

     20,363,452        25.22  

National Pension Service

     7,159,704        8.87  

Institutional investors and other minority shareholders

     43,086,004        53.36  

Treasury shares

     10,136,551        12.55  
  

 

 

    

 

 

 

Total number of shares

     80,745,711        100.00  
  

 

 

    

 

 

 

These consolidated financial statements comprise the Parent Company and its subsidiaries (together referred to as the “Group” and individuals as “Group entities”). SK Holdings Co., Ltd. is the ultimate controlling entity of the Parent Company.

(2)    List of subsidiaries

The list of subsidiaries as of December 31, 2016 and 2015 is as follows:

 

            Ownership (%)(*1)  

Subsidiary

 

Location

 

Primary business

  Dec. 31,
2016
    Dec. 31,
2015
 
Subsidiaries owned by the Parent Company  

SK Telink Co., Ltd.(*2)

  Korea   Telecommunication and MVNO service     85.9       83.5  
 

SK Communications Co., Ltd.(*3)

  Korea   Internet website services     64.5       64.5  
 

SK Broadband Co., Ltd.(*4)

  Korea   Telecommunication services     100.0       100.0  
 

PS&Marketing Corporation

  Korea   Communications device retail business     100.0       100.0  
 

SERVICEACE Co., Ltd.

  Korea   Customer center management service     100.0       100.0  
 

SERVICE TOP Co., Ltd.

  Korea   Customer center management service     100.0       100.0  
 

Network O&S Co., Ltd.

  Korea   Base station maintenance service     100.0       100.0  
 

SK Planet Co., Ltd.(*5)

  Korea   Telecommunication service     98.1       100.0  
 

IRIVER LIMITED (*6)

  Korea   Manufacturing digital audio players and other portable media devices     48.9       49.0  

 

F-12


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

            Ownership (%)(*1)  

Subsidiary

 

Location

 

Primary business

  Dec. 31,
2016
    Dec. 31,
2015
 
 

SK Telecom China Holdings Co., Ltd.

  China   Investment     100.0       100.0  
 

SK Global Healthcare Business Group, Ltd.

 

Hong Kong

 

Investment

 

 

100.0

 

 

 

100.0

 

 

SKT Vietnam PTE. Ltd.

  Singapore   Telecommunication services     73.3       73.3  
 

SKT Americas, Inc.

  USA   Information gathering and consulting     100.0       100.0  
 

YTK Investment Ltd.

  Cayman Islands   Investment association     100.0       100.0  
 

Atlas Investment

  Cayman Islands   Investment association     100.0       100.0  
 

Entrix Co., Ltd.

  Korea   Cloud streaming services     100.0       100.0  
 

SK techx Co., Ltd.(*7)

  Korea   System software development and supply     100.0        
 

One Store Co., Ltd.(*7)

  Korea   Telecommunication services     65.5        
Subsidiaries owned by SK Planet Co., Ltd.  

M&Service Co., Ltd.

  Korea   Data base and internet website service     100.0       100.0  
 

Commerce Planet Co., Ltd.(*7)

  Korea   Online shopping mall operation agency           100.0  
 

SK Planet Japan, K. K.

  Japan   Digital contents sourcing service     100.0       100.0  
 

SK Planet Global PTE. Ltd.

  Singapore   Digital contents sourcing service     100.0       100.0  
 

SKP GLOBAL HOLDINGS PTE. LTD.

  Singapore   Investment     100.0       100.0  
 

SKP America LLC.

  USA   Digital contents sourcing service     100.0       100.0  
 

shopkick Management Company, Inc.(*8)

  USA   Investment     100.0       95.2  
 

shopkick, Inc.

  USA   Reward points-based in-store shopping application development     100.0       100.0  
 

Planet11 E-commerce Solutions India Pvt. Ltd.(*7)

  India   Electronic commerce platform service     99.0        
 

11street (Thailand) Co., Ltd.(*7)

  Thailand   Electronic commerce     100.0        
 

Hello Nature Ltd.(*7)

  Korea   Retail of agro-fisheries and livestock     100.0        
Subsidiaries owned by IRIVER LIMITED  

iriver Enterprise Ltd.

  Hong Kong   Management of Chinese subsidiary     100.0       100.0  
 

iriver America Inc.(*7)

  USA   Marketing and sales in North America           100.0  
 

iriver Inc.

  USA   Marketing and sales in North America     100.0       100.0  

 

F-13


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

            Ownership (%)(*1)  

Subsidiary

 

Location

 

Primary business

  Dec. 31,
2016
    Dec. 31,
2015
 
 

iriver China Co., Ltd.

  China   Sales and manufacturing MP3 and 4 players     100.0       100.0  
 

Dongguan iriver Electronics Co., Ltd.

  China   Sales and manufacturing e-book     100.0       100.0  
 

groovers JP Ltd.

  Japan   Digital music contents sourcing and distribution service     100.0       100.0  
Subsidiaries owned by SK Telink Co., Ltd.  

Neosnetworks Co., Ltd.(*2)

  Korea   Security and maintenance services     100.0       83.9  
Subsidiaries owned by SK techx Co., Ltd.  

K-net Culture and Contents Venture Fund

  Korea   Capital investing in startups     59.0       59.0  
 

Fitech Focus Limited Partnership II(*7)

  Korea   Capital investing in startups           66.7  
 

Open Innovation Fund(*7)

  Korea   Capital investing in startups           98.9  
Others(*9)  

Stonebridge Cinema Fund

  Korea   Capital investing in startups     55.2       55.2  
 

SK Telecom Innovation Fund, L.P. (formerly, Technology Innovation Partners, L.P.)(*10)

  USA   Investment     100.0       100.0  
 

SK Telecom China Fund I L.P.

  Cayman Islands   Investment     100.0       100.0  

 

 

(*1) The ownership interest represents direct ownership interest in subsidiaries either by the Parent Company or subsidiaries of the Parent Company.

 

(*2) During the year ended December 31, 2016, the Parent Company acquired 219,967 shares of SK Telink Co., Ltd., a subsidiary of the Parent Company, in return for the transfer of Parent Company’s owned shares of Neosnetworks Co., Ltd., a subsidiary of the Parent Company, to SK Telink Co., Ltd., as contribution in kind.

In addition, SK Telink Co., Ltd. exercised call options to purchase the entire shares of Neosnetworks Co., Ltd. held by the non-controlling interests during the year ended December 31, 2016 and Neosnetworks Co., Ltd. became a wholly owned subsidiary of SK Telink Co., Ltd.

 

(*3) On November 24, 2016, the board of directors of the Parent Company resolved to acquire the shares of SK Communications Co., Ltd. held by all of the other shareholders of SK Communications Co., Ltd. on February 7, 2017 at ₩ 2,814 per share in cash.

On November 24, 2016, the extraordinary meeting of shareholders of the SK Communications Co., Ltd. approved the sale of shares and its voluntary delisting of SK Communication Co., Ltd.’s ordinary shares from KOSDAQ market of Korea Exchange.

 

(*4) On November 2, 2015, the board of directors of the Parent Company entered into a share purchase agreement to acquire 30%(23,234,060 shares) of the issued and outstanding common shares of CJ Hello Vision Co., Ltd. (“CJ Hello Vision”) from CJ O Shopping Co., Ltd. (“CJ O Shopping”) for an aggregate purchase price of ₩500,000 million. The agreement stated government’s approval as prerequisite.

On November 2, 2015, the board of directors of SK Broadband Co., Ltd. (“SK Broadband”), a subsidiary of the Parent Company, approved the merger of SK Broadband into CJ Hello Vision, and then SK Broadband entered into a merger agreement with CJ Hello Vision with government’s approval as prerequisite.

 

F-14


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

After the announcement of disapproval of proposed takeover of CJ Hello Vision by the Fair Trade Commission (FTC) on July 18, 2016, the Parent Company announced the revocation of share purchase agreement with CJ O Shopping while SK Broadband withdrew from merger agreement with CJ Hello Vision on July 25, 2016 as execution of the share purchase agreement with CJ O Shopping and merger agreement between SK Broadband and CJ Hello Vision became objectively impossible.

 

(*5) The ownership interest changed due to the shares issued to employee stock ownership association by SK Planet Co., Ltd. during the year ended December 31, 2016.

 

(*6) Although the Group has less than 50% of the voting rights of IRIVER LIMITED, the Group is considered to have control over IRIVER LIMITED since the Group holds significantly more voting rights than any other vote holder or organized group of vote holders, and the other shareholdings are widely dispersed.

 

(*7) Changes in subsidiaries are explained in Note 1-(4).

 

(*8) During the year ended December 31, 2016, the Group acquired all of the non-controlling interests in shopkick Management Company, Inc.

 

(*9) Others are owned together by SK techx Co., Ltd. and three other subsidiaries of the Parent Company.

 

(*10) Changed its name to SK Telecom Innovation Fund, L.P. during the year ended December 31, 2016.

(3)    Condensed financial information of subsidiaries

Condensed financial information of the significant subsidiaries as of and for the year ended December 31, 2016 is as follows:

 

(In millions of won)    As of December 31, 2016      2016  

Subsidiary

   Total
assets
     Total
liabilities
     Total
equity
     Revenue      Profit
(loss)
 

SK Telink Co., Ltd.

   440,956        122,741        318,215        406,930        61,585  

M&Service Co., Ltd.

     107,768        56,596        51,172        173,816        4,958  

SK Communications Co., Ltd.

     128,233        31,592        96,641        58,154        (20,411

SK Broadband Co., Ltd.

     3,523,494        2,376,429        1,147,065        2,942,976        21,526  

PS&Marketing Corporation

     546,803        328,846        217,957        1,679,735        11,908  

SERVICEACE Co., Ltd.

     67,735        40,014        27,721        199,828        3,605  

SERVICE TOP Co., Ltd.

     59,004        39,121        19,883        186,740        3,971  

Network O&S Co., Ltd.

     69,774        35,798        33,976        218,917        3,755  

SK Planet Co., Ltd.(*1)

     1,935,663        834,151        1,101,512        1,177,323        (30,959

IRIVER LIMITED(*2)

     50,075        11,941        38,134        52,328        (9,987

SKP America LLC.

     439,209               439,209               1,226  

SK techx Co., Ltd.

     212,819        52,563        160,256        193,396        28,213  

One Store Co., Ltd.

     134,207        41,738        92,469        106,809        (22,161

shopkick Management Company, Inc.

     354,627               354,627               (85

shopkick, Inc.

     37,947        34,024        3,923        45,876        (27,149

The above summary financial information is derived from separate financial statements of each subsidiary except for IRIVER LIMITED’s, which is consolidated financial information.

 

(*1) The separate financial information of SK Planet Co., Ltd. includes pre-merger income and expenses of Commerce Planet Co., Ltd. prior to the merger date of February 1, 2016.

 

(*2) The consolidated financial information of IRIVER LIMITED includes financial information of iriver Enterprise Ltd., iriver America Inc., iriver Inc., iriver China Co., Ltd., Dongguan iriver Electronics Co., Ltd. and groovers Japan Co., Ltd., subsidiaries of IRIVER LIMITED.

 

F-15


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

Condensed financial information of the significant subsidiaries as of and for the year ended December 31, 2015 is as follows:

 

(In millions of won)    As of December 31, 2015     2015  

Subsidiary

   Total
assets
     Total
liabilities
     Total
equity
    Revenue      Profit
(loss)
 

SK Telink Co., Ltd.

   309,955        113,878        196,077       431,368        55,781  

M&Service Co., Ltd.

     89,452        42,414        47,038       143,255        5,549  

SK Communications Co., Ltd.

     152,496        35,014        117,482       80,147        (14,826

SK Broadband Co., Ltd.

     3,291,707        2,170,484        1,121,223       2,731,344        10,832  

PS&Marketing Corporation

     509,580        300,364        209,216       1,791,944        4,835  

SERVICEACE Co., Ltd.

     65,424        34,240        31,184       206,338        2,778  

SERVICE TOP Co., Ltd.

     61,897        38,482        23,415       197,092        4,396  

Network O&S Co., Ltd.

     77,426        48,069        29,357       210,676        6,466  

SK Planet Co., Ltd.

     2,406,988        784,631        1,622,357       1,624,630        (75,111

IRIVER LIMITED(*)

     60,434        12,377        48,057       55,637        635  

SKP America LLC.

     380,141               380,141              791  

Entrix Co., Ltd.

     30,876        3,186        27,690       4,895        (1,826

shopkick Management Company, Inc.

     306,248        7        306,241       7        (2,455

shopkick, Inc.

     25,388        32,243        (6,855     33,851        (52,390

The above summary financial information is derived from separate financial statements of each subsidiary except for IRIVER LIMITED’s, which is consolidated financial information.

 

(*) The consolidated financial information of IRIVER LIMITED includes financial information of iriver Enterprise Ltd., iriver America Inc., iriver Inc., iriver China Co., Ltd., Dongguan iriver Electronics Co., Ltd. and groovers Japan Co., Ltd., subsidiaries of IRIVER LIMITED.

Condensed financial information of the significant subsidiaries as of and for the year ended December 31, 2014 is as follows:

 

(In millions of won)  
      As of December 31, 2014      2014  

Subsidiary

   Total
assets
     Total
liabilities
     Total
equity

(deficit)
     Revenue      Profit
(loss)
 

SK Telink Co., Ltd.

   324,028        184,074        139,954        465,463        13,073  

M&Service Co., Ltd.

     78,826        36,817        42,009        133,789        7,458  

SK Communications Co., Ltd.

     176,168        41,987        134,181        93,910        (18,386

SK Broadband Co., Ltd.

     3,109,991        1,988,379        1,121,612        2,654,381        4,307  

PS&Marketing Corporation

     544,292        336,221        208,071        1,627,217        2,817  

SERVICEACE Co., Ltd.

     66,336        37,770        28,566        207,427        3,570  

SERVICE TOP Co., Ltd.

     57,032        36,723        20,309        188,835        3,503  

Network O&S Co., Ltd.

     71,348        45,770        25,578        211,916        3,823  

SK Planet Co., Ltd.

     2,579,286        746,832        1,832,454        1,512,492        1,593  

IRIVER LIMITED(*)

     61,945        14,392        47,553        53,192        2,345  

SKP America LLC.

     297,981        67        297,914               (2,370

shopkick Management Company, Inc.

     230,925               230,925                

shopkick, Inc.

     28,216        13,698        14,518                

 

F-16


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

The above summary financial information is derived from separate financial statements of each subsidiary except for IRIVER LIMITED’s, which is consolidated financial information.

 

(*) The condensed financial information of IRIVER LIMITED includes financial information of iriver CS Co., Ltd., iriver Enterprise Ltd., iriver America Inc., iriver Inc., iriver China Co., Ltd., and Dongguan iriver Electronics Co., Ltd., subsidiaries of IRIVER LIMITED.

(4)    Changes in subsidiaries

The list of subsidiaries that were newly included in consolidation during the year ended December 31, 2016 is as follows:

 

Subsidiary

  

Reason

SK techx Co., Ltd.

   Established by spin-off from SK Planet Co., Ltd.

One Store Co., Ltd.

   Established by spin-off from SK Planet Co., Ltd.

Planet11 E-commerce Solutions India Pvt. Ltd.

   Acquired by SK Planet Co., Ltd.

11street (Thailand) Co., Ltd.

   Established by SKP GLOBAL HOLDINGS PTE. LTD.

Hello Nature Ltd.

   Acquired by SK Planet Co., Ltd.

The list of subsidiaries that were excluded from consolidation during the year ended December 31, 2016 is as follows:

 

Subsidiary

  

Reason

Commerce Planet Co., Ltd

   Merged into SK Planet Co., Ltd.

Fitech Focus Limited Partnership II

   Liquidated during the year ended December 31, 2016.

Open Innovation Fund

   Liquidated during the year ended December 31, 2016.

iriver America Inc.

   Liquidated during the year ended December 31, 2016.

 

F-17


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(5)    The information of significant non-controlling interests of the Group as of and for the years ended December 31, 2016, 2015 and 2014 are as follows. There were no dividends paid during the years ended December 31, 2016, 2015 and 2014 by subsidiaries of which non-controlling interests are significant.

 

(In millions of won)  
     SK Communications Co., Ltd.     One Store Co., Ltd.  

Ownership of non-controlling interests (%)

     35.46       34.46  
     As of December 31, 2016  

Current assets

   81,806       90,414  

Non-current assets

     46,427       43,793  

Current liabilities

     (30,098     (40,969

Non-current liabilities

     (1,494     (769

Net assets

     96,641       92,469  

Carrying amount of non-controlling interests

     34,265       31,863  
     2016  

Revenue

   58,154       106,809  

Loss for the year

     20,411       22,161  

Total comprehensive loss

     20,841       22,402  

Loss attributable to non-controlling interests

     7,240       6,772  

Net cash used in operating activities

     (4,891     (4,447

Net cash provided by(used in) investing activities

     3,625       (20,796

Net cash provided by financing activities

           51,426  

Net increase(decrease) in cash and cash equivalents

     (1,266     26,183  

 

(In millions of won)       
     SK Communications Co., Ltd.  

Ownership of non-controlling interests (%)

     35.46  
     As of December 31, 2015  

Current assets

   95,662  

Non-current assets

     56,834  

Current liabilities

     (33,306

Non-current liabilities

     (1,708

Net assets

     117,482  

Carrying amount of non-controlling interests

     41,659  
     2015  

Revenue

   80,147  

Loss for the period

     14,826  

Total comprehensive loss

     16,698  

Loss attributable to non-controlling interests

     5,254  

Net cash used in operating activities

     (2,706

Net cash provided by investing activities

     8,723  

Net cash provided by financing activities

      

Net increase in cash and cash equivalents

     6,017  

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(In millions of won)  
     SK Communications
Co.,  Ltd.
    SK Broadband Co.,
Ltd.(*)
 

Ownership of non-controlling interests (%)

     35.46       49.44  
     As of December 31, 2014  

Current assets

   89,135       463,764  

Non-current assets

     87,033       2,646,227  

Current liabilities

     (41,252     (881,886

Non-current liabilities

     (735     (1,106,493

Net assets

     134,181       1,121,612  

Adjustment for fair value

           111,561  

Net assets of consolidated entities

     134,181       1,233,173  

Carrying amount of non-controlling interests

     47,577       609,638  
     2014  

Revenue

   93,910       2,654,381  

Profit (loss) for the period

     (18,386     4,307  

Amortization of fair value adjustment

           (1,916

Profit (loss) of the consolidated entities

     (18,386     2,391  

Total comprehensive income (loss)

     530       (10,324

Profit (loss) attributable to non-controlling interests

     (6,519     1,182  

Net cash provided by (used in) operating activities

     (5,962     431,760  

Net cash used in investing activities

     (17,927     (599,016

Net cash provided by financing activities

           119,484  

Net decrease in cash and cash equivalents

     (23,889     (47,772

 

 

(*) On March 20, 2015, the Board of Directors of the Parent Company decided to grant 0.0168936 share of its treasury stock in exchange for 1 share of SK Broadband Co., Ltd., a subsidiary of the Parent Company, to the shareholders of SK Broadband Co., Ltd. as of June 9, 2015. After the stock exchange, SK Broadband Co., Ltd. became a wholly-owned subsidiary of the Parent Company.

 

2. Basis of Presentation

(1)    Statement of compliance

These consolidated financial statements were prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).

The consolidated financial statements were authorized for issuance by the Board of Directors on February 2, 2017.

(2)    Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis, except for the following material items in the consolidated statements of financial position:

 

   

derivative financial instruments measured at fair value;

 

   

financial instruments at fair value through profit or loss measured at fair value;

 

   

available-for-sale financial assets measured at fair value; and

 

   

liabilities (assets) for defined benefit plans recognized at the net of the total present value of defined benefit obligations less the fair value of plan assets.

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(3)    Functional and presentation currency

Financial statements of Group entities within the Group are prepared in functional currency of each group entity, which is the currency of the primary economic environment in which each entity operates. Consolidated financial statements of the Group are presented in Korean won, which is the Parent Company’s functional and presentation currency.

(4)    Use of estimates and judgments

The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period prospectively.

1)    Critical judgments

Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements is included in Note 3 for the following areas: consolidation: whether the Group has de facto control over an investee, and classification of lease.

2)    Assumptions and estimation uncertainties

Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year are included in the following notes: allowance for doubtful accounts, estimated useful lives of property and equipment and intangible assets, impairment of goodwill, recognition of provision, measurement of defined benefit liabilities, and recognition of deferred tax assets (liabilities).

3)    Fair value measurement

A number of the Group’s accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities. The Group has established policies and processes with respect to the measurement of fair values. This includes a valuation team that has overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values, and reports directly to the finance executives.

The valuation team regularly reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or pricing services, is used to measure fair values, then the valuation team assesses the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of IFRS, including the level in the fair value hierarchy in which such valuations should be classified.

When measuring the fair value of an asset or a liability, the Group uses market observable data as far as possible. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows.

 

   

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

 

   

Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

 

   

Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

If the inputs used to measure the fair value of an asset or a liability fall into different levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

as the lowest level input that is significant to the entire measurement. The Group recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.

Information about assumptions used for fair value measurements are included in Note 33.

 

3. Significant Accounting Policies

The significant accounting policies applied by the Group in the preparation of its consolidated financial statements in accordance with IFRS are included below. The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.

(1)    Operating segments

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. The Group’s operating segments have been determined to be each business unit, for which the Group generates separately identifiable financial information that is regularly reported to the chief operating decision maker for the purpose of resource allocation and assessment of segment performance. The Group has four reportable segments which consist of cellular services, fixed-line telecommunication services, e-commerce services and others, as described in Note 4. Segment results that are reported to the chief operating decision maker include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.

The Group’s chief operating decision maker receives and reviews operating income based on Korean IFRS as the measure of segment profit and loss for each operating segment. Segment operating income differs from consolidated operating income used in the Group’s consolidated statements of income. Segment operating income does not include certain items such as fee revenues, gain/loss from disposal of property, plant, equipment and intangible assets, impairment losses on property, plant, equipment and intangible assets, donations, bad debt expense and penalties. The chief operating decision maker does not receive any information about segment assets and liabilities.

(2)    Basis of consolidation

(i)    Business combination

A business combination is accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control.

Consideration transferred is generally measured at fair value, identical to the measurement of identifiable net assets acquired at fair value. The difference between the acquired company’s fair value and the consideration transferred is accounted for goodwill. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognized in profit or loss immediately. Acquisition-related costs are expensed in the periods in which the costs are incurred and the services are received excluding costs to issue debt or equity securities recognized based on International Accounting Standards (“IAS”) 32 and 39.

Consideration transferred does not include the amount settled in relation to the pre-existing relationship and the amount settled in relation to the pre-existing relationship is generally recognized through profit or loss.

Contingent consideration is measured at fair value at the acquisition date. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. If contingent consideration is not classified as equity, the Group subsequently recognizes changes in fair value of contingent consideration through profit or loss.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(ii)    Non-controlling interests

Non-controlling interests are measured at their proportionate share of the acquiree’s identifiable net assets at the date of acquisition.

Changes in a Controlling Company’s ownership interest in a subsidiary that do not result in the Controlling Company losing control of the subsidiary are accounted for as equity transactions.

(iii)    Subsidiaries

Subsidiaries are entities controlled by the Group. The Group controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Consolidation of an investee begins from the date the Group obtains control of the investee and cease when the Group loses control of the investee.

(iv)    Loss of control

If the Group loses control of a subsidiary, the Group derecognizes the assets and liabilities of the former subsidiary from the consolidated statement of financial position and recognizes gain or loss associated with the loss of control attributable to the former controlling interest. Any investment retained in the former subsidiary is recognized at its fair value when control is lost.

(v)    Interest in investees accounted for using the equity method

Interest in investees accounted for using the equity method composed of interest in associates and joint ventures. An associate is an entity in which the Group has significant influence, but not control, over the entity’s financial and operating policies. A joint venture is a joint arrangement whereby the Group that has joint control of the arrangement has rights to the net assets of the arrangement.

The investment in an associate and a joint venture is initially recognized at cost including transaction costs and the carrying amount is increased or decreased to recognize the Group’s share of the profit or loss and changes in equity of the associate or the joint venture after the date of acquisition.

(vi)    Intra-group transactions

Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. The Group’s share of unrealized gain incurred from transactions with investees accounted for using the equity method are eliminated and unrealized loss are eliminated using the same basis if there are no evidence of asset impairments.

(vii)    Business combinations under common control

SK Holdings Co., Ltd. is the ultimate controlling entity of the Group. The assets and liabilities acquired under business combination under common control are recognized at the carrying amounts in the ultimate controlling shareholder’s consolidated financial statements. The difference between consideration and carrying amount of net assets acquired is added to or subtracted from capital surplus and others.

(3)    Cash and cash equivalents

Cash and cash equivalents comprise cash balances, call deposits and financial assets with maturities of three months or less from the acquisition date that are easily convertible to cash and subject to an insignificant risk of changes in their fair value.

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(4)    Inventories

Inventories are stated at the acquisition cost using the average method. During the period, a perpetual inventory system is used to track inventory quantities, which is adjusted to the physical inventory counts performed at the period end. When the net realizable value of inventories is less than the acquisition cost, the carrying amount is reduced to the net realizable value and any difference is charged to current operations as operating expenses.

(5)    Non-derivative financial assets

The Group recognizes and measures non-derivative financial assets by the following four categories: financial assets at fair value through profit or loss, held-to-maturity investments, loans and receivables and available-for-sale financial assets. The Group recognizes financial assets in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of the instrument.

Upon initial recognition, non-derivative financial assets not at fair value through profit or loss are measured at their fair value plus transaction costs that are directly attributable to the acquisition of the asset.

(i)    Financial assets at fair value through profit or loss

A financial asset is classified as financial asset at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Upon initial recognition, transaction costs are recognized in profit or loss when incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss.

(ii)    Held-to-maturity investments

A non-derivative financial asset with a fixed or determinable payment and fixed maturity, for which the Group has the positive intention and ability to hold to maturity, are classified as held-to-maturity investment. Subsequent to initial recognition, held-to-maturity investments are measured at amortized cost using the effective interest rate method.

(iii)    Loans and receivables

Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method except for loans and receivables of which the effect of discounting is immaterial.

(iv)    Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified as financial assets at fair value through profit or loss, held-to-maturity investments or loans and receivables. Subsequent to initial recognition, they are measured at fair value with changes in fair value, net of any tax effect, recorded in other comprehensive income (OCI) in equity. Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at cost.

(v)    De-recognition of financial assets

The Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognized as a separate asset or liability. If the Group retains substantially all the risks and rewards of ownership of the transferred financial assets, the Group continues to recognize the transferred financial assets and recognizes financial liabilities for the consideration received.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(vi)    Offsetting between financial assets and financial liabilities

Financial assets and liabilities are offset and the net amount is presented in the consolidated statement of financial position only when the Group currently has a legally enforceable right to offset the recognized amounts, and there is the intention to settle on a net basis or to realize the asset and settle the liability simultaneously.

(6)    Derivative financial instruments, including hedge accounting

Derivatives are initially recognized at fair value. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below.

(i)    Hedge accounting

The Group holds forward exchange contracts, interest rate swaps, currency swaps and other derivative contracts to manage interest rate risk and foreign exchange risk. The Group designates derivatives as hedging instruments to hedge the risk of changes in the fair value of assets, liabilities or firm commitments (a fair value hedge) and foreign currency risk of highly probable forecasted transactions or firm commitments (a cash flow hedge).

On initial designation of the hedge, the Group formally documents the relationship between the hedging instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship.

Fair value hedge

Changes in the fair value of a derivative hedging instrument designated as a fair value hedge are recognized in profit or loss. The gain or loss from remeasuring the hedging instrument at fair value for a derivative hedging instrument and the gain or loss on the hedged item attributable to the hedged risk are recognized in profit or loss in the same line item of the consolidated statement of income. The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, or if the hedge no longer meets the criteria for hedge accounting. Any adjustment arising from gain or loss on the hedged item attributable to the hedged risk is amortized to profit or loss from the date the hedge accounting is discontinued.

Cash flow hedge

When a derivative is designated to hedge the variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecasted transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognized in other comprehensive income, net of tax, and presented in the hedging reserve in equity. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss on the hedging instrument that has been recognized in other comprehensive income is reclassified to profit or loss in the periods during which the forecasted transaction occurs. If the forecasted transaction is no longer expected to occur, then the balance in other comprehensive income is recognized immediately in profit or loss.

(ii)    Separable embedded derivatives

Embedded derivatives are separated from the host contract and accounted for separately only if the following criteria have been met:

 

  (a) the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract;

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

  (b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and

 

  (c) the hybrid (combined) instrument is not measured at fair value with changes in fair value recognized in profit or loss.

Changes in the fair value of separable embedded derivatives are recognized immediately in profit or loss.

(iii)    Other derivative financial instruments

Changes in the fair value of other derivative financial instrument not designated as a hedging instrument are recognized immediately in profit or loss.

(7)    Impairment of financial assets

A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. However, losses expected as a result of future events, regardless of likelihood, are not recognized.

Objective evidence that a financial asset is impaired includes following loss events:

 

   

significant financial difficulty of the issuer or obligor;

 

   

a breach of contract, such as default or delinquency in interest or principal payments;

 

   

the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider;

 

   

it becoming probable that the borrower will enter bankruptcy or other financial reorganization;

 

   

the disappearance of an active market for that financial asset because of financial difficulties; or

 

   

observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group.

In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment.

If financial assets have objective evidence that they are impaired, impairment losses are measured and recognized.

(i)    Financial assets measured at amortized cost

An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of its estimated future cash flows discounted at the asset’s original effective interest rate. The Group can recognize impairment losses directly or by establishing an allowance account. 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 (such as an improvement in the debtor’s credit rating), the previously recognized impairment loss is reversed either directly or by adjusting an allowance account.

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(ii)     Financial assets carried at cost

If there is objective evidence that an impairment loss has occurred on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, the amount of the impairment loss is measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment losses are not reversed.

(iii)    Available-for-sale financial assets

When a decline in the fair value of an available-for-sale financial asset has been recognized in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss that had been recognized in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment even though the financial asset has not been derecognized. Impairment losses recognized in profit or loss for an investment in an equity instrument classified as available-for-sale is not reversed through profit or loss subsequently. 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, with the amount of the reversal recognized in profit or loss.

(8)    Property and equipment

Property and equipment are initially measured at cost. The cost of property and equipment includes expenditures arising directly from the construction or acquisition of the asset, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management and the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

Subsequent to initial recognition, an item of property and equipment is carried at its cost less any accumulated depreciation and any accumulated impairment losses.

Subsequent costs are recognized in the carrying amount of property and equipment at cost or, if appropriate, as a separate item if 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. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing are recognized in profit or loss as incurred.

Property and equipment, except for land, are depreciated on a straight-line basis over estimated useful lives that appropriately reflect the pattern in which the asset’s future economic benefits are expected to be consumed. A component that is significant compared to the total cost of property and equipment is depreciated over its separate useful life.

Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment and are recognized as other non-operating income (loss).

The estimated useful lives of the Group’s property and equipment are as follows:

 

     Useful lives (years)  

Buildings and structures

     15 ~ 40  

Machinery

     3 ~ 15  

Other property and equipment

     4 ~ 10  

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

Depreciation methods, useful lives and residual values are reviewed at the end of each reporting date and adjusted, if appropriate. The change is accounted for as a change in an accounting estimate.

(9)    Borrowing costs

The Group capitalizes borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Other borrowing costs are recognized in expense as incurred. A qualifying asset is an asset that requires a substantial period of time to get ready for its intended use or sale. Financial assets are not qualifying assets. Assets that are ready for their intended use or sale when acquired are not qualifying assets.

To the extent that the Group borrows funds specifically for the purpose of obtaining a qualifying asset, the Group determines the amount of borrowing costs eligible for capitalization as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings. To the extent that the Group borrows funds generally and uses them for the purpose of obtaining a qualifying asset, the Group determines the amount of borrowing costs eligible for capitalization by applying a capitalization rate to the expenditures on that asset. The capitalization rate is the weighted average of the borrowing costs applicable to the borrowings of the Group that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs that the Group capitalizes during a period do not exceed the amount of borrowing costs incurred during that period.

(10)    Intangible assets

Intangible assets are measured initially at cost and, subsequently, are carried at cost less accumulated amortization and accumulated impairment losses.

Amortization of intangible assets except for goodwill is calculated on a straight-line basis over the estimated useful lives of intangible assets from the date that they are available for use. The residual value of intangible assets is zero. However, club memberships are determined to have indefinite useful lives as there is no foreseeable limit to the period over which they are expected to be available for use and therefore not amortized.

The estimated useful lives of the Group’s intangible assets are as follows:

 

     Useful lives (years)

Frequency usage rights

   5 ~ 13.1

Land usage rights

   5

Industrial rights

   5, 10

Development costs

   5

Facility usage rights

   10, 20

Customer relations

   3 ~ 7

Other

   3 ~ 20

Amortization periods and the amortization methods for intangible assets with finite useful lives are reviewed at the end of each reporting period. The useful lives of intangible assets that are not being amortized are reviewed at the end of each reporting period to determine whether events and circumstances continue to support indefinite useful life assessments for those assets. Changes are accounted for as changes in accounting estimates.

Expenditures on research activities are recognized in profit or loss as incurred. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Group intends to and has sufficient resources to complete development and to use or sell the asset. Other development expenditures are recognized in profit or loss as incurred.

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

Subsequent expenditures are capitalized only when they increase the future economic benefits embodied in the specific asset to which it relates. All other expenditures, including expenditures on internally generated goodwill and brands, are recognized in profit or loss as incurred.

(11)    Government grants

Government grants are not recognized unless there is reasonable assurance that the Group will comply with the grant’s conditions and that the grant will be received.

(i)    Grants related to assets

Government grants whose primary condition is that the Group purchases, constructs or otherwise acquires a long-term asset are deducted in calculating the carrying amount of the asset. The grant is recognized in profit or loss over the life of a depreciable asset as a reduction to depreciation expense.

(ii)    Grants related to income

Government grants which are intended to compensate the Group for expenses incurred are deducted from the related expenses.

(12)    Investment property

Property held for the purpose of earning rentals or benefiting from capital appreciation is classified as investment property. Investment property is initially measured at its cost. Transaction costs are included in the initial measurement. Subsequently, investment property is carried at depreciated cost less any accumulated impairment losses.

Subsequent costs are recognized in the carrying amount of investment property at cost or, if appropriate, as a separate item if 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. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing are recognized in profit or loss as incurred.

Investment property except for land, are depreciated on a straight-line basis over 15~40 years as estimated useful lives.

Depreciation methods, useful lives and residual values are reviewed at the end of each reporting date and adjusted, if appropriate. The change is accounted for as a change in an accounting estimate.

(13)    Impairment of non-financial assets

The carrying amounts of the Group’s non-financial assets, other than assets arising from employee benefits, inventories, deferred tax assets and non-current assets held for sale, are reviewed at the end of the reporting period to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill and intangible assets that have indefinite useful lives or that are not yet available for use, irrespective of whether there is any indication of impairment, are tested for impairment annually by comparing their recoverable amount to their carrying amount.

The Group estimates the recoverable amount of an individual asset, if it is impossible to measure the individual recoverable amount of an asset, then the Group estimates the recoverable amount of cash-generating unit (“CGU”). A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. The value in use is estimated by applying a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU for which estimated future cash flows have not been adjusted, to the estimated future cash flows expected to be generated by the asset or CGU.

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

An impairment loss is recognized in profit or loss to the extent the carrying amount of the asset exceeds its recoverable amount.

Goodwill acquired in a business combination is allocated to each CGU that is expected to benefit from the synergies arising from the business acquired. Any impairment identified at the CGU level will first reduce the carrying value of goodwill and then be used to reduce the carrying amount of the other assets in the CGU on a pro rata basis. Except for impairment losses in respect of goodwill which are never reversed, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

(14)    Leases

The Group classifies and accounts for leases as either a finance or operating lease, depending on the terms. Leases where the Group assumes substantially all of the risks and rewards of ownership are classified as finance leases. All other leases are classified as operating leases.

(i)    Finance leases

At the commencement of the lease term, the Group recognizes as finance assets and finance liabilities in its consolidated statements of financial position, the lower amount of the fair value of the leased property and the present value of the minimum lease payments, each determined at the inception of the lease. Any initial direct costs are added to the amount recognized as an asset.

Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is 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. Contingent rents are charged as expenses in the periods in which they are incurred.

The depreciable amount of a leased asset is allocated to each accounting period during the period of expected use on a systematic basis consistent with the depreciation policy the Group adopts for depreciable assets that are owned. If there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is fully depreciated over the shorter of the lease term and its useful life. The Group reviews to determine whether the leased assets are impaired.

(ii)    Operating leases

Leases where the lessor retains a significant portion of the risks and rewards of ownership are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are recognized in profit or loss on a straight-line basis over the period of the lease.

(iii)    Determining whether an arrangement contains a lease

Determining whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether fulfillment of the arrangement is dependent on the use of a specific asset and the arrangement conveys a right to use the asset.

At inception or reassessment of the arrangement, the Group separates payments and other consideration required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the Group concludes for a financial lease that it is impracticable to separate the payments reliably, the Group recognizes an asset and a liability at an amount equal to the fair value of the underlying asset that was identified as the subject of the lease. Subsequently, the liability is reduced as payments are made and an imputed finance charge on the liability is recognized using the Group’s incremental borrowing rate of interest.

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(15)    Non-current assets held for sale

Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. In order to be classified as held for sale, the asset (or disposal group) must be available for immediate sale in its present condition and its sale must be highly probable. The assets or disposal group that are classified as non-current assets held for sale are measured at the lower of their carrying amount and fair value less cost to sell. The Group recognizes an impairment loss for any initial or subsequent write-down of an asset (or disposal group) to fair value less costs to sell, and a gain for any subsequent increase in fair value less costs to sell, up to the cumulative impairment loss previously recognized in accordance with IAS 36, Impairment of Assets.

A non-current asset that is classified as held for sale or part of a disposal group classified as held for sale is not depreciated (or amortized).

(16)    Non-derivative financial liabilities

The Group classifies non-derivative financial liabilities into financial liabilities at fair value through profit or loss or other financial liabilities in accordance with the substance of the contractual arrangement. The Group recognizes financial liabilities in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of the financial liability.

(i)    Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss include financial liabilities held for trading or designated as such upon initial recognition. Subsequent to initial recognition, financial liabilities at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. Upon initial recognition, transaction costs that are directly attributable to the issue of the financial liability are recognized in profit or loss as incurred.

(ii)    Other financial liabilities

Non-derivative financial liabilities other than financial liabilities at fair value through profit or loss are classified as other financial liabilities. At the date of initial recognition, other financial liabilities are measured at fair value minus transaction costs that are directly attributable to the issue of the financial liability. Subsequent to initial recognition, other financial liabilities are measured at amortized cost using the effective interest method.

The Group derecognizes a financial liability from the consolidated statement of financial position when it is extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expires).

(17)    Employee benefits

(i)    Short-term employee benefits

Short-term employee benefits are employee benefits that are due to be settled within 12 months after the end of the period in which the employees render the related service. When an employee has rendered service to the Group during an accounting period, the Group recognizes the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service.

(ii)    Other long-term employee benefits

Other long-term employee benefits include employee benefits that are settled beyond 12 months after the end of the period in which the employees render the related service. The Group’s net obligation in respect of long-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value. Remeasurements are recognized in profit or loss in the period in which they arise.

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(iii)    Retirement benefits: defined contribution plans

When an employee has rendered service to the Group during a period, the Group recognizes the contribution payable to a defined contribution plan in exchange for that service as a liability (accrued expense), after deducting any contribution already paid. If the contribution already paid exceeds the contribution due for service before the end of the reporting period, the Group recognizes that excess as an asset (prepaid expense) to the extent that the prepayment will lead to a reduction in future payments or a cash refund.

(iv)    Retirement benefits: defined benefit plans

At the end of reporting period, defined benefits liabilities relating to defined benefit plans are recognized at present value of defined benefit obligations net of fair value of plan assets.

The calculation is performed annually by an independent actuary using the projected unit credit method. When the fair value of plan assets exceeds the present value of the defined benefit obligation, the Group recognizes an asset, to the extent of the present value of any economic benefits available in the form of refunds from the plan or reduction in the future contributions to the plan.

Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in other comprehensive income. The Group determines net interests on net defined benefit liability (asset) by multiplying discount rate determined at the beginning of the annual reporting period and considers changes in net defined benefit liability (asset) from contributions and benefit payments. Net interest costs and other costs relating to the defined benefit plan are recognized through profit or loss.

When the plan amendment or curtailment occurs, gains or losses on amendment or curtailment in benefits for the past service provided are recognized through profit or loss. The Group recognizes gain or loss on a settlement when the settlement of defined benefit plan occurs.

(v)    Termination benefits

The Group recognizes a liability and expense for termination benefits at the earlier of the period when the Group can no longer withdraw the offer of those benefits and the period when the Group recognizes costs for a restructuring that involves the payment of termination benefits. If benefits are payable more than 12 months after the reporting period, they are discounted to their present value.

(18)    Provisions

Provisions are recognized when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

The risks and uncertainties that inevitably surround many events and circumstances are taken into account in reaching the best estimate of a provision. Where the effect of the time value of money is material, provisions are determined at the present value of the expected future cash flows.

Where some or all of the expenditures required to settle a provision are expected to be reimbursed by another party, the reimbursement is recognized when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The reimbursement is treated as a separate asset.

Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimates. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed.

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

A provision is used only for expenditures for which the provision was originally recognized.

(19)    Transactions in foreign currencies

(i)    Foreign currency transactions

Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated to the functional currency using the reporting date’s exchange rate. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined.

Foreign currency differences arising on retranslation are recognized in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments which are recognized in OCI.

(ii)    Foreign operations

If the presentation currency of the Group is different from a foreign operation’s functional currency, the financial statements of the foreign operation are translated into the presentation currency using the following methods:

The assets and liabilities of foreign operations, whose functional currency is not the currency of a hyperinflationary economy, are translated to presentation currency at exchange rates at the reporting date. The income and expenses of foreign operations are translated to functional currency at exchange rates at the dates of the transactions. Foreign currency differences are recognized in other comprehensive income.

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation is treated as assets and liabilities of the foreign operation. Thus they are expressed in the functional currency of the foreign operation and translated at the closing rate at the reporting date.

When a foreign operation is disposed of, the relevant amount in the translation is transferred to profit or loss as part of the profit or loss on disposal. On the partial disposal of a subsidiary that includes a foreign operation, the relevant proportion of such cumulative amount is reattributed to non-controlling interest. In any other partial disposal of a foreign operation, the relevant proportion is reclassified to profit or loss.

(20)    Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issuance of ordinary shares and share options are recognized as a deduction from equity, net of any tax effects.

When the Group repurchases its own shares, the amount of the consideration paid is recognized as a deduction from equity and classified as treasury shares. The profits or losses from the purchase, disposal, reissue, or retirement of treasury shares are directly recognized in equity being as transaction with owners.

(21)    Hybrid bond

The Group recognizes a financial instrument issued by the Group as an equity instrument if it does not include contractual obligation to deliver financial assets including cash to the counter party.

(22)    Revenue

Revenue from the sale of goods, rendering of services or use of the Group assets is measured at the fair value of the consideration received or receivable. Returns, trade discounts and volume rebates are recognized as a reduction of revenue.

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

When two or more revenue generating activities or deliverables are sold under a single arrangement, each deliverable that is considered to be a separate unit of account is accounted for separately. The allocation of consideration from a revenue arrangement to its separate units of account is based on the relative fair value of each unit.

(i)    Services rendered

Revenue from cellular services consists of revenue from basic charges, voice charges, data charges, data-roaming services and interconnection charges. Such revenues are recognized as services are performed. Revenues received for the activation of service are deferred and recognized over the average customer retention period.

Revenue from fixed-line services includes domestic and long distance call charges, international phone connection charges, and broadband internet services. Such revenues are recognized as the related services are performed.

Revenue from other services rendered is recognized in profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to surveys of work performed.

(ii)    Goods sold

Revenue is recognized when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably.

(iii)    Customer loyalty programs

For customer loyalty programs, the fair value of the consideration received or receivable in respect of the initial sale is allocated between the award credits and the other components of the sale. The amount allocated to the award credits is estimated by reference to the fair value of the services to be provided with respect to the redeemable award credits. The fair value of the services to be provided with respect to the redeemable portion of the award credits granted to the customers in accordance with customer loyalty programs is estimated taking into account the expected redemption rate and timing of the expected redemption. Considerations allocated to the award credits are deferred and revenue is recognized when the award credits are recovered and the Group performs its obligation to provide the service. The amount of revenue recognized is based on the relative size of the total award credits that are expected to be redeemed and the redeemed award credits in exchange for services.

(23)    Operating profit

Operating profit is the result generated from the continuing principal revenue producing activities of the Group as well as other income and expenses related to operating activities. Operating profit excludes net finance costs, share of profit of equity accounted investees and income taxes.

(24)    Finance income and finance costs

Finance income comprises interest income on funds invested (including available-for-sale financial assets), dividend income, gains on disposal of available-for-sale financial assets, changes in fair value of financial assets at fair value through profit or loss, and gains on hedging instruments that are recognized in profit or loss. Interest income is recognized as it accrues in profit or loss, using the effective interest rate method. Dividend income is recognized in profit or loss on the date that the Group’s right to receive payment is established.

Finance costs comprise interest expense on borrowings, unwinding of the discount on provisions, changes in fair value of financial assets at fair value through profit or loss, and losses on hedging instruments that are recognized in profit or loss. Interest expense on borrowings and debentures are recognized in profit or loss using the effective interest rate method.

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(25)    Income taxes

Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.

(i)    Current tax

Current tax is the expected tax payable or receivable on the taxable profit or loss for the year, using tax rates enacted or substantively enacted at the end of the reporting period and any adjustment to tax payable in respect of previous years. The taxable profit is different from the accounting profit for the period since the taxable profit is calculated excluding the temporary differences, which will be taxable or deductible in determining taxable profit (tax loss) of future periods, and non-taxable or non-deductible items from the accounting profit.

(ii)    Deferred tax

Deferred tax is recognized, using the asset-liability method, in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The Group recognizes a deferred tax liability for all taxable temporary differences, except for the difference associated with investments in subsidiaries and associates that the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The Group recognizes a deferred tax asset for all deductible temporary differences to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.

The Group reviews the carrying amount of a deferred tax asset at the end of each reporting period and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset only if there is a legally enforceable right to offset the related current tax liabilities and assets, and they relate to income taxes levied by the same tax authority and they are intended to be settled current tax liabilities and assets on a net basis. Income tax expense in relation to dividend payments is recognized when liabilities relating to the dividend payments are recognized.

(26)    Earnings per share

The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Parent Company by the weighted average number of ordinary shares outstanding during the period, adjusted for own shares held. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding, adjusted for own shares held, for the effects of all dilutive potential ordinary shares, which comprise convertible notes and share options granted to employees, if any.

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(27)    Standards issued but not yet effective

The following new standards are effective for annual periods beginning after January 1, 2016 and earlier application is permitted; however, the Group has not early adopted the following new standards in preparing these financial statements.

1)    IFRS 9, Financial Instruments

IFRS 9, published in July 2014 which will replace the IAS 39, Financial Instruments: Recognition and Measurement, is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The Group currently plans to apply IFRS 9 in the period beginning on January 1, 2018.

Adoption of IFRS 9 will generally be applied retrospectively, except for the following:

 

   

exemption allowing the Group not to restate comparative information for prior periods with respect to classification and measurement (including impairment) changes; and

 

   

Prospective application of new hedge accounting except for those specified in IFRS 9 for retrospective application such as accounting for the time value of options and the forward element of forward contracts.

Key features of IFRS 9 includes new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics, impairment model based on changes in expected credit losses, and new approach to hedge qualification and methods for assessing hedge effectiveness.

To ensure smooth implementation of IFRS 9, the Group needs to assess the financial impact of adopting IFRS 9, to formulate the accounting policy, and to design, implement and enhance the accounting system and related controls. The expected quantitative impact of adopting IFRS 9 on the Group’s financial statements cannot be reliably estimated because it will be dependent on the financial instruments that the Group holds and economic conditions at that time as well as accounting elections and judgments that it will make in the future.

The Group plans to change the accounting process and internal control and to assess the financial impact on its consolidated financial statements resulting from the adoption of IFRS 9 by December 31, 2017. Qualitative impacts on consolidated financial statements upon adoption of IFRS 9 are as follows:

i)    Classification and measurement of financial assets

Classification of financial assets under IFRS 9 is driven by the entity’s business model for managing financial assets and their contractual cash flows. This contains three principal classification categories: financial assets measured at amortized cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL). Derivatives embedded in contracts where the host is a financial asset are never bifurcated. Instead, the hybrid financial instrument as a whole is assessed for classification. Details of the classification based on business models and contractual cash flows are as follows:

 

    

Contractual cash flow characteristics

Business model assessment

  

Solely payments of principal and interest

  

Others

Hold to collect contractual cash flows

   Amortized cost(*1)    FVTPL-measured at fair value(*2)

Hold to collect contractual cash flows and sell financial assets

   FVOCI- measured at fair value(*1)   

Hold to sell financial assets and others

   FVTPL-measured at fair value   

 

(*1) To eliminate or significantly reduce the accounting mismatch, the Group may irrevocably designate a financial asset as measured at FVTPL using the fair value option at initial recognition.

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(*2) Equity instruments that are not held for trading may be irrevocably designated as FVOCI using the fair value option.

As new classification requirements for financial assets under IFRS 9 are more stringent than requirements under IAS 39, the adoption of the new standard may result in increase in financial assets designated as FVTPL and higher volatility in profit or loss of the Group. As of December 31, 2016, the Group’s financial assets consist of ₩5,937,507 million of loans and receivables, ₩935,885 million of available-for-sale financial assets, and ₩7,368 million of financial assets at fair value through profit or loss.

A financial asset is measured at amortized cost under IFRS 9 if the asset is held by the Group to collect its contractual cash flows and the asset’s contractual cash flows represent solely payments of principal and interest. As of December 31, 2016, the Group has ₩5,937,507 million of loans and receivables measured at amortized cost.

A financial asset is measured at FVOCI under IFRS 9 if the objective of the business model is achieved both by collecting contractual cash flows and selling financial assets; and the asset’s contractual cash flows represent solely payments of principal and interest. As of December 31, 2016, the Group has ₩6,755 million of debt instruments classified as available-for-sale financial assets.

Under IFRS 9, equity instruments that are not held for trading may be irrevocably designated as FVOCI on initial recognition with no recycling of amounts from OCI to profit and loss. As of December 31, 2016, the Group has ₩929,130 million of available-for-sale equity instruments; and unrealized valuation gain from available-for-sale equity instruments amounting to ₩296,027 million is recycled from OCI to profit or loss during the year ended December 31, 2016.

All other financial assets are measured at FVTPL. As of December 31, 2016, the Group has no debt and equity instruments designated as FVTPL using the fair value option.

ii)    Classification and measurement of financial liabilities

Under IFRS 9, for the financial liabilities designated as FVTPL using the fair value option, the element of gains or losses attributable to changes in the own credit risk should normally be recognized in OCI, with the remainder recognized in profit or loss. These amounts recognized in OCI are not recycled to profit or loss even when the liability is derecognized. However, if presentation of the fair value change in respect of the liability’s credit risk in OCI results in or enlarges an accounting mismatch in profit or loss, gains and losses are entirely presented in profit or loss.

Adoption of IFRS 9 may result in decrease in profit or loss, since the amount of fair value changes that is attributable to changes in the credit risk of the liability will be presented in OCI.

As of December 31, 2016, the Group’s total financial liability amounts to ₩12,702,059 million, among which the financial liabilities designated as FVTPL using fair value option amount to ₩59,600 million. Changes in fair value on financial liabilities designated as FVTPL using fair value option amounting to ₩4,018 million was recognized as loss during the year ended December 31, 2016.

iii)    Impairment: financial assets and contract assets

The current impairment requirements under IAS 39 are based on an ‘incurred loss model’, where the impairment exists if there is objective evidence as a result of one or more events that occurred after the initial recognition of an asset. However, IFRS 9 replaces the incurred loss model in IAS 39 with an ‘expected credit loss model’ which applies to debt instruments measured at amortized cost or at fair value through other comprehensive income.

Under IFRS 9, the Group should recognize a loss allowance or provision at an amount equal to 12-month expected credit losses or lifetime expected credit losses for financial assets determined by the extent of probable

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

credit deterioration since initial recognition as explained below. Therefore, the new impairment requirements are expected to result in earlier recognition of credit losses compared to the incurred loss model of IAS 39.

 

Stages (*1)

  

Loss allowances

Stage 1

   No significant increase in credit risk since initial recognition(*2)    Loss allowances are determined for the amount of the expected credit losses that result from default events that are possible within 12 months after the reporting date.

Stage 2

   Significant increase in credit risk since initial recognition    Loss allowances are determined for the amount of the expected credit losses that result from all possible default events over the expected life of the financial instrument.

Stage 3

   Objective evidence of credit risk impairment   

 

 

(*1) Under IFRS 15, Revenue from Contracts with Customers (see note 3 (27) (2)), for trade receivables and contract assets arising with no significant credit risk, loss allowances are recognized at an amount equal to lifetime expected credit losses. However, for trade receivables and contract assets with a significant financing component arising under IFRS 15, the Group may choose as its accounting policy to recognize loss allowances at an amount equal to lifetime expected credit losses. In addition, for receivables under lease arrangement, the Group may choose to recognize loss allowances at an amount equal to lifetime expected credit losses.

 

(*2) The Group may determine that a financial asset’s credit risk has not increased significantly if the asset has low credit risk at the reporting date.

IFRS 9 allows the Group to only recognize the cumulative changes in lifetime expected credit losses since initial recognition as a loss allowance for purchased or originated credit-impaired financial assets at the reporting date. As of December 31, 2016, the Group has ₩5,937,507 million of carrying amount of debt instrument financial assets measured at amortized cost and ₩369,332 million as loss allowances for these assets.

iv)    Hedge accounting

IFRS 9 maintains the mechanics of hedge accounting from those in IAS 39. However, IFRS 9 replaces existing rule-based requirements under IAS 39 that are complex and difficult to apply with principle based requirement focusing more on the Group’s risk management purposes and procedures. Under IFRS 9, more hedging instruments and hedged items are permitted and 80%-125% effectiveness requirement is removed.

By complying with the hedging rules in IFRS 9, the Group may apply hedge accounting for transactions that currently do not meet the hedging criteria under IAS 39 thereby reducing volatility in profit or loss. As of December 31, 2016, the Group recognized the total amount of ₩2,782,026 million as hedged liabilities that applied hedge accounting and changes in fair value of cash flow hedge in the amount of ₩96,418 million was recognized in OCI for the year ended December 31, 2016.

Upon initial application of IFRS 9, the Group may choose as its accounting policy to continue to apply hedge accounting requirements under IAS 39 instead of the requirements in IFRS 9. The Group is still in the process of evaluating whether to make such accounting policy election upon adoption date.

2)    IFRS 15, Revenue from Contracts with Customers

IFRS 15, Revenue from Contracts with Customers, published in May 2014 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. It replaces existing revenue recognition guidance, including IAS 18, Revenue, IAS 11, Construction Contracts, SIC 31, Revenue: Barter Transactions Involving Advertising Services, International Financial Reporting Interpretations Committee (“IFRIC”) 13, Customer Loyalty Programs, IFRIC 15, Agreements for the Construction of Real Estate, and IFRIC 18, Transfers of Assets from Customers. The Group plans to adopt IFRS 15 on January 1, 2018. In accordance with the requirements

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

in IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, and the transition guidance in IFRS 15, the Group is considering to adopt IFRS 15 using the retrospective approach. However, the Group has not yet decided whether to apply the practical expedient and which method to use in applying the practical expedient.

IAS 18 provides separate revenue recognition criteria by transaction type which include sale of goods, rendering of services, and use of entity assets by others yielding interest, royalties and dividends. However, IFRS 15 introduces a five-step model for revenue recognition that focuses on the ‘transfer of control’ rather than the ‘transfer of risks and rewards’. The steps in five-step model are as follows:

 

   

identification of the contract with a customer;

 

   

identification of the performance obligations in the contract;

 

   

determination of the transaction price;

 

   

allocation of the transaction price to the performance obligations in the contract; and

 

   

recognition of revenue when (or as) the entity satisfies a performance obligation.

As of December 31, 2016, the Group has not yet changed its accounting process and internal controls related to revenue recognition.

The Group plans to change the accounting process and internal control and to assess the financial impact on its consolidated financial statements resulting from the adoption of IFRS 15 by December 31, 2017. The impact of accounting changes on its consolidated financial statements that may arise from the adoption of IFRS 15 is expected to include the following:

i) Identification of the separate performance obligations in the contract

A substantial portion of the Group’s revenues are generated from provision of wireless telecommunications services. IFRS 15 requires the Group to evaluate goods or services promised to customers to determine if they are performance obligations other than wireless telecommunications service that should be accounted for separately. The amount and timing of revenue recognition under IFRS 15 may be different from those under IAS 18 depending on the conclusion over the existence of separately identifiable performance obligations and the timing of satisfying each performance obligation.

ii) Allocate the transaction price to the separate performance obligations

In accordance with IFRS 15, the Group should allocate the transaction price to each performance obligation in a contract in proportion to their stand-alone selling price. The Group plans to use adjusted market assessment method for estimating the stand-alone selling price. However, in some circumstances, ‘expected cost plus a margin’ approach will be used.

iii) Incremental costs to acquire a contract

The Group has exclusive contracts with its sales agents to sell the Group’s wireless telecommunications services to subscribers. These agents receive commissions depending on the number of subscribers newly added and retained. The commissions paid to the agents constitute a significant portion of the Group’s operating expenses. Currently, the portion of these commissions that would not have been incurred if there have been no binding contracts with the subscribers are expensed.

Under IFRS 15, incremental costs to acquire a contract and certain costs to fulfill a contract are capitalized and amortized over the period the goods and services are delivered. However, as a practical expedient, the Group plans to expense the incremental cost as incurred if the amortization period of the contract acquisition and fulfillment cost is considered to be not longer than one year.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

3)    IFRS 16, Leases

IFRS 16, published in January 2016, replaces the existing guidance in IAS 17, Leases. IFRS 16 eliminates the current dual accounting model for lessees, which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases. Instead, there is a single, on-balance sheet accounting model that is similar to current finance lease accounting. IFRS 16 is effective for annual reporting periods beginning on or after January 1, 2019, with early adoption permitted. As of December 31, 2016, management is in the process of evaluating the impact of applying IFRS 16 on its financial position and results of operations.

 

4. Operating Segments

The Group’s operating segments have been identified to be each business unit, by which the Group provides independent services and merchandise. The Group’s reportable segments are cellular services, which include cellular voice service, wireless data service and wireless internet services; fixed-line telecommunication services, which include telephone services, internet services, and leased line services; e-commerce services, which include online commerce services; and all other businesses, which include the Group’s internet portal services and other immaterial operations, each of which does not meet the quantitative threshold to be considered as a reportable segment and are presented collectively as others. In 2016, the Group separately reported information about the e-commerce services operating segment as a reportable segment due to the significance of its reported segment results. Information for e-commerce services segment for 2015 and 2014, which was previously included in “other” segment, has been recasted to separately present e-commerce services segment information.

(1) Segment information for the years ended December 31, 2016, 2015 and 2014 is as follows:

 

(In millions of won)      
    2016  
    Cellular
Services
    Fixed-line
telecommu-
nication
services
    E-commerce
Services
    Others     Sub-total     Adjustments     Total  

Total revenue

  14,635,720       3,349,905       1,177,323       726,374       19,889,322       (2,797,506     17,091,816  

Inter-segment revenue

    1,630,811       698,712       176,007       291,976       2,797,506       (2,797,506      

External revenue

    13,004,909       2,651,193       1,001,316       434,398       17,091,816             17,091,816  

Depreciation and amortization

    2,262,363       551,811       68,298       59,414       2,941,886             2,941,886  

Operating profit (loss)

    1,799,127       132,459       (365,194     (30,648     1,535,744       (232,326     1,303,418  

Gain relating to investments in subsidiaries, associates and joint ventures, net

                544,501  

Finance income

                575,050  

Finance costs

                (326,830
             

 

 

 

Profit before income tax

                2,096,139  

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(In millions of won)      
    2015  
    Cellular
Services
    Fixed-line
telecommu-
nication
services
    E-commerce
Services
    Others     Sub-total     Adjustments     Total  

Total revenue

  14,962,689       3,162,712       1,703,278       410,265       20,238,944       (3,102,210     17,136,734  

Inter-segment revenue

    1,693,411       668,139       643,299       97,361       3,102,210       (3,102,210      

External revenue

    13,269,278       2,494,573       1,059,979       312,904       17,136,734             17,136,734  

Depreciation and amortization

    2,174,819       531,106       112,537       26,833       2,845,295             2,845,295  

Operating profit (loss)

    1,678,339       108,252       (6,740     (71,845     1,708,006       (212,581     1,495,425  

Gain relating to investments in subsidiaries, associates and joint ventures, net

                786,140  

Finance income

                103,900  

Finance costs

                (350,100
             

 

 

 

Profit before income tax

                2,035,365  

 

   
(In millions of won)   2014  
     Cellular
Services
    Fixed-line
telecommu-
nication
services
    E-commerce
Services
    Others     Sub-total     Adjustments     Total  

Total revenue

  15,248,039       3,119,845       1,577,000       307,784       20,252,668       (3,088,870     17,163,798  

Inter-segment revenue

    1,720,158       669,925       604,968       93,819       3,088,870       (3,088,870      

External revenue

    13,527,881       2,449,920       972,032       213,965       17,163,798             17,163,798  

Depreciation and amortization

    2,113,510       501,623       79,650       19,947       2,714,730             2,714,730  

Operating profit (loss)

    1,754,433       80,423       9,817       (19,568     1,825,105       (217,279     1,607,826  

Gain relating to investments in subsidiaries, associates and joint ventures, net

                906,338  

Finance income

                126,337  

Finance costs

                (386,673
             

 

 

 

Profit before income tax

                2,253,828  

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(2) Reconciliation of total segment operating income to consolidated operating profit from continuing operations for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

(In millions of won)    2016     2015     2014  

Total segment operating income

   1,535,744       1,708,006       1,825,105  

Other operating income:

      

Fees revenues

     573             8,199  

Gain on disposal of property and equipment and intangible assets

     6,908       7,140       8,792  

Others(*1)

     59,067       23,795       39,480  
  

 

 

   

 

 

   

 

 

 
     66,548       30,935       56,471  

Other operating expenses:

      

Impairment loss on property and equipment and intangible assets

     (24,506     (35,845     (47,489

Loss on disposal of property and equipment and intangible assets

     (63,797     (21,392     (32,950

Donations

     (96,633     (72,454     (67,823

Bad debt for accounts receivable — other

     (40,312     (15,323     (17,943

Others(*2)

     (73,626     (98,502     (107,545
  

 

 

   

 

 

   

 

 

 
     (298,874     (243,516     (273,750
  

 

 

   

 

 

   

 

 

 

Consolidated operating profit from continuing operations

   1,303,418       1,495,425       1,607,826  
  

 

 

   

 

 

   

 

 

 

 

 

(*1) Others for the year ended December 31, 2016 include ₩0.9 billion and ₩25 billion of V.A.T refund and penalty refund, respectively, and Others for the years ended December 31, 2015 and 2014 include V.A.T refund of ₩2.1 billion and ₩8.1 billion, respectively.

 

(*2) Others for the years ended December 31, 2016, 2015 and 2014 include ₩7.6 billion, ₩29.5 billion and ₩54.7 billion of penalties, respectively, and various other expenses with inconsequential amounts.

Since there are no intersegment sales of inventory or depreciable assets, there is no unrealized intersegment profit to be eliminated on consolidation. Domestic revenue for the years ended December 31, 2016, 2015 and 2014 amounts to ₩16,940 billion, ₩17,083 billion and ₩17,073 billion, respectively. Domestic non-current assets (excluding financial assets, investments in associates and joint ventures and deferred tax assets) as of December 31, 2016, 2015 and 2014 amount to ₩15,949 billion, ₩14,474 billion and ₩14,817 billion, and non-current assets outside of Korea amount to ₩286 billion, ₩287 billion and ₩278 billion, respectively.

No single customer contributed 10% or more to the Group’s total sales for the years ended December 31, 2016, 2015 and 2014.

The Group principally operates its businesses in Korea and the revenue amounts earned outside of Korea are immaterial. Therefore, no entity-wide geographical information is presented.

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(3) The Group’s operating revenue by service type is as follows:

 

(In millions of won)  
     2016      2015      2014  

Cellular revenue:

        

Wireless service(*1)

   10,582,963        10,720,518        11,010,639  

Cellular interconnection

     614,446        710,026        817,038  

Wireless device sales

     922,449        963,354        761,629  

Miscellaneous(*2)

     885,051        875,380        938,575  
  

 

 

    

 

 

    

 

 

 
     13,004,909        13,269,278        13,527,881  

Fixed-line telecommunication services revenue:

        

Fixed line telephone service

     357,754        420,611        467,333  

Fixed line interconnection

     134,089        57,130        57,401  

Broadband internet service and advanced media platform service

     1,472,776        1,308,789        1,152,708  

International calling service

     95,986        99,106        111,983  

Miscellaneous(*3)

     590,588        608,937        660,495  
  

 

 

    

 

 

    

 

 

 
     2,651,193        2,494,573        2,449,920  

E-commerce services revenue(*4)

     1,001,316        1,059,979        972,032  

Other revenue:

        

Portal service(*5)

     54,177        71,812        80,265  

Miscellaneous(*6)

     380,221        241,092        133,700  
  

 

 

    

 

 

    

 

 

 
     434,398        312,904        213,965  
  

 

 

    

 

 

    

 

 

 

Consolidated operating revenue

   17,091,816        17,136,734        17,163,798  
  

 

 

    

 

 

    

 

 

 

 

 

(*1) Wireless service revenue includes revenue from wireless voice and data transmission services principally derived through monthly plan-based fees, usage charges for outgoing voice calls, usage charges for wireless data services and value-added service fees.

 

(*2) Miscellaneous cellular services revenue includes revenue from IoT solutions platform services as well as other miscellaneous cellular services.

 

(*3) Miscellaneous fixed-line telecommunication services revenue includes revenues from business communications services (other than fixed-line telephone service) provided by SK Broadband and VoIP services provided by SK Telink.

 

(*4) E-commerce service revenue includes revenue from 11st, an online open marketplace platform, and O2O commerce solutions.

 

(*5) Portal service revenue includes revenues from Nate, and online portal service operated by SK Communications, and Cyworld, a social networking service formerly operated by SK Communications. In March 2014, the Cyworld business was spun-off into an unaffiliated company.

 

(*6) Miscellaneous other revenue includes revenues from hardware business, security business operated by one of the Group’s subsidiaries, Neosnetworks, and an online open marketplace for mobile applications among other operations.

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

5. Restricted Deposits

Deposits which are restricted in use as of December 31, 2016 and 2015 are summarized as follows:

 

(In millions of won)              
     December 31, 2016      December 31, 2015  

Short-term financial instruments(*)

   90,278        82,469  

Long-term financial instruments(*)

     937        10,596  
  

 

 

    

 

 

 
   91,215        93,065  
  

 

 

    

 

 

 

 

 

(*) Financial instruments include charitable trust fund established by the Group where profits from the fund are donated to charitable institutions. As of December 31, 2016, the funds cannot be withdrawn before maturity.

 

6. Trade and Other Receivables

 

(1) Details of trade and other receivables as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)  
     December 31, 2016  
     Gross
amount
     Allowances for
doubtful accounts
    Carrying
amount
 

Current assets:

       

Accounts receivable — trade

   2,482,502        (241,576     2,240,926  

Short-term loans

     59,526        (547     58,979  

Accounts receivable — other

     1,200,421        (78,977     1,121,444  

Accrued income

     2,780              2,780  

Others

     3,937              3,937  
  

 

 

    

 

 

   

 

 

 
     3,749,166        (321,100     3,428,066  

Non-current assets:

       

Long-term loans

     113,456        (47,980     65,476  

Long-term accounts receivable — other

     149,669              149,669  

Guarantee deposits

     298,964              298,964  

Long-term accounts receivable — trade

     20,637        (252     20,385  
  

 

 

    

 

 

   

 

 

 
     582,726        (48,232     534,494  
  

 

 

    

 

 

   

 

 

 
   4,331,892        (369,332     3,962,560  
  

 

 

    

 

 

   

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(In millions of won)  
     December 31, 2015  
     Gross
amount
     Allowances for
doubtful accounts
    Carrying
amount
 

Current assets:

       

Accounts receivable — trade

   2,583,558        (238,691     2,344,867  

Short-term loans

     54,377        (482     53,895  

Accounts receivable — other

     752,731        (78,992     673,739  

Accrued income

     10,753              10,753  

Others

     1,861              1,861  
  

 

 

    

 

 

   

 

 

 
     3,403,280        (318,165     3,085,115  

Non-current assets:

       

Long-term loans

     87,501        (25,047     62,454  

Long-term accounts receivable — other

     2,420              2,420  

Guarantee deposits

     297,281              297,281  

Long-term accounts receivable — trade

     46,047        (804     45,243  
  

 

 

    

 

 

   

 

 

 
     433,249        (25,851     407,398  
  

 

 

    

 

 

   

 

 

 
   3,836,529        (344,016     3,492,513  
  

 

 

    

 

 

   

 

 

 

 

(2) Changes in allowances for doubtful accounts of trade and other receivables for the years ended December 31, 2016 and 2015 are as follows:

 

(In millions of won)       
     2016     2015  

Balance at January 1

   344,016       328,191  

Bad debt expense

     78,132       75,773  

Write-offs

     (79,891     (87,798

Other

     27,075       27,850  
  

 

 

   

 

 

 

Balance at December 31

   369,332       344,016  
  

 

 

   

 

 

 

 

(3) Details of overdue but not impaired, and impaired trade and other receivables as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)       
     December 31, 2016     December 31, 2015  
     Accounts
receivable — trade
    Other
receivables
    Accounts
receivable — trade
    Other
receivables
 

Neither overdue nor impaired

   1,715,966       1,617,349       1,841,442       1,053,096  

Overdue but not impaired

     41,613       5,663       77,008       5,155  

Impaired

     745,560       205,741       711,155       148,673  
  

 

 

   

 

 

   

 

 

   

 

 

 
     2,503,139       1,828,753       2,629,605       1,206,924  

Allowances for doubtful accounts

     (241,828     (127,504     (239,495     (104,521
  

 

 

   

 

 

   

 

 

   

 

 

 
   2,261,311       1,701,249       2,390,110       1,102,403  
  

 

 

   

 

 

   

 

 

   

 

 

 

The Group establishes allowances for doubtful accounts based on the likelihood of recoverability of trade and other receivables based on their aging at the end of the period, past customer default experience, customer credit status, and economic and industrial factors.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(4) The aging of overdue but not impaired accounts receivable as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)              
     December 31, 2016      December 31, 2015  
     Accounts
receivable — trade
     Other
receivables
     Accounts
receivable — trade
     Other
receivables
 

Less than 1 month

   11,543        2,838        20,908        2,770  

1 ~ 3 months

     9,144        140        21,941        924  

3 ~ 6 months

     4,643        1        7,043        265  

More than 6 months

     16,283        2,684        27,116        1,196  
  

 

 

    

 

 

    

 

 

    

 

 

 
   41,613        5,663        77,008        5,155  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

7. Inventories

Details of inventories as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)              
     December 31, 2016      December 31, 2015  
     Acquisition
cost
     Write-down     Carrying
amount
     Acquisition
cost
     Write-down     Carrying
amount
 

Merchandise

   232,871        (6,913     225,958        247,294        (5,064     242,230  

Finished goods

     1,931        (363     1,568        3,530        (179     3,351  

Work-in-process

     2,895        (347     2,548        1,976        (149     1,827  

Raw materials and supplies

     31,141        (1,369     29,772        27,296        (1,148     26,148  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   268,838        (8,992     259,846        280,096        (6,540     273,556  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The amount of the inventory write-downs charged to the consolidated statement of income and write-off of inventories are as follows:

 

(In millions of won)                     
     2016      2015      2014  

Charged to cost of products that have been resold

   3,751        1,983        2,052  

Write-off upon sale

     (1,299      (2,095      (1,326

There are no significant reversals of inventory write-downs for the periods presented.

 

8. Investment Securities

 

(1) Details of short-term investment securities as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)              
     December 31, 2016      December 31, 2015  

Beneficiary certificates(*)

   107,364        92,262  

 

 

(*) The income distributable in relation to beneficiary certificates as of December 31, 2016 were accounted for as accrued income.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(2) Details of long-term investment securities as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)              
     December 31, 2016      December 31, 2015  

Equity securities:

     

Marketable equity securities(*1)

   526,363        897,958  

Unlisted equity securities(*2)

     95,300        96,899  

Equity investments(*2)

     200,103        207,916  
  

 

 

    

 

 

 
     821,766        1,202,773  

Debt securities:

     

Investment bonds

     6,755        4,453  
  

 

 

    

 

 

 
   828,521        1,207,226  
  

 

 

    

 

 

 

 

 

(*1) During the year ended December 31, 2016, the Group sold 3,793,756 shares of Loen Entertainment, Inc. to Kakao Corp. in exchange for 1,357,367 shares of Kakao Corp. and ₩218,037 million in cash. In connection with the sale of Loen Entertainment shares, the Group recognized gain on disposal of long-term investment securities amounting to ₩314,745 million.

 

   The Group recognized gain on disposal amounting to ₩138,779 million as the Group disposed its entire marketable equity securities of POSCO Co., Ltd. for ₩305,110 million of cash during the year ended December 31, 2016.

 

(*2) Unlisted equity securities and equity investments whose fair value cannot be measured reliably are recorded at cost.

 

9. Business Combination

 

(1) 2015

 

1) General information

On April 1, 2015, Neosnetworks Co., Ltd., a subsidiary of the Parent Company, acquired an unmanned machine security business of Joeun Safe Co., Ltd., which provides security and maintenance services, in order to expand infrastructure and enhance competitiveness of its security business.

The Group recognized the acquired assets and liabilities at fair value and the difference between the consideration and fair value of net assets as goodwill.

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

2) Considerations paid and identifiable assets acquired and liabilities assumed

Considerations paid and assets in succession recognized at the acquisition date are as follows:

 

(In millions of won)       
     2015  

Considerations paid and liabilities assumed:

  

Cash and cash equivalents

   13,197  

Accounts payable — other

     1,858  
  

 

 

 
   15,055  
  

 

 

 

Assets acquired:

  

Property and equipment

   3,208  

Intangible assets

     8,486  

Other assets

     1,603  
  

 

 

 
   13,297  
  

 

 

 

 

10. Business Combinations under Common Control

 

(1) 2016

During the year ended December 31, 2016, the Parent Company distributed its entire ownership interests in Neosnetworks Co., Ltd. to SK Telink Co., Ltd., a subsidiary of the Parent Company as contribution in kind. Neosnetworks Co., Ltd. became a wholly owned subsidiary of SK Telink Co., Ltd. As this transaction is a business combination under common control, SK Telink Co., Ltd. recognized the book value of the assets and liabilities of Neosnetworks Co., Ltd. in its financial statements. There’s no effect on the assets and liabilities of the consolidated financial statements.

 

(2) 2015

During the year ended December 31, 2015, hoppin service division of SK Planet Co., Ltd., a subsidiary of the Parent Company, was spun off from SK Planet Co., Ltd. and was merged into SK Broadband, Co., Ltd., a subsidiary of the Parent Company. There is no impact on the consolidated financial statements as it is a business combination under common control.

 

F-47


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

11. Investments in Associates and Joint Ventures

 

(1) Investments in associates and joint ventures accounted for using the equity method as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)       December 31, 2016     December 31, 2015  
   

Country

  Ownership
(%)
    Carrying
amount
    Ownership
(%)
    Carrying
amount
 

Investments in associates:

         

SK China Company Ltd.(*1)

  China     9.6     46,354       9.6     43,814  

Korea IT Fund(*2)

  Korea     63.3       263,850       63.3       260,456  

KEB HanaCard Co., Ltd.(*1)

  Korea     15.0       265,798       15.0       254,177  

Candle Media Co., Ltd.(*3)

  Korea                 35.1       20,144  

NanoEnTek, Inc.

  Korea     28.5       39,514       28.6       45,008  

SK Industrial Development China Co., Ltd.

  Hong Kong     21.0       74,717       21.0       86,324  

SK Technology Innovation Company

  Cayman Islands     49.0       47,488       49.0       45,891  

HappyNarae Co., Ltd.

  Korea     42.5       17,236       42.5       17,095  

SK hynix Inc.

  Korea     20.1       6,132,122       20.1       5,624,493  

SK MENA Investment B.V.

  Netherlands     32.1       15,451       32.1       14,929  

SKY Property Mgmt. Ltd.

  Virgin Island     33.0       263,225       33.0       251,166  

Xinan Tianlong Science and Technology Co., Ltd.

  China     49.0       25,880       49.0       25,767  

Daehan Kanggun BcN Co., Ltd. and others

            127,174             161,058  
     

 

 

     

 

 

 

Sub-total

        7,318,809         6,850,322  
     

 

 

     

 

 

 

Investments in joint ventures:

         

Dogus Planet, Inc.(*4,5)

  Turkey     50.0       20,081       50.0       15,118  

PT. Melon Indonesia(*3,5)

  Indonesia                 49.0       4,339  

Celcom Planet(*2,4,5)

  Malaysia     51.0       2,851       51.0       3,406  

PT XL Planet Digital(*4,5)

  Indonesia     50.0       27,512       50.0       23,108  

Finnq Co. Ltd.(*6)

  Korea     49.0       24,174              

12CM GLOBAL PTE. LTD.(*7)

  Singapore     62.7       10,896              
     

 

 

     

 

 

 

Sub-total

        85,514         45,971  
     

 

 

     

 

 

 
      7,404,323       6,896,293  
     

 

 

     

 

 

 

 

(*1) These investments were classified as investments in associates as the Group can exercise significant influence through its right to appoint the members of board of directors even though the Group has less than 20% of equity interests.

 

(*2) Classified as investment in associates or joint ventures as the Group does not have control over investments under the contractual agreement.

 

(*3) These investments were disposed during the year ended December 31, 2016.

 

(*4) The carrying amount has increased due to additional investment during the year ended December 31, 2016. There was no change in ownership percentage as a result of this additional investment.

 

(*5) The ownership interest is owned by SK Planet Co., Ltd.

 

(*6) Investment in Finnq Co. Ltd., a company newly established and changed its name from HanaSK Fintech Co., Ltd. to Finnq Co. Ltd., during the year ended December 31, 2016, was classified as investment in joint venture as the Group has joint control pursuant to the agreement with the other shareholder.

 

F-48


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(*7) The Group acquired 62.7% of equity interests in 12CM GLOBAL PTE. LTD. during the year ended December 31, 2016. Investment in 12CM GLOBAL PTE. LTD. was classified as investment in joint venture as the Group has joint control pursuant to the agreement with the other shareholder.

 

(2) The market price of investments in listed associates as of December 31, 2016 and 2015 are as follows:

 

(In millions of won, except for share data)  
     December 31, 2016      December 31, 2015  
   Market value
per share

(in won)
     Number of
shares
     Fair value      Market value
per share

(in won)
     Number of
shares
     Fair value  

Candle Media Co., Ltd.

                        1,170        21,620,360        25,296  

NanoEnTek, Inc.

     5,020        6,960,445        34,941        7,300        6,960,445        50,811  

SK hynix Inc.

     44,700        146,100,000        6,530,670        30,750        146,100,000        4,492,575  

 

(3) The financial information of significant associates as of December 31, 2016 and 2015 and for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

(In millions of won)              
     SK hynix Inc.      KEB HanaCard Co., Ltd.  
     As of December 31, 2016  

Current assets

   9,838,982        6,868,387  

Non-current assets

     22,377,044        239,758  

Current liabilities

     4,160,849        1,219,327  

Non-current liabilities

     4,031,647        4,476,979  
     2016  

Revenue

     17,197,975        1,413,077  

Profit for the year

     2,960,483        75,595  

Other comprehensive income (loss)

     28,844        (154

Total comprehensive income

     2,989,327        75,441  

 

(In millions of won)              
     SK hynix Inc.      KEB HanaCard Co., Ltd.  
     As of December 31, 2015  

Current assets

   9,760,030        6,228,076  

Non-current assets

     19,917,876        509,579  

Current liabilities

     4,840,698        1,103,873  

Non-current liabilities

     3,449,505        4,297,289  
     2015  

Revenue

     18,797,998        1,472,830  

Profit for the year

     4,323,595        10,119  

Other comprehensive income (loss)

     40,215        (547

Total comprehensive income

     4,363,810        9,572  

 

(In millions of won)       
     SK hynix Inc.     KEB HanaCard Co., Ltd.  
     2014  

Revenue

   17,125,566       305,756  

Profit for the year

     4,195,169       (11,196

Other comprehensive income (loss)

     (52,360     (734

Total comprehensive income (loss)

     4,142,809       (11,930

 

F-49


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(4) The condensed financial information of joint ventures as of December 31, 2016 and 2015 and for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

(In millions of won)       
     Dogus
Planet, Inc.
    PT  XL
Planet

Digital
    Celcom
Planet
    Finnq
Co. Ltd.
    12CM
GLOBAL

PTE.  LTD.
 
     As of December 31, 2016  

Current assets

   46,433       20,077       13,445       48,699       12,061  

Cash and cash equivalents

     45,839       14,985       11,771       48,408       12,061  

Non-current assets

     20,218       50,765       7,341       673       727  

Current liabilities

     26,417       14,513       15,196       138       725  

Accounts payable, other payables and provision

     1,971       10,306       9,406       15        

Non-current liabilities

     72       1,305             784        
     2016  

Revenue

     53,864       9,492       6,511              

Depreciation and amortization

     (5,299     (940     (2,150     (12      

Interest income

     394       267       134       182        

Interest expense

     (2,139                        

Income tax benefit

           51                    

Loss for the period

     (22,017     (49,438     (41,742     (829     (22

Total comprehensive loss

     (22,017     (49,438     (41,742     (829     (22

 

(In millions of won)  
     Dogus
Planet, Inc.
    PT. Melon
Indonesia
    PT XL
Planet
Digital
    Celcom
Planet
 
     As of December 31, 2015  

Current assets

   46,248       12,805       9,500       21,416  

Cash and cash equivalents

     8,091       4,027       5,034       19,371  

Non-current assets

     18,088       2,657       46,013       5,519  

Current liabilities

     34,022       6,416       8,583       20,257  

Account payable, other payables and provision

     4,317       3,396       3,648       5,889  

Non-current liabilities

     78       140       714        
     2015  

Revenue

     38,944       17,094       5,536       1,647  

Depreciation and amortization

     (5,318     (132     (2,746     (1,332

Interest income

     465       288       525       345  

Income tax benefit

                 7,025        

Profit (Loss) for the year

     (32,713     1,853       (21,381     (25,881

Total comprehensive income (loss)

     (32,713     1,853       (21,381     (25,881

 

F-50


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(In millions of won)       
     Television
Media
Korea Ltd.
    Dogus
Planet,
Inc.
    PT.
Melon
Indonesia
    PT XL
Planet
Digital
    Celcom
Planet
 
     2014  

Revenue

   16,403       23,897       11,826       1,019        

Depreciation and amortization

     (3,732     (2,402     (928     (1,452     (1

Interest income

     254       1,154       268              

Interest expense

           (6                  

Income tax benefit

                       5,334        

Profit (loss) for the year

     (3,361     (37,146     523       (15,596     (1,479

Total comprehensive income (loss)

     (3,361     (37,146     523       (15,596     (1,479

 

(5) Reconciliations of financial information of significant associates to carrying amounts of investments in associates in the consolidated financial statements as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)       
     December 31, 2016  
     Net
assets
     Ownership
interests
(%)
     Net assets
attributable to
the ownership
interests
     Cost-book
value
differentials
     Carrying
amount
 

Associates:

              

SK hynix Inc.(*1,2)

   24,016,955        20.1        4,970,267        1,161,855        6,132,122  

KEB HanaCard Co., Ltd.

     1,411,839        15.0        211,776        54,022        265,798  

SKY Property Mgmt. Ltd.(*1)

     576,785        33.0        190,339        72,886        263,225  

Korea IT Fund

     416,606        63.3        263,850               263,850  

 

(In millions of won)       
     December 31, 2015  
     Net
assets
     Ownership
interests
(%)
     Net assets
attributable to
the ownership
interests
     Cost-book
value
differentials
     Carrying
amount
 

Associates:

              

SK hynix Inc.(*1,2)

   21,386,863        20.1        4,425,794        1,198,699        5,624,493  

KEB HanaCard Co., Ltd.

     1,336,493        15.0        200,474        53,703        254,177  

SKY Property Mgmt. Ltd.(*1)

     537,847        33.0        177,490        73,676        251,166  

Korea IT Fund

     411,246        63.3        260,456               260,456  

 

 

(*1) Net assets of these entities represent net assets excluding those attributable to their non-controlling interests.

 

(*2) The ownership interest is based on the number of shares owned by the Parent Company as divided by the total shares issued by the investee company. The Group applied the equity method using the effective ownership interest of 20.69% which is based on the number of shares owned by the Parent Company and the total shares outstanding.

 

F-51


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(6) Details of the changes in investments in associates and joint ventures accounted for using the equity method for the years ended December 31, 2016 and 2015 are as follows:

 

(In millions of won)       
      2016  
     Beginning
balance
     Acquisition
and
disposition
    Share of
profit
(loss)
    Other
compre-
hensive
income
(loss)
    Impair-
ment
loss
    Other
increase
(decrease)
    Ending
balance
 

Investments in associates:

               

SK China Company Ltd.

   43,814              2,257       283                   46,354  

Korea IT Fund(*1)

     260,456              14,864       (5,388           (6,082     263,850  

KEB HanaCard Co., Ltd.

     254,177              11,658       (37                 265,798  

Candle Media Co., Ltd.

     20,144        (18,860     (673     (611                  

NanoEnTek, Inc.

     45,008              (3,950     (1,544                 39,514  

SK Industrial Development China Co., Ltd.

     86,324              (6,298     (5,309                 74,717  

SK Technology Innovation Company

     45,891              162       1,435                   47,488  

HappyNarae Co., Ltd.

     17,095              240       (99                 17,236  

SK hynix Inc.(*1)

     5,624,493              572,086       8,593             (73,050     6,132,122  

SK MENA Investment B.V.

     14,929              63       459                   15,451  

SKY Property Mgmt. Ltd.

     251,166              16,066       (4,007                 263,225  

Xinan Tianlong Science and Technology Co., Ltd.

     25,767              113                         25,880  

Daehan Kanggun BcN Co., Ltd. and others

     161,058        (14,659     (13,325     754       (6,972     318       127,174  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

     6,850,322        (33,519     593,263       (5,471     (6,972     (78,814     7,318,809  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investments in joint ventures:

 

Dogus Planet, Inc.

     15,118        18,722       (11,008     (2,751                 20,081  

PT. Melon Indonesia(*2)

     4,339        (3,488     918       (1,769                  

Celcom Planet

     3,406        20,734       (21,289                       2,851  

PT XL Planet Digital

     23,108        29,123       (24,719                       27,512  

Finnq Co. Ltd

            24,580       (406                       24,174  

12CM GLOBAL PTE. LTD.

            10,896                               10,896  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

     45,971        100,567       (56,504     (4,520                 85,514  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   6,896,293        67,048       536,759       (9,991     (6,972     (78,814     7,404,323  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(*1) Dividends received from the associate are deducted from the carrying amount during the year ended December 31, 2016.

 

(*2) During the year ended December 31, 2016, the Group disposed of all shares of PT. Melon Indonesia and recognized gain on disposal of ₩11,634 million.

 

F-52


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(In millions of won)      
    2015  
    Beginning
balance
    Acquisition
and
disposition
    Share of
profit
(loss)
    Other
compre-
hensive
income
(loss)
    Impair-
ment
loss
    Other
increase
(decrease)
    Ending
balance
 

Investments in associates:

             

SK China Company Ltd.

  35,817             4,361       3,636                   43,814  

Korea IT Fund(*)

    240,676             11,971       9,912             (2,103     260,456  

KEB HanaCard Co., Ltd.

    425,140       (174,475     3,275       237                   254,177  

Candle Media Co., Ltd.

    19,486             550       70             38       20,144  

NanoEnTek, Inc.

    36,527       10,000       (1,649     130                   45,008  

SK Industrial Development China Co., Ltd.

    79,394             3,380       3,550                   86,324  

Packet One Network

    53,670             (8,714     (3,030           (41,926      

SK Technology Innovation Company

    44,052             (2,907     4,746                   45,891  

HappyNarae Co., Ltd.

    15,551             1,589       (45                 17,095  

SK hynix Inc.(*)

    4,849,159             842,086       (22,922           (43,830     5,624,493  

SK MENA Investment B.V.

    14,015             3       911                   14,929  

SKY Property Mgmt. Ltd.

    248,534             6,408       (3,776                 251,166  

Xinan Tianlong Science and Technology Co., Ltd.

    25,874             (107                       25,767  

Daehan Kanggun BcN Co., Ltd. and others(*)

    158,725       12,320       (15,726     1,689       (1,305     5,355       161,058  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

    6,246,620       (152,155     844,520       (4,892     (1,305     (82,466     6,850,322  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investments in joint ventures:

             

Dogus Planet, Inc.

    11,441       16,419       (16,357     3,615                   15,118  

PT. Melon Indonesia

    3,564             908       (133                 4,339  

Television Media Korea Ltd.

    6,944       (6,712     (232                        

Celcom Planet

    16,605             (13,199                       3,406  

PT XL Planet Digital

    12,914       20,884       (10,690                       23,108  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

    51,468       30,591       (39,570     3,482                   45,971  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  6,298,088       (121,564     804,950       (1,410     (1,305     (82,466     6,896,293  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*) Dividends paid by the associate are deducted from the carrying amount during the year ended December 31, 2015.

 

F-53


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(7) The Group discontinued the application of equity method to the following investees due to their carrying amounts being reduced to zero. The details of cumulative unrecognized equity method losses as of December 31, 2016 are as follows:

 

(In millions of won)       
     Unrecognized loss(profit)      Unrecognized change in equity  
     Year ended
December 31,
2016
    Cumulative
loss
     Year ended
December 31,
2016
     Cumulative
loss
 

Wave City Development Co., Ltd.

   (1,248     3,290                

Daehan Kanggun BcN Co., Ltd. and others

     4,281       10,791               365  
  

 

 

   

 

 

    

 

 

    

 

 

 
   3,033       14,081               365  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

12. Property and Equipment

 

(1) Property and equipment as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)                          
     December 31, 2016  
     Acquisition cost      Accumulated
depreciation
    Accumulated
impairment
loss
    Carrying
amount
 

Land

   835,909                    835,909  

Buildings

     1,604,863        (704,891           899,972  

Structures

     812,010        (453,055           358,955  

Machinery

     29,705,088        (22,667,047     (1,991     7,036,050  

Other

     1,701,794        (1,138,303     (457     563,034  

Construction in progress

     680,292                    680,292  
  

 

 

    

 

 

   

 

 

   

 

 

 
   35,339,956        (24,963,296     (2,448     10,374,212  
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(In millions of won)                          
     December 31, 2015  
     Acquisition cost      Accumulated
depreciation
    Accumulated
impairment
loss
    Carrying
amount
 

Land

   812,947                    812,947  

Buildings

     1,563,069        (651,940           911,129  

Structures

     763,122        (418,901           344,221  

Machinery

     28,624,842        (21,281,400     (1,433     7,342,009  

Other

     1,511,304        (1,036,780     (1,086     473,438  

Construction in progress

     487,512                    487,512  
  

 

 

    

 

 

   

 

 

   

 

 

 
   33,762,796        (23,389,021     (2,519     10,371,256  
  

 

 

    

 

 

   

 

 

   

 

 

 

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(2) Changes in property and equipment for the years ended December 31, 2016 and 2015 are as follows:

 

(In millions of won)  
    2016  
    Beginning
balance
    Acquisition     Disposal     Reclassification(*)     Depreciation     Impairment     Ending
balance
 

Land

  812,947       2,464       (3,514     24,012                   835,909  

Buildings

    911,129       4,637       (9,176     43,910       (50,528           899,972  

Structures

    344,221       33,802       (33     15,145       (34,180           358,955  

Machinery

    7,342,009       660,629       (45,672     1,234,737       (2,152,725     (2,928     7,036,050  

Other

    473,438       807,047       (6,052     (568,644     (142,700     (55     563,034  

Construction in progress

    487,512       1,154,424       (9,710     (951,934                 680,292  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  10,371,256       2,663,003       (74,157     (202,774     (2,380,133     (2,983     10,374,212  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*) Includes reclassification to intangible assets.

 

(In millions of won)  
    2015  
    Beginning
balance
    Acquisition     Disposal     Reclassifi-
cation
    Depreciation     Impairment     Business
combination
    Change of
consolidation
scope
    Ending
balance
 

Land

  766,780       6,629       (2,031     41,569                               812,947  

Buildings

    933,867       6,042       (6,839     27,500       (49,441                       911,129  

Structures

    352,789       9,776       (57     16,104       (34,391                       344,221  

Machinery

    7,310,815       645,986       (22,518     1,538,235       (2,133,193     (524     3,208             7,342,009  

Other

    499,050       786,531       (16,721     (652,022     (143,288     (4           (108     473,438  

Construction in progress

    704,400       1,063,169       (1,522     (1,271,762           (6,773                 487,512  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  10,567,701       2,518,133       (49,688     (300,376     (2,360,313     (7,301     3,208       (108     10,371,256  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

13. Investment Property

 

(1) There are no investment property as of December 31, 2016. Investment property as of December 31, 2015 are as follows:

 

(In millions of won)                    
     December 31, 2015  
     Acquisition
cost
     Accumulated
depreciation
    Carrying
amount
 

Land

   10,634              10,634  

Buildings

     7,531        (3,094     4,437  
  

 

 

    

 

 

   

 

 

 
   18,165        (3,094     15,071  
  

 

 

    

 

 

   

 

 

 

 

(2) Changes in investment properties for the years ended December 31, 2016 and 2015 are as follows:

 

(In millions of won)  
     2016  
     Beginning
balance
     Reclassification(*)     Depreciation     Ending
balance
 

Land

   10,634        (10,634            

Buildings

     4,437        (4,334     (103      
  

 

 

    

 

 

   

 

 

   

 

 

 
   15,071        (14,968     (103      
  

 

 

    

 

 

   

 

 

   

 

 

 

 

 

(*) Includes reclassification to property and equipment.

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(In millions of won)  
     2015  
     Beginning
balance
     Reclassification      Depreciation     Ending
balance
 

Land

   10,418        216              10,634  

Buildings

     4,579        98        (240     4,437  
  

 

 

    

 

 

    

 

 

   

 

 

 
   14,997        314        (240     15,071  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(3) Fair value of investment properties as of December 31, 2015 are as follows:

 

(In millions of won)              
     December 31, 2015  
     Carrying
amount
     Fair value  

Land

   10,634        6,009  

Buildings

     4,437        4,261  
  

 

 

    

 

 

 
   15,071        10,270  
  

 

 

    

 

 

 

The fair value of investment properties was determined on the comparative market analysis by an independent appraisal company.

 

(4) Income and expenses from investment property for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

(In millions of won)                   
     2016     2015     2014  

Rent revenue

   386       850       896  

Operating expense

     (114     (240     (239

 

14. Goodwill

 

(1) Goodwill as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)              
     December 31,
2016
     December 31,
2015
 

Goodwill related to acquisition of Shinsegi Telecom, Inc.

   1,306,236        1,306,236  

Goodwill related to acquisition of SK Broadband Co., Ltd.

     358,443        358,443  

Other goodwill

     267,773        243,911  
  

 

 

    

 

 

 
   1,932,452        1,908,590  
  

 

 

    

 

 

 

Goodwill is allocated to the following CGUs for the purpose of impairment testing.

 

   

goodwill related to Shinsegi Telecom, Inc.(*1): cellular services;

 

   

goodwill related to SK Broadband Co., Ltd.(*2): fixed-line telecommunication services; and

 

   

other goodwill: other.

 

 

(*1) Goodwill related to acquisition of Shinsegi Telecom, Inc.

The recoverable amount of the CGU is based on its value in use calculated by applying the annual discount rate of 4.9% to the estimated future cash flows based on financial budgets for the next five years. An annual growth

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

rate of 0.3% was applied for the cash flows expected to be incurred after five years and is not expected to exceed the Group’s long-term wireless telecommunication business growth rate. Management of the Group does not expect the total carrying amount of the CGU will exceed the total recoverable amount due to reasonably possible changes from the major assumptions used to estimate the recoverable amount.

 

(*2) Goodwill related to acquisition of SK Broadband Co., Ltd.

The recoverable amount of the CGU is based on its value in use calculated by applying the annual discount rate of 5.0% to the estimated future cash flows based on financial budgets for the next five years. An annual growth rate of 1.0%, the Group’s long-term fixed-line telecommunication business growth rate, was applied for the cash flows expected to be incurred after five years. Management of the Group does not expect the total carrying amount of the CGU will exceed the total recoverable amount due to reasonably possible changes from the major assumptions used to estimate the recoverable amount.

 

(2) Details of the changes in goodwill for the years ended December 31, 2016 and 2015 are as follows:

 

(In millions of won)       
     2016      2015  

Beginning balance

   1,908,590        1,917,595  

Acquisition

     19,974        1,758  

Impairment loss

            (19,245

Other

     3,888        8,482  
  

 

 

    

 

 

 
   1,932,452        1,908,590  
  

 

 

    

 

 

 

Accumulated impairment losses as of December 31, 2016 and 2015 are ₩17,269 million.

 

15. Intangible Assets

 

(1) Intangible assets as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)       
     December 31, 2016  
     Acquisition
cost
     Accumulated
amortization
    Accumulated
impairment
    Carrying
amount
 

Frequency usage rights

   4,843,955        (2,263,127           2,580,828  

Land usage rights

     65,148        (44,314           20,834  

Industrial rights

     160,897        (39,697           121,200  

Development costs

     141,727        (136,446     (410     4,871  

Facility usage rights

     151,906        (110,118           41,788  

Customer relations

     19,742        (13,090           6,652  

Club memberships(*1)

     113,161              (39,122     74,039  

Other(*2)

     3,315,921        (2,386,992     (2,787     926,142  
  

 

 

    

 

 

   

 

 

   

 

 

 
   8,812,457        (4,993,784     (42,319     3,776,354  
  

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(In millions of won)       
     December 31, 2015  
     Acquisition
cost
     Accumulated
amortization
    Accumulated
impairment
    Carrying
amount
 

Frequency usage rights

   3,033,879        (1,930,362           1,103,517  

Land usage rights

     74,217        (47,641           26,576  

Industrial rights

     159,926        (43,384           116,542  

Development costs

     140,226        (132,754           7,472  

Facility usage rights

     149,841        (101,822           48,019  

Customer relations

     16,528        (9,353           7,175  

Club memberships(*1)

     126,622              (35,115     91,507  

Other(*2)

     3,101,622        (2,197,646           903,976  
  

 

 

    

 

 

   

 

 

   

 

 

 
   6,802,861        (4,462,962     (35,115     2,304,784  
  

 

 

    

 

 

   

 

 

   

 

 

 

 

 

(*1) Club memberships are classified as intangible assets with indefinite useful life and are not amortized.

 

(*2) Other intangible assets primarily consist of computer software and usage rights to a research facility which the Group built and donated, and the Group is given rights-to-use for a definite number of years in turn.

 

(2) Details of the changes in intangible assets for the years ended December 31, 2016 and 2015 are as follows:

 

(In millions of won)      
    2016  
    Beginning
balance
    Acquisition     Disposal     Reclassifi-
cation(*2)
    Amortization     Impairment(*3)     Business
combination
    Ending
balance
 

Frequency usage rights(*1)

  1,103,517       1,810,076                   (332,765                 2,580,828  

Land usage rights

    26,576       5,338       (1,921           (9,159                 20,834  

Industrial rights

    116,542       6,226       (148     5,004       (6,424                 121,200  

Development costs

    7,472       1,404             338       (3,933     (410           4,871  

Facility usage rights

    48,019       2,181       (50     231       (8,593                 41,788  

Customer relations

    7,175       499                   (4,051           3,029       6,652  

Club memberships

    91,507       7,983       (7,624                 (17,827           74,039  

Other

    903,976       141,045       (20,306     228,110       (323,397     (3,286           926,142  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  2,304,784       1,974,752       (30,049     233,683       (688,322     (21,523     3,029       3,776,354  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*1) During the year ended December 31, 2016, the Parent Company acquired the frequency right for bandwidth blocs in the 2.6 GHz band for ₩1,330,100 million at the spectrum auction held by the Ministry of Science, ICT and Future Planning (MSIP) of Korea and made the initial payment in accordance with the terms of the agreement in August 2016. The remaining consideration will be paid on an annual installment basis for 10 years from August 2016. In addition, the Parent Company extended frequency usage rights for 2.1 GHz band for ₩568,500 million with the initial payment made to MSIP during the year ended December 31, 2016. The remaining consideration will be paid on an annual installment basis for 5 years from December 2016.

 

(*2) Includes reclassification from advance payments and property and equipment.

 

(*3) The Group recognized the difference between recoverable amount and the carrying amount of intangible assets, amounting to ₩21,523 million as impairment loss for the year ended December 31, 2016.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(In millions of won)      
    2015  
    Beginning
balance
    Acquisition     Disposal     Reclassifi-
cation
    Amortization     Impairment(*)     Business
combination
    Change of
consolidation
scope
    Ending
balance
 

Frequency usage rights

  1,384,044                         (280,527                       1,103,517  

Land usage rights

    25,353       11,956       (1,314           (9,419                       26,576  

Industrial rights

    107,760       5,878       (22     8,935       (6,009                       116,542  

Development costs

    8,331       3,737             23       (4,563     (56                 7,472  

Facility usage rights

    52,636       2,721       (23     1,177       (8,492                       48,019  

Customer relations

    6,404                         (4,689           8,486       (3,026     7,175  

Club memberships

    94,119       1,137       (1,802     68             (2,015                 91,507  

Other

    805,347       103,137       (1,772     323,933       (319,234     (7,228           (207     903,976  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  2,483,994       128,566       (4,933     334,136       (632,933     (9,299     8,486       (3,233     2,304,784  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*) The Group recognized the difference between recoverable amount and the carrying amount of intangible assets, amounting to ₩9,299 million as impairment loss for the year ended December 31, 2015.

 

(3) Research and development expenditures recognized as expense for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

     2016      2015      2014  

Research and development costs expensed as incurred

   344,787        315,790        390,943  

 

(4) The carrying amount and residual useful lives of frequency usage rights as of December 31, 2016 are as follows, all of which are amortized on a straight-line basis:

 

(In millions of won)  
     Amount     

Description

   Commencement
of amortization
     Completion of
amortization
 

800MHz license

   182,448      Frequency usage rights relating to CDMA and LTE service      Jul. 2011        Jun. 2021  

1.8GHz license

     628,100      Frequency usage rights relating to LTE service      Sept. 2013        Dec. 2021  

WiBro license

     5,306      WiBro service      Mar. 2012        Mar. 2019  

2.6GHz license

     1,214,190      Frequency usage rights relating to LTE service      Sept. 2016        Dec. 2026  

2.1GHz license

     550,784      Frequency usage rights relating to W-CDMA and LTE service      Dec. 2016        Dec. 2021  
  

 

 

          
   2,580,828           
  

 

 

          

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

16. Borrowings and Debentures

 

(1) Short-term borrowings as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)       
     Lender      Annual
interest
rate (%)
     December 31,
2016
     December 31,
2015
 

Commercial Papers

    
KTB Investment and
Securities Co., Ltd., etc.
 
 
     1.76~1.84             220,000  

Short-term borrowings

     Woori Bank        2.88        2,614        40,000  
        

 

 

    

 

 

 
         2,614        260,000  
        

 

 

    

 

 

 

 

(2) Long-term borrowings as of December 31, 2016 and 2015 are as follows:

 

(In millions of won and thousands of U.S. dollars)  

Lender

   Annual interest
rate (%)
     Maturity      December 31,
2016
    December 31,
2015
 

Kookmin Bank

     1.98        Jun. 15, 2016            1,625  

Shinhan Bank

    
6M bank debenture
rate+1.58
 
 
     Apr. 30, 2016              10,000  

Kookmin Bank

     1.29        Mar. 15, 2017        500       2,498  

Kookmin Bank

     1.29        Mar. 15, 2018        3,583       6,450  

Korea Development Bank(*1)

     3.32        Jul. 30, 2019        35,750       39,000  

Korea Development Bank(*1)

     2.94        Jul. 30, 2019        9,167       10,000  

Korea Development Bank

     2.32        Dec. 20, 2021        49,000        

Export Kreditnamnden(*2,3)

     1.70        Apr. 29, 2022        76,493       87,685  
           (USD 63,296     (USD 74,817
        

 

 

   

 

 

 

Sub-total

           174,493       157,258  

Less present value discount

           (1,586     (2,124
        

 

 

   

 

 

 
           172,907       155,134  

Less current installments

           (33,191     (33,581
        

 

 

   

 

 

 
   139,716       121,553  
        

 

 

   

 

 

 

 

 

(*1) In November 2016, SK Broadband Co., Ltd. agreed to refinance these fixed rate borrowings with floating-rate borrowings on January 30, 2017 and entered into a floating-to-fixed interest rate swap agreement to mitigate the interest rate risk that will arise from floating-rate borrowings.

 

(*2) Prior to 2015, the Group obtained long-term borrowings from Export Kreditnamnden, an export credit agency. The long-term borrowings are to be repaid by installments on an annual basis from 2014 to 2022.

 

(*3) Convenient translation was provided for the borrowings repayable in foreign currencies.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(3) Debentures as of December 31, 2016 and 2015 are as follows:

 

(In millions of won, thousands of U.S. dollars and thousands of other currencies)  
   

Purpose

  Maturity   Annual interest
rate (%)
  December 31,
2016
    December 31,
2015
 

Unsecured private bonds

  Refinancing fund   2016   5.00         200,000  

Unsecured private bonds

  Other fund   2018   5.00     200,000       200,000  

Unsecured private bonds

    2016   5.54           40,000  

Unsecured private bonds

    2016   5.92           230,000  

Unsecured private bonds

  Operating fund   2016   3.95           110,000  

Unsecured private bonds

    2021   4.22     190,000       190,000  

Unsecured private bonds

  Operating and   2019   3.24     170,000       170,000  

Unsecured private bonds

  refinancing fund   2022   3.30     140,000       140,000  

Unsecured private bonds

    2032   3.45     90,000       90,000  

Unsecured private bonds

  Operating fund   2023   3.03     230,000       230,000  

Unsecured private bonds

    2033   3.22     130,000       130,000  

Unsecured private bonds

    2019   3.30     50,000       50,000  

Unsecured private bonds

    2024   3.64     150,000       150,000  

Unsecured private bonds(*1)

    2029   4.72     59,600       54,695  

Unsecured private bonds

  Refinancing fund   2019   2.53     160,000       160,000  

Unsecured private bonds

    2021   2.66     150,000       150,000  

Unsecured private bonds

    2024   2.82     190,000       190,000  

Unsecured private bonds

  Operating and   2022   2.40     100,000       100,000  

Unsecured private bonds

  refinancing fund   2025   2.49     150,000       150,000  

Unsecured private bonds

    2030   2.61     50,000       50,000  

Unsecured private bonds

  Operating fund   2018   1.89     90,000       90,000  

Unsecured private bonds

    2025   2.66     70,000       70,000  

Unsecured private bonds

    2030   2.82     90,000       90,000  

Unsecured private bonds(*1,2)

    2030   3.40           50,485  

Unsecured private bonds

  Operating and   2018   2.07     80,000       80,000  

Unsecured private bonds

  refinancing fund   2025   2.55     100,000       100,000  

Unsecured private bonds

    2035   2.75     70,000       70,000  

Unsecured private bonds(*1,2)

    2030   3.10           50,524  

Unsecured private bonds

  Operating fund   2019   1.65     70,000        

Unsecured private bonds

    2021   1.80     100,000        

Unsecured private bonds

    2026   2.08     90,000        

Unsecured private bonds

    2036   2.24     80,000        

Unsecured private bonds

    2019   1.62     50,000        

Unsecured private bonds

    2021   1.71     50,000        

Unsecured private bonds

    2026   1.97     120,000        

Unsecured private bonds

    2031   2.17     50,000        

Unsecured private bonds(*3)

    2017   4.28     100,000       100,000  

Unsecured private bonds(*3)

    2017   3.27     120,000       120,000  

Unsecured private bonds(*3)

    2016   3.05           80,000  

Unsecured private bonds(*3)

    2019   3.49     210,000       210,000  

Unsecured private bonds(*3)

    2019   2.76     130,000       130,000  

Unsecured private bonds(*3)

    2018   2.23     50,000       50,000  

Unsecured private bonds(*3)

    2020   2.49     160,000       160,000  

Unsecured private bonds(*3)

    2020   2.43     140,000       140,000  

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(In millions of won, thousands of U.S. dollars and thousands of other currencies)  
   

Purpose

  Maturity   Annual interest
rate (%)
  December 31,
2016
    December 31,
2015
 

Unsecured private bonds(*3)

    2020   2.18     130,000       130,000  

Unsecured private bonds(*3)

    2019   1.58     50,000        

Unsecured private bonds(*3)

  Operating and   2021   1.77     120,000        
  Refinancing fund        

Unsecured private bonds(*4)

  Operating fund   2016   3.24           10,000  

Unsecured private bonds(*4)

    2017   3.48     20,000       20,000  

Unsecured global bonds

    2027   6.63     483,400       468,800  
          (USD 400,000     (USD 400,000

Unsecured private Swiss
bonds

    2017   1.75     354,399       355,617  
          (CHF 300,000     (CHF 300,000

Unsecured global bonds

    2018   2.13     845,950       820,400  
          (USD 700,000     (USD 700,000

Unsecured private Australian
bonds

    2017   4.75     261,615       255,930  
          (AUD 300,000     (AUD 300,000

Floating rate notes(*5)

    2020   3M Libor + 0.88     362,550       351,600  
          (USD 300,000     (USD 300,000

Foreign global bonds(*3)

    2018   2.88     362,550       351,600  
          (USD 300,000     (USD 300,000
       

 

 

   

 

 

 

Sub-total

          7,220,064       7,139,651  

Less discounts on bonds

          (25,858     (30,998
       

 

 

   

 

 

 
          7,194,206       7,108,653  

Less current installments of bonds

          (855,276     (669,506
       

 

 

   

 

 

 
        6,338,930       6,439,147  
       

 

 

   

 

 

 

 

 

(*1) The Group eliminated a measurement inconsistency of accounting profit or loss between the bonds and related derivatives by designating the structured bonds as financial liabilities at fair value through profit or loss.

 

   The carrying amount of financial liabilities designated at fair value through profit or loss exceeds the principal amount required to pay at maturity by ₩9,600 million as of December 31, 2016.

 

(*2) The principal amount and the fair value of the structured bonds that were designated as financial liabilities at fair value through profit or loss as of December 31, 2015 were ₩100,000 million and ₩101,009 million, respectively. The bonds were early redeemed during the year ended December 31, 2016.

 

(*3) Unsecured private bonds were issued by SK Broadband Co., Ltd., a subsidiary of the Parent Company.

 

(*4) Unsecured private bonds were issued by PS&Marketing Corporation, a subsidiary of the Parent Company.

 

(*5) As of December 31, 2016, 3M LIBOR rate is 1.00%.

 

(*6) Convenient translation was provided for the bonds repayable in other foreign currencies.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

17. Long-term Payables — Other

 

(1) Long-term payables — other as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)              
     December 31, 2016      December 31, 2015  

Payables related to acquisition of frequency usage rights

   1,602,943        550,964  

Other(*)

     21,647        30,733  
  

 

 

    

 

 

 
   1,624,590        581,697  
  

 

 

    

 

 

 

 

 

(*) Other includes other long-term employee compensation liabilities.

 

(2) As of December 31, 2016 and 2015, details of long-term payables — other which consist of payables related to the acquisition of frequency usage rights are as follows (See Note 15):

 

(In millions of won)             
     December 31, 2016     December 31, 2015  

Long-term payables — other

   2,013,122       709,888  

Present value discount on long-term payables — other

     (108,406     (38,739
  

 

 

   

 

 

 
     1,904,716       671,149  

Less current installments of long-term payables — other

     (301,773     (120,185
  

 

 

   

 

 

 

Carrying amount at December 31

   1,602,943       550,964  
  

 

 

   

 

 

 

 

(3) The repayment schedule of the principal amount of long-term payables — other related to acquisition of frequency usage rights as of December 31, 2016 is as follows:

 

(In millions of won)       
     Amount  

Less than 1 year

   302,867  

1~3 years

     605,734  

3~5 years

     605,734  

More than 5 years

     498,787  
  

 

 

 
   2,013,122  
  

 

 

 

 

18. Provisions

 

(1) Changes in provisions for the years ended December 31, 2016 and 2015 are as follows:

 

(In millions of won)        
    For the year ended December 31, 2016     As of December 31, 2016  
    Beginning
balance
    Increase     Utilization     Reversal     Other     Ending
balance
    Current     Non-current  

Provision for installment of handset subsidy(*1)

  5,670       37,530       (18,490                 24,710       19,939       4,771  

Provision for restoration(*2)

    59,954       6,677       (1,082     (913     43       64,679       37,760       26,919  

Emission allowance(*3)

    1,477       1,480       (169                 2,788       2,788        

Other provisions

    3,104       3,237       (601                 5,740       5,740        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  70,205       48,924       (20,342     (913     43       97,917       66,227       31,690  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(In millions of won)              
    For the year ended December 31, 2015     As of December 31, 2015  
    Beginning
balance
    Increase     Utilization     Reversal     Other     Change of
consolida-

tion scope
    Ending
balance
    Current     Non-current  

Provision for installment of handset subsidy(*1)

  26,799       1,641       (5,004     (17,766                 5,670       2,232       3,438  

Provision for
restoration(*2)

    59,727       4,983       (1,135     (5,433     1,812             59,954       34,336       25,618  

Emission allowance(*3)

          1,477                               1,477       1,477        

Other provisions

    562       3,795       (510     (472           (271     3,104       2,943       161  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  87,088       11,896       (6,649     (23,671     1,812       (271     70,205       40,988       29,217  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*1) The Group recognizes a provision for handset subsidies given to the subscribers who purchase handsets on an installment basis. The amount recognized as a provision for handset subsidies is the Group’s best estimate of the expenditure required to settle the current obligations to the relevant subscribers at the end of the reporting period, which is the present value of estimated handset subsidies to be granted over the relevant service periods, taking into account the customer retention rate for the relevant subscribers. The discount rate used in calculating the present values is based on AAA-rated corporate bonds with a two-year maturity. The customer retention rate is based on the Group’s historical retention rate.

 

(*2) In the course of the Group’s activities, base station and other assets are installed on leased premises which are expected to have costs associated with restoring the premises to their original conditions where these assets are situated upon ceasing their use on those premises. The associated cash outflows, which are long-term in nature, are generally expected to occur at the dates of the termination of lease contracts to which the assets relate. These restoration costs are calculated on the basis of the identified costs for the current financial year, extrapolated into the future based on management’s best estimates of future trends in prices, inflation, and other factors, and are discounted to present value at a risk-adjusted rate specifically applicable to the liability. Forecasts of estimated future cash outflows are revised in light of future changes in business conditions or technological requirements. The Group records these restoration costs as property and equipment and subsequently expenses them using the straight-line method over the asset’s useful life, and records the accretion of the liability as a charge to finance costs.

 

(*3) The Group recognizes estimated future payment for the number of emission certificates required to settle the Group’s obligation exceeding the actual number of certificates on hand as emission allowances according to the Act on Allocation and Trading of Greenhouse Gas Emission Permits.

 

(2) The followings are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period.

 

    

Key assumptions

Provision for handset subsidy

   estimation based on historical service retention period data

Provision for restoration

   estimation based on cost of demolition and inflation with an assumption of demolishing the relevant assets after six years

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

19. Lease

In 2012, the Group disposed a portion of its property and equipment and investment property, and entered into lease agreements with respect to those assets. These sale and leaseback transactions were accounted for as operating leases. The Group entered into operating lease agreements and sublease agreements in relation to rented office space and the expected future lease payments and lease revenues as of December 31, 2016 are as follows:

 

(In millions of won)              
     Minimum
lease
payments
     Revenues  

Less than 1 year

   35,684        1,882  

1~5 years

     70,766        896  

More than 5 years

     17,075        224  
  

 

 

    

 

 

 
   123,525        3,002  
  

 

 

    

 

 

 

 

20. Defined Benefit Liabilities(Assets)

 

(1) Details of defined benefit liabilities(assets) as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)             
     December 31, 2016     December 31, 2015  

Present value of defined benefit obligations

   595,667       525,269  

Fair value of plan assets

     (555,175     (426,413
  

 

 

   

 

 

 

Defined benefit assets(*)

     (30,247      
  

 

 

   

 

 

 

Defined benefit liabilities

     70,739       98,856  
  

 

 

   

 

 

 

 

 

(*) Since the Group entities neither have legally enforceable right nor intention to settle the defined benefit obligations of Group entities with defined benefit assets of other Group entities, defined benefit assets of Group entities have been separately presented from defined benefit liabilities.

 

(2) Principal actuarial assumptions as of December 31, 2016 and 2015 are as follows:

 

     December 31, 2016    December 31, 2015

Discount rate for defined benefit obligations

   1.90~2.96%    1.90~2.93%

Expected rate of salary increase

   2.49~6.09%    2.51~7.04%

Discount rate for defined benefit obligation is determined based on yield rate of high-quality corporate bonds with similar maturities for estimated payment term of defined benefit obligation. Expected rate of salary increase is determined based on the Group’s historical promotion index, inflation rate and salary increase ratio.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(3) Changes in defined benefit obligations for the years ended December 31, 2016 and 2015 are as follows:

 

(In millions of won)                  
               2016                        2015          

Beginning balance

     525,269          437,844  

Current service cost

       114,528          106,764  

Interest cost

       13,441          12,292  

Remeasurement

         

- Demographic assumption

       677          732  

- Financial assumption

       (2,462        5,900  

- Adjustment based on experience

       6,229          15,100  

Benefit paid

       (55,350        (58,513

Others

       (6,665        5,150  
    

 

 

      

 

 

 

Ending balance

     595,667          525,269  
    

 

 

      

 

 

 

 

(4) Changes in plan assets for the years ended December 31, 2016 and 2015 are as follows:

 

(In millions of won)             
     2016     2015  

Beginning balance

   426,413       346,257  

Interest income

     9,826       9,035  

Remeasurement

     (6,320     3,146  

Contributions

     159,687       115,640  

Benefit paid

     (34,247     (47,809

Others

     (184     144  
  

 

 

   

 

 

 

Ending balance

   555,175       426,413  
  

 

 

   

 

 

 

The Group expects to make a contribution of ₩121,727 million to the defined benefit plans in 2017.

 

(5) Total amount of expenses recognized in profit and loss (included in labor in the consolidated statement of income) and capitalized into construction-in-progress for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

(In millions of won)                     
     2016      2015      2014  

Current service cost

   114,528        106,764        109,625  

Net interest cost

     3,615        3,257        3,092  
  

 

 

    

 

 

    

 

 

 
   118,143        110,021        112,717  
  

 

 

    

 

 

    

 

 

 

The above costs are recognized in labor, research and development, or capitalized into construction-in-progress.

 

(6) Details of plan assets as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)              
     December 31, 2016      December 31, 2015  

Equity instruments

   13,640        1,086  

Debt instruments

     95,359        81,867  

Short-term financial instruments, etc.

     446,176        343,460  
  

 

 

    

 

 

 
   555,175        426,413  
  

 

 

    

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(7) As of December 31, 2016, effects on defined benefit obligations if each of significant actuarial assumptions changes within expectable and reasonable range are as follows:

 

(In millions of won)             
     Increase     Decrease  

Discount rate (if changed by 0.5%)

   (24,168     26,443  

Expected salary increase rate (if changed by 0.5%)

     26,410       (24,408

The sensitivity analysis does not consider dispersion of all cash flows that are expected from the plan and provides approximate values of sensitivity for the assumptions used.

Weighted average durations of defined benefit obligations as of December 31, 2016 and 2015 are 9.10 years and 9.35 years, respectively.

 

F-67


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

21. Derivative Instruments

 

(1) Currency and interest rate swap contracts under cash flow hedge accounting as of December 31, 2016 are as follows:

 

Borrowing
date

  

Hedging Instrument(Hedged item)

 

Hedged risk

  

Financial
institution

 

Duration of
contract

Jul. 20,
2007
  

Fixed-to-fixed cross currency swap (U.S. dollar denominated bonds face value of USD 400,000)

  Foreign currency risk    Morgan Stanley and five other banks   Jul. 20, 2007 ~
Jul. 20, 2027
Jun. 12,
2012
  

Fixed-to-fixed cross currency swap (Swiss Franc denominated bonds face value of CHF 300,000)

  Foreign currency risk    Citibank and four other banks   Jun. 12, 2012 ~ Jun.12, 2017
Nov. 1,

2012

  

Fixed-to-fixed cross currency swap (U.S. dollar denominated bonds face value of USD 700,000)

  Foreign currency risk    Standard Chartered and eight other banks   Nov. 1, 2012~ May. 1, 2018
Jan. 17,

2013

  

Fixed-to-fixed cross currency swap (Australia dollar denominated bonds face value of AUD 300,000)

  Foreign currency risk    BNP Paribas and two other banks   Jan. 17, 2013 ~ Nov. 17, 2017
Mar. 7,

2013

  

Floating-to-fixed cross currency interest rate swap (U.S. dollar denominated bonds face value of USD 300,000)

  Foreign currency risk and interest rate risk    DBS bank   Mar. 7, 2013 ~ Mar. 7, 2020
Oct. 29,
2013
  

Fixed-to-fixed cross currency swap (U.S. dollar denominated bonds face value of USD 300,000)

  Foreign currency risk    Korea Development Bank and others   Oct.29, 2013 ~ Oct. 26, 2018
Dec. 16,
2013
  

Fixed-to-fixed cross currency swap (U.S. dollar borrowing amounting to USD 63,296)

  Foreign currency risk    Deutsche bank   Dec.16, 2013 ~ Apr. 29, 2022
Dec. 20,
2016
  

Floating-to-fixed interest rate swap (Korean won borrowing amounting to KRW 49,000)

  Interest rate risk    Korea Development Bank  

Dec. 20, 2016~

Dec. 20, 2021

Jan. 30,
2017
  

Floating-to-fixed interest rate swap(*) (Korean won borrowing amounting to KRW 44,917)

  Interest rate risk    Korea Development Bank  

Nov. 10, 2016~

Jul. 30, 2019

 

 

(*) In November 2016, SK Broadband Co., Ltd. agreed to refinance these fixed rate borrowings with floating-rate borrowings on January 30, 2017 and entered into a floating-to-fixed interest rate swap agreement to mitigate the interest rate risk that will arise from floating-rate borrowings. SK Broadband Co., Ltd. designated interest rate swap as hedging instrument for a highly probable forecasted transaction.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(2) As of December 31, 2016, details of fair values of the above derivatives recorded in assets or liabilities are as follows:

 

(In millions of won and thousands of foreign currencies)  
     Fair value  
     Cash flow hedge      Held for
trading
     Total  

Hedging instrument

   Accumulated
gain (loss) on
valuation of
derivatives
    Tax
effect
    Accumulated
foreign
currency
translations
(gain) loss
    Others
(*)
       

Non-current assets:

              

Structured bond(face value of KRW 50,000)

                            7,368        7,368  

Fixed-to-fixed cross currency swap (U.S. dollar denominated bonds face value of USD 400,000)

     (61,846     (19,745     25,594       129,806               73,809  

Fixed-to-fixed cross currency swap (U.S. dollar denominated bonds face value of USD 700,000)

     (16,070     (5,132     82,207                     61,005  

Floating-to-fixed cross currency interest rate swap (U.S. dollar denominated bonds face value of USD 300,000)

     (5,714     (1,824     37,363                     29,825  

Fixed-to-fixed cross currency swap (U.S. dollar denominated bonds face value of USD 300,000)

     (5,458           43,763                     38,305  

Fixed-to-fixed long-term borrowings (U.S. dollar borrowing amounting to USD 63,296)

     (3,859     (1,232     9,549                     4,458  
              

 

 

 

Total assets

               214,770  
              

 

 

 

Current liabilities:

              

Fixed-to-fixed cross currency swap (Swiss Franc denominated bonds face value of CHF 300,000)

   (4,376     (1,397     (9,068                   (14,841

Fixed-to-fixed cross currency swap (U.S. dollar denominated bonds face value of AUD 300,000)

     1,109       354       (73,572                   (72,109
              

 

 

 

Non-current liabilities:

              

Floating-to-fixed interest rate swap (Korean won borrowing amounting to KRW 49,000)

     (203                               (203
              

 

 

 

Total liabilities

               (87,153
              

 

 

 

 

 

(*) Cash flow hedge accounting has been applied to the relevant contracts from May 12, 2010. Others represent gain on valuation of currency swap recognized in profit or loss prior to May 12, 2010.

 

F-69


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

22. Share Capital and Capital Surplus (Deficit) and Others

The Parent Company’s outstanding share capital consists entirely of common stock with a par value of ₩500. The number of authorized, issued and outstanding common shares and the details of capital surplus and others as of December 31, 2016 and 2015 are as follows:

 

(In millions of won, except for share data)             
     December 31, 2016     December 31, 2015  

Number of authorized shares

     220,000,000       220,000,000  

Number of issued shares(*1)

     80,745,711       80,745,711  

Share capital:

    

Common stock

   44,639       44,639  

Capital surplus and others:

    

Paid-in surplus

     2,915,887       2,915,887  

Treasury shares(Note 23)

     (2,260,626     (2,260,626

Others(*2)

     (854,000     (864,269
  

 

 

   

 

 

 
   (198,739     (209,008
  

 

 

   

 

 

 

 

 

(*1) Prior to 2015, the Parent Company retired shares of treasury shares which reduced its retained earnings before appropriation. As a result, the Parent Company’s outstanding shares have decreased without change in share capital.

 

(*2) Others primarily consist of the excess of the consideration paid by the Group over the carrying values of net assets acquired from entities under common control.

There were no changes in share capital during the years ended December 31, 2016 and 2015 and details of shares outstanding as of December 31, 2016 and 2015 are as follows:

 

(In shares)                                         
     2016      2015  
     Issued
shares
     Treasury
shares
     Outstanding
shares
     Issued
shares
     Treasury
shares
    Outstanding
shares
 

Beginning

     80,745,711        10,136,551        70,609,160        80,745,711        9,809,375       70,936,336  

Disposal of treasury shares

                                 (1,692,824     1,692,824  

Acquisition of treasury shares

                                 2,020,000       (2,020,000
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Ending

     80,745,711        10,136,551        70,609,160        80,745,711        10,136,551       70,609,160  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

23. Treasury Shares

The Parent Company acquired treasury shares to provide stock dividends, merge with Shinsegi Telecom, Inc. and SK IMT Co, Ltd., increase shareholder value and to stabilize its stock prices.

Treasury shares as of December 31, 2016 and 2015 are as follows:

 

(In millions of won, shares)              
     December 31, 2016      December 31, 2015  

Number of shares

     10,136,551        10,136,551  

Acquisition cost

   2,260,626        2,260,626  

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

24. Hybrid Bonds

Hybrid bonds classified as equity as of December 31, 2016 are as follows:

 

(In millions of won)  
    

Type

  

Issuance date

  

Maturity(*1)

   Annual
interest
rate(%)(*2)
     Amount  

Private hybrid bonds

   Unsecured subordinated bearer bond    June 7, 2013    June 7, 2073      4.21      400,000  

Issuance costs

                 (1,482
              

 

 

 
               398,518  
              

 

 

 

Hybrid bonds issued by the Parent Company are classified as equity as there is no contractual obligation for delivery of financial assets to the bond holders. These are subordinated bonds which rank before common stocks in the event of a liquidation or reorganization of the Parent Company.

 

 

(*1) The Parent Company has a right to extend the maturity under the same terms at issuance without any notice or announcement. The Parent Company also has the right to defer interest payment at its sole discretion.

 

(*2) Annual interest rate is calculated as yield rate of 5 year national bonds plus premium. According to the step-up clause, additional premium of 0.25% and 0.75%, respectively, after 10 years and 25 years from the issuance date are applied.

 

25. Retained Earnings

 

(1) Retained earnings as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)              
     December 31, 2016      December 31, 2015  

Appropriated:

     

Legal reserve

   22,320        22,320  

Reserve for research & manpower development

     60,001        87,301  

Reserve for business expansion

     9,871,138        9,671,138  

Reserve for technology development

     2,826,300        2,616,300  
  

 

 

    

 

 

 
     12,779,759        12,397,059  

Unappropriated

     3,173,405        2,610,568  
  

 

 

    

 

 

 
   15,953,164        15,007,627  
  

 

 

    

 

 

 

 

(2) Legal reserve

The Korean Commercial Act requires the Parent Company to appropriate as a legal reserve at least 10% of cash dividends paid for each accounting period until the reserve equals 50% of outstanding share capital. The legal reserve may not be utilized for cash dividends, but may only be used to offset a future deficit, if any, or may be transferred to share capital.

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

26. Reserves

 

(1) Details of reserves, net of taxes, as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)             
     December 31, 2016     December 31, 2015  

Valuation gain on available-for-sale financial assets

   12,534       232,316  

Other comprehensive loss of investments in associates

     (179,167     (169,520

Valuation loss on derivatives

     (96,418     (83,200

Foreign currency translation differences for foreign operations

     36,868       29,707  
  

 

 

   

 

 

 
   (226,183     9,303  
  

 

 

   

 

 

 

 

(2) Changes in reserves for the years ended December 31, 2016 and 2015 are as follows:

 

(In millions of won)       
     2016  
     Valuation gain
(loss)  on
available-for-

sale financial
assets
    Other compre-
hensive loss
of investments  in
associates
    Valuation
loss on
derivatives
    Foreign currency
translation
differences for
foreign

operations
     Total  

Balance at January 1, 2016

   232,316       (169,520     (83,200     29,707        9,303  

Changes, net of taxes

     (219,782     (9,647     (13,218     7,161        (235,486
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at December 31, 2016

   12,534       (179,167     (96,418     36,868        (226,183
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(In millions of won)       
     2015  
     Valuation gain
(loss)  on
available-for-

sale financial
assets
    Other compre-
hensive loss
of investments  in
associates
    Valuation
loss on
derivatives
    Foreign currency
translation
differences for
foreign

operations
     Total  

Balance at January 1, 2015

   235,385       (163,808     (77,531     1,465        (4,489

Changes, net of taxes

     (3,069     (5,712     (5,669     28,242        13,792  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at December 31, 2015

   232,316       (169,520     (83,200     29,707        9,303  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(3) Changes in valuation gain on available-for-sale financial assets for the years ended December 31, 2016 and 2015 are as follows:

 

(In millions of won)             
     2016     2015  

Balance at January 1

   232,316       235,385  

Amount recognized as other comprehensive income (loss) during the year, net of taxes

     4,606       (1,835

Amount reclassified through profit or loss, net of taxes

     (224,388     (1,234
  

 

 

   

 

 

 

Balance at December 31

   12,534       232,316  
  

 

 

   

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(4) Changes in valuation loss on derivatives for the years ended December 31, 2016 and 2015 are as follows:

 

(In millions of won)             
     2016     2015  

Balance at January 1

   (83,200     (77,531

Amount recognized as other comprehensive loss during the year, net of taxes

     (12,213     (5,284

Amount reclassified through profit or loss, net of taxes

     (1,005     (385
  

 

 

   

 

 

 

Balance at December 31

   (96,418     (83,200
  

 

 

   

 

 

 

 

27. Other Operating Income and Expenses

Details of other operating income and expenses for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

(In millions of won)                     
     2016      2015      2014  

Other Operating Income:

        

Gain on disposal of property and equipment and intangible assets

   6,908        7,140        8,792  

Others(*1)

     59,640        23,795        47,679  
  

 

 

    

 

 

    

 

 

 
   66,548        30,935        56,471  
  

 

 

    

 

 

    

 

 

 

Other Operating Expenses:

        

Communication expenses

   31,196        43,979        58,622  

Utilities

     277,497        270,621        247,919  

Taxes and dues

     35,020        36,118        33,500  

Repair

     326,076        312,517        260,533  

Research and development

     344,787        315,790        390,943  

Training

     33,303        37,278        42,781  

Bad debt for accounts receivables — trade

     37,820        60,450        45,754  

Travel

     25,263        27,860        28,912  

Supplies and other

     113,930        176,248        209,933  

Loss on disposal of property and equipment and intangible assets

     63,797        21,392        32,950  

Impairment loss on other investment securities

     24,033        42,966        22,749  

Impairment loss on property and equipment and intangible assets

     24,506        35,845        47,489  

Donations

     96,633        72,454        67,823  

Bad debt for accounts receivable — other

     40,312        15,323        17,943  

Others(*2)

     49,593        55,536        84,796  
  

 

 

    

 

 

    

 

 

 
   1,523,766        1,524,377        1,592,647  
  

 

 

    

 

 

    

 

 

 

 

 

(*1) Others for the year ended December 31, 2016 include ₩0.9 billion and ₩25 billion of V.A.T refund and penalty refund, respectively, and Others for the years ended December 31, 2015 and 2014 include V.A.T refund of ₩2.1 billion and ₩8.1 billion, respectively.

 

(*2) Others for the years ended December 31, 2016, 2015 and 2014 primarily consist of ₩7.6 billion, ₩29.5 billion and ₩54.7 billion of penalties, respectively.

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

28. Finance Income and Costs

 

(1) Details of finance income and costs for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

(In millions of won)                     
     2016      2015      2014  

Finance Income:

        

Interest income

   54,353        45,884        60,006  

Gain on sale of accounts receivable — trade

     18,638                

Dividends

     19,161        16,102        13,048  

Gain on foreign currency transactions

     14,186        18,923        16,301  

Gain on foreign currency translations

     5,085        5,090        6,277  

Gain on disposal of long-term investment securities

     459,349        10,786        13,994  

Gain on valuation of derivatives

     4,132        1,927        8,713  

Gain on settlement of derivatives

                   7,998  

Gain relating to financial assets at fair value through profit or loss

     25                

Gain relating to financial liability at fair value through profit or loss

     121        5,188         
  

 

 

    

 

 

    

 

 

 
   575,050        103,900        126,337  
  

 

 

    

 

 

    

 

 

 

Finance Costs:

        

Interest expense

   290,454        297,662        323,910  

Loss on foreign currency transactions

     16,765        17,931        18,053  

Loss on foreign currency translations

     3,991        4,750        5,079  

Loss on disposal of long-term investment securities

     2,919        2,599        2,694  

Loss on valuation of derivatives

                   10  

Loss on settlement of derivatives

     3,428        4,845        672  

Loss relating to financial assets at fair value through profit or loss

                   1,352  

Loss relating to financial liability at fair value through profit or loss

     4,018        526        10,370  

Other finance costs(*)

     5,255        21,787        24,533  
  

 

 

    

 

 

    

 

 

 
   326,830        350,100        386,673  
  

 

 

    

 

 

    

 

 

 

 

 

(*) See Note 28-(5).

 

(2) Details of interest income included in finance income for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

(In millions of won)                     
     2016      2015      2014  

Interest income on cash equivalents and deposits

   20,203        20,009        33,417  

Interest income on installment receivables and others

     34,150        25,875        26,589  
  

 

 

    

 

 

    

 

 

 
   54,353        45,884        60,006  
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(3) Details of interest expenses included in finance costs for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

(In millions of won)                     
     2016      2015      2014  

Interest expense on bank overdrafts and borrowings

   7,962        19,577        26,360  

Interest expense on debentures

     239,560        238,450        247,972  

Interest on finance lease liabilities

            58        504  

Others

     42,932        39,577        49,074  
  

 

 

    

 

 

    

 

 

 
   290,454        297,662        323,910  
  

 

 

    

 

 

    

 

 

 

 

(4) Finance income and costs by category of financial instruments for the years ended December 31, 2016, 2015 and 2014 are as follows. Bad debt expense (reversal of allowance for doubtful accounts) for accounts receivable — trade, loans and receivables are presented and explained separately in Note 6.

(i)    Finance income

 

(In millions of won)       
     2016      2015      2014  

Financial Assets:

        

Financial assets at fair value through profit or loss

   4,157        1,927        8,713  

Available-for-sale financial assets

     484,300        31,220        32,227  

Loans and receivables

     86,256        64,749        57,685  

Derivatives designated as hedging instruments

                   7,998  
  

 

 

    

 

 

    

 

 

 

Sub-total

     574,713        97,896        106,623  
  

 

 

    

 

 

    

 

 

 

Financial Liabilities:

        

Financial liabilities at fair value through profit or loss

     121        5,188         

Financial liabilities measured at amortized cost

     216        816        19,714  
  

 

 

    

 

 

    

 

 

 

Sub-total

     337        6,004        19,714  
  

 

 

    

 

 

    

 

 

 
   575,050        103,900        126,337  
  

 

 

    

 

 

    

 

 

 

(ii)     Finance costs

 

(In millions of won)       
     2016      2015      2014  

Financial Assets:

        

Financial assets at fair value through profit or loss

   2,791        4,188        1,361  

Available-for-sale financial assets

     8,174        24,386        27,227  

Loans and receivables

     15,810        15,861        18,182  

Derivatives designated as hedging instruments

     637        657        672  
  

 

 

    

 

 

    

 

 

 

Sub-total

     27,412        45,092        47,442  
  

 

 

    

 

 

    

 

 

 

Financial Liabilities:

        

Financial liabilities at fair value through profit or loss

     4,018        526        10,370  

Financial liabilities measured at amortized cost

     295,400        304,482        328,861  
  

 

 

    

 

 

    

 

 

 

Sub-total

     299,418        305,008        339,231  
  

 

 

    

 

 

    

 

 

 
   326,830        350,100        386,673  
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(iii)    Other comprehensive income (loss)

 

(In millions of won)                   
          2016               2015               2014       

Financial Assets:

      

Available-for-sale financial assets

   (223,981     (3,661     26,856  

Derivatives designated as hedging instruments

     (172     (3,248     (20,301
  

 

 

   

 

 

   

 

 

 
     (224,153     (6,909     6,555  
  

 

 

   

 

 

   

 

 

 

Financial Liabilities:

      

Derivatives designated as hedging instruments

     (13,046     1,977       (21,801
  

 

 

   

 

 

   

 

 

 
     (13,046     1,977       (21,801
  

 

 

   

 

 

   

 

 

 
   (237,199     (4,932     (15,246
  

 

 

   

 

 

   

 

 

 

 

(5) Details of impairment losses for financial assets for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

(In millions of won)                     
          2016                2015                2014       

Available-for-sale financial assets(*)

   5,255        21,787        24,533  

Accounts receivable — trade

     37,820        60,450        45,754  

Other receivables

     40,312        15,323        17,943  
  

 

 

    

 

 

    

 

 

 
   83,387        97,560        88,230  
  

 

 

    

 

 

    

 

 

 

 

(*) This is included in other finance costs (See Note 28-(1)).

 

29. Income Tax Expense

 

(1) Income tax expenses for the years ended December 31, 2016, 2015 and 2014 consist of the following:

 

(In millions of won)                   
     2016     2015     2014  

Current tax expense

      

Current year

   473,543       417,022       181,273  

Current tax of prior years

     (11,925     (4,124     (19,938
  

 

 

   

 

 

   

 

 

 
     461,618       412,898       161,335  
  

 

 

   

 

 

   

 

 

 

Deferred tax expense

      

Changes in net deferred tax assets

     (25,580     106,399       292,978  

Others (tax rate differences, etc.)

           183       195  
  

 

 

   

 

 

   

 

 

 

Income tax expense

   436,038       519,480       454,508  
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(2) The difference between income taxes computed using the statutory corporate income tax rates and the recorded income taxes for the years ended December 31, 2016, 2015 and 2014 is attributable to the following:

 

(In millions of won)                   
     2016     2015     2014  

Income taxes at statutory income tax rate

   506,804       492,096       544,964  

Non-taxable income

     (38,989     (85,589     (32,277

Non-deductible expenses

     52,648       44,770       61,580  

Tax credit and tax reduction

     (29,484     (25,756     (33,581

Changes in unrecognized deferred taxes

     (84,276     83,623       (43,820

Others (income tax refund, etc.)

     29,335       10,336       (42,358
  

 

 

   

 

 

   

 

 

 

Income tax expense

   436,038       519,480       454,508  
  

 

 

   

 

 

   

 

 

 

 

(3) Deferred taxes directly charged to (credited from) equity for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

(In millions of won)                    
     2016      2015     2014  

Valuation gain (loss) on available-for-sale financial assets

   82,993        2,461       (4,089

Share of other comprehensive income (loss) of associates

     2        (63     (72

Valuation gain (loss) on derivatives

     4,454        (448     12,188  

Remeasurement of defined benefit liabilities

     3,174        2,719       8,902  
  

 

 

    

 

 

   

 

 

 
   90,623        4,669       16,929  
  

 

 

    

 

 

   

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(4) Details of the changes in deferred tax assets (liabilities) for the years ended December 31, 2016 and 2015 are as follows:

 

(In millions of won)                          
     2016  
     Beginning     Deferred tax
expense
(income)
    Directly charged
to (credited
from) equity
     Ending  

Deferred tax assets (liabilities) related to temporary differences:

         

Allowance for doubtful accounts

   59,957       1,954              61,911  

Accrued interest income

     (2,567     1,951              (616

Available-for-sale financial assets

     30,365       (11,886     82,993        101,472  

Investments in subsidiaries, associates and joint ventures

     (355,273     (120,827     2        (476,098

Property and equipment (depreciation)

     (327,572     74,249              (253,323

Provisions

     2,485       4,963              7,448  

Retirement benefit obligation

     28,327       4,004       3,174        35,505  

Valuation gain on derivatives

     24,521             4,454        28,975  

Gain or loss on foreign currency translation

     19,517       (148            19,369  

Reserve for research and manpower development

     (7,162     2,387              (4,775

Goodwill

     3,713       (608            3,105  

Unearned revenue (activation fees)

     2,065       (2,065             

Others

     (23,782     58,693              34,911  
  

 

 

   

 

 

   

 

 

    

 

 

 
     (545,406     12,667       90,623        (442,116
  

 

 

   

 

 

   

 

 

    

 

 

 

Deferred tax assets related to unused tax loss carryforwards and tax credit carryforwards

         

Tax loss carryforwards

     24,549       12,913              37,462  
  

 

 

   

 

 

   

 

 

    

 

 

 
   (520,857     25,580       90,623        (404,654
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(In millions of won)                                      
     2015  
     Beginning     Changes in
scope of
consolidation
    Deferred tax
expense
(income)
    Directly charged
to (credited
from) equity
    Other      Ending  

Deferred tax assets (liabilities) related to temporary differences:

             

Allowance for doubtful accounts

   53,578             6,379                    59,957  

Accrued interest income

     (2,450           (117                  (2,567

Available-for-sale financial assets

     (4,824           32,728       2,461              30,365  

Investments in subsidiaries, associates and joint ventures

     (211,043           (144,167     (63            (355,273

Property and equipment (depreciation)

     (372,332           44,760                    (327,572

Provisions

     7,587             (5,102                  2,485  

Retirement benefit obligation

     27,361             (1,753     2,719              28,327  

Valuation gain (loss) on derivatives

     24,969                   (448            24,521  

Gain or loss on foreign currency translation

     19,324             193                    19,517  

Reserve for research and manpower development

     (7,162                              (7,162

Goodwill

     4,433             (720                  3,713  

Unearned revenue (activation fees)

     25,977             (23,912                  2,065  

Others

     (15,682     (575     (7,708           183        (23,782
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
     (450,264     (575     (99,419     4,669       183        (545,406
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Deferred tax assets related to unused tax loss carryforwards and tax credit carryforwards

             

Tax loss carryforwards

     31,712             (7,163                  24,549  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
   (418,552     (575     (106,582     4,669       183        (520,857
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(5) Details of temporary differences, unused tax loss carryforwards and unused tax credits carryforwards which are not recognized as deferred tax assets, in the consolidated statements of financial position as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)              
     December 31, 2016      December 31, 2015  

Allowance for doubtful accounts

   165,935        182,266  

Investments in subsidiaries, associates and joint ventures

     228,025        281,719  

Other temporary differences

     320,260        285,845  

Unused tax loss carryforwards

     755,050        1,034,070  

Unused tax credit carryforwards

     1,211        2,271  

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(6) The amount of unused tax loss carryforwards and unused tax credit carryforwards which are not recognized as deferred tax assets as of December 31, 2016 are expiring within:

 

(In millions of won)              
     Unused tax loss carryforwards      Unused tax credit carryforwards  

Less than 1 year

   12,647        154  

1 ~ 2 years

     33,658        870  

2 ~ 3 years

     320,630        101  

More than 3 years

     388,115        86  
  

 

 

    

 

 

 
   755,050        1,211  
  

 

 

    

 

 

 

 

30. Earnings per Share

(1)    Basic earnings per share

 

1) Basic earnings per share for the years ended December 31, 2016, 2015 and 2014 are calculated as follows:

 

(In millions of won, shares)                   
     2016     2015     2014  

Basic earnings per share attributable to owners of the Parent Company:

      

Profit attributable to owners of the Parent Company

   1,675,967       1,518,604       1,801,178  

Interest on hybrid bonds

     (16,840     (16,840     (16,840
  

 

 

   

 

 

   

 

 

 

Profit attributable to owners of the Parent Company on common shares

     1,659,127       1,501,764       1,784,338  

Weighted average number of common shares outstanding

     70,609,160       71,551,966       70,936,336  
  

 

 

   

 

 

   

 

 

 

Basic earnings per share (in won)

   23,497       20,988       25,154  
  

 

 

   

 

 

   

 

 

 

 

2) The weighted average number of common shares outstanding for the years ended December 31, 2016, 2015 and 2014 are calculated as follows:

 

(In shares)                   
     2016     2015     2014  

Issued common shares at January 1

     80,745,711       80,745,711       80,745,711  

Effect of treasury shares

     (10,136,551     (9,193,745     (9,809,375
  

 

 

   

 

 

   

 

 

 

Weighted average number of common shares outstanding at December 31

     70,609,160       71,551,966       70,936,336  
  

 

 

   

 

 

   

 

 

 

(2)    Diluted earnings per share

For the years ended December 31, 2016, 2015 and 2014, there were no potentially dilutive shares. Therefore, diluted earnings per share for the years ended December 31, 2016, 2015 and 2014 are the same as basic earnings per share.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

31. Dividends

(1)    Details of dividends declared

Details of dividend declared for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

(In millions of won, except for face value and share data)  

  Year  

  

Dividend type

   Number of
shares
outstanding
     Face value
(In won)
     Dividend
ratio
    Dividends  
2016    Cash dividends (Interim)      70,609,160        500        200   70,609  
   Cash dividends (Year-end)      70,609,160        500        1,800     635,482  
             

 

 

 
              706,091  
             

 

 

 
2015    Cash dividends (Interim)      72,629,160        500        200   72,629  
   Cash dividends (Year-end)      70,609,160        500        1,800     635,482  
             

 

 

 
              708,111  
             

 

 

 
2014    Cash dividends (Interim)      70,936,336        500        200   70,937  
   Cash dividends (Year-end)      70,936,336        500        1,680     595,865  
             

 

 

 
              666,802  
             

 

 

 

(2)    Dividends yield ratio

Dividends yield ratios for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

(In won)

Year

   Dividend type    Dividend per share    Closing price at
settlement
   Dividend yield ratio

2016

   Cash dividend    10,000    224,000    4.46%

2015

   Cash dividend    10,000    215,500    4.64%

2014

   Cash dividend    9,400    268,000    3.51%

 

32. Categories of Financial Instruments

 

(1) Financial assets by category as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)  
     December 31, 2016  
     Financial
assets at
fair value
through
profit or
loss
     Available-
for-sale
financial
assets
     Loans and
receivables
     Derivatives
hedging
instrument
     Total  

Cash and cash equivalents

                 1,505,242               1,505,242  

Financial instruments

                   469,705               469,705  

Short-term investment securities

            107,364                      107,364  

Long-term investment securities

            828,521                      828,521  

Accounts receivable — trade

                   2,261,311               2,261,311  

Loans and other receivables(*)

                   1,701,249               1,701,249  

Derivative financial assets

     7,368                      207,402        214,770  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   7,368        935,885        5,937,507        207,402        7,088,162  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(In millions of won)  
     December 31, 2015  
     Financial
assets at
fair value
through
profit or
loss
     Available-
for-sale
financial
assets
     Loans and
receivables
     Derivatives
hedging
instrument
     Total  

Cash and cash equivalents

                 768,922               768,922  

Financial instruments

                   701,713               701,713  

Short-term investment securities

            92,262                      92,262  

Long-term investment securities

            1,207,226                      1,207,226  

Accounts receivable — trade

                   2,390,110               2,390,110  

Loans and other receivables(*)

                   1,102,403               1,102,403  

Derivative financial assets

     6,277                      160,122        166,399  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   6,277        1,299,488        4,963,148        160,122        6,429,035  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(*) Details of loans and other receivables as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)              
      December 31,
2016
     December 31,
2015
 

Short-term loans

   58,979        53,895  

Accounts receivable — other

     1,121,444        673,739  

Accrued income

     2,780        10,753  

Other current assets

     3,937        1,861  

Long-term loans

     65,476        62,454  

Long-term accounts receivable — other

     149,669        2,420  

Guarantee deposits

     298,964        297,281  
  

 

 

    

 

 

 
   1,701,249        1,102,403  
  

 

 

    

 

 

 

 

(2) Financial liabilities by category as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)                            
     December 31, 2016  
     Financial
liabilities
at fair
value
through
profit or
loss
     Financial
liabilities
measured at
amortized
cost
     Derivatives
hedging
instrument
     Total  

Accounts payable — trade

          402,445               402,445  

Derivative financial liabilities

                   87,153        87,153  

Borrowings

            175,521               175,521  

Debentures(*1)

     59,600        7,134,606               7,194,206  

Accounts payable — other and others(*2)

            4,842,734               4,842,734  
  

 

 

    

 

 

    

 

 

    

 

 

 
   59,600        12,555,306        87,153        12,702,059  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(In millions of won)                            
     December 31, 2015  
     Financial
liabilities at
fair value
through
profit or
loss
     Financial
liabilities
measured at
amortized
cost
     Derivatives
hedging
instrument
     Total  

Accounts payable — trade

          279,782               279,782  

Derivative financial liabilities

                   89,296        89,296  

Borrowings

            415,134               415,134  

Debentures(*1)

     155,704        6,952,949               7,108,653  

Accounts payable — other and others(*2)

            2,970,801               2,970,801  
  

 

 

    

 

 

    

 

 

    

 

 

 
   155,704        10,618,666        89,296        10,863,666  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(*1) Bonds classified as financial liabilities at fair value through profit or loss as of December 31, 2016 and 2015 are structured bonds and they were designated as financial liabilities at fair value through profit or loss in order to eliminate a measurement inconsistency with the related derivatives.

 

(*2) Details of accounts payable — other and others as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)              
     December 31,
2016
     December 31,
2015
 

Accounts payable — other

   1,767,799        1,323,434  

Withholdings

     1,525        1,178  

Accrued expenses

     1,125,816        920,739  

Current portion of long-term payables — other

     301,773        120,185  

Finance lease liabilities

            26  

Long-term payables — other

     1,624,590        581,697  

Other non-current liabilities

     21,231        23,542  
  

 

 

    

 

 

 
   4,842,734        2,970,801  
  

 

 

    

 

 

 

 

33. Financial Risk Management

 

(1) Financial risk management

The Group is exposed to credit risk, liquidity risk and market risk. Market risk is the risk related to the changes in market prices, such as foreign exchange rates, interest rates and equity prices. The Group implements a risk management system to monitor and manage these specific risks.

The Group’s financial assets consist of cash and cash equivalents, financial instruments, available-for-sale financial assets, accounts receivable — trade and other. Financial liabilities consist of accounts payable — trade and other, borrowings, and debentures.

 

1) Market risk

(i)     Currency risk

The Group incurs exchange position due to revenue and expenses from its global operations. Major foreign currencies where the currency risk occur are USD, JPY and EUR. The Group determines the currency risk management policy after considering the nature of business and the presence of methods that mitigate the currency risk for each Group entities. Currency risk occurs on forecasted transactions and recognized assets and liabilities

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

which are denominated in a currency other than the functional currency of each Group entity. The Group manages currency risk arising from business transactions by using currency forwards, etc.

Monetary assets and liabilities denominated in foreign currencies as of December 31, 2016 are as follows:

 

(In millions of won, thousands of foreign currencies)  
     Assets      Liabilities  
     Foreign
currencies
     Won
equivalent
     Foreign
currencies
     Won
equivalent
 

USD

     144,158      174,210        1,842,559      2,226,736  

EUR

     14,650        18,570        24        29  

JPY

     68,014        705        320        3  

AUD

                   299,532        261,207  

CHF

                   299,806        354,170  

Others

            429               299  
     

 

 

       

 

 

 
      193,914         2,842,444  
     

 

 

       

 

 

 

In addition, the Group has entered into cross currency swaps to hedge against currency risk related to foreign currency borrowings and debentures. (Refer to Note 21)

As of December 31, 2016, a hypothetical change in exchange rates by 10% would have increase (reduce) the Group’s income before income tax as follows:

 

(In millions of won)              
     If increased by 10%      If decreased by 10%  

USD

   6,711        (6,711

EUR

     1,854        (1,854

JPY

     70        (70

Others

     13        (13
  

 

 

    

 

 

 
   8,648        (8,648
  

 

 

    

 

 

 

(ii)    Equity price risk

The Group has listed and non-listed equity securities for its liquidity management and operating purpose. As of December 31, 2016, available-for-sale equity instruments measured at fair value amount to ₩741,285 million.

(iii)    Interest rate risk

The interest rate risk of the Group arises from borrowings and debenture. Since the Group’s interest bearing assets are mostly fixed-interest bearing assets, the Group’s revenue and operating cash flows are not influenced by the changes in market interest rates.

Accordingly, the Group performs various analysis of interest rate risk to reduce interest rate risk and to optimize its financing. To minimize risks arising from changes in interest rates, the Group takes various measures such as refinancing, renewal, alternative financing and hedging.

As of December 31, 2016, the floating-rate borrowings and bonds of the Group are ₩53,083 million and ₩362,550 million, respectively, and the Group has entered into interest rate swap agreements, as described in Note 21, for all floating-rate bonds to hedge the interest rate risk.

If the interest rate increases (decreases) 1% with all other variables held constant, income before income taxes for the year ended December 31, 2016, would change by ₩41 million due to the interest expense on floating-rate borrowings that are exposed to interest rate risk.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

2) Credit risk

The maximum credit exposure as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)              
     2016      2015  

Cash and cash equivalents

   1,505,082        768,794  

Financial instruments

     469,705        701,713  

Available-for-sale financial assets

     6,755        3,430  

Accounts receivable — trade

     2,261,311        2,390,110  

Loans and other receivables

     1,701,249        1,102,403  

Derivative financial assets

     214,770        166,399  
  

 

 

    

 

 

 
   6,158,872        5,132,849  
  

 

 

    

 

 

 

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet his/her contractual obligations.

To manage credit risk, the Group evaluates the credit worthiness of each customer or counterparty considering the party’s financial information, its own trading records and other factors. Based on such information, the Group establishes credit limits for each customer or counterparty.

The Group establishes an allowance for doubtful account that represents its estimate of incurred losses in respect of trade and other receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. Also, the Group’s credit risk can arise due to transactions with financial institutions related to its cash and cash equivalents, financial instruments and derivatives. To minimize such risk, the Group has a policy to deal only with financial institutions with high credit ratings. The amount of maximum exposure to credit risk of the Group is the carrying amount of financial assets as of December 31, 2016.

 

3) Liquidity risk

The Group’s approach to managing liquidity is to ensure that it will always maintain sufficient cash and cash equivalents balances and have enough liquidity through various committed credit lines. The Group maintains enough liquidity within credit lines through active operating activities.

Contractual maturities of financial liabilities as of December 31, 2016 are as follows:

 

(In millions of won)  
     Carrying
amount
     Contractual
cash flows
     Less than
1 year
     1- 5 years      More than
5 years
 

Accounts payable — trade

   402,445        402,446        402,446                

Borrowings(*)

     175,521        190,107        42,658        140,453        6,996  

Debentures(*)

     7,194,206        8,484,345        1,083,877        4,437,037        2,963,431  

Accounts payable — other and others

     4,842,734        4,993,086        3,121,127        1,348,069        523,890  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   12,614,906        14,069,984        4,650,108        5,925,559        3,494,317  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Group does not expect that the cash flows included in the maturity analysis could occur significantly earlier or at different amounts.

 

 

(*) Includes interest payables.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

As of December 31, 2016, periods in which cash flows from cash flow hedge derivatives are expected to occur are as follows:

 

(In millions of won)  
     Carrying
amount
    Contractual
cash flows
    Less than
1  year
    1- 5 years     More than
5  years
 

Assets

   207,402       217,982       5,154       187,287       25,541  

Liabilities

     (87,153     (88,381     (88,219     (162      
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   120,249       129,601       (83,065     187,125       25,541  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(2) Capital management

The Group manages its capital to ensure that it will be able to continue as a business while maximizing the return to shareholders through the optimization of its debt and equity structure.

The Group monitors its debt-equity ratio as a capital management indicator. This ratio is calculated as total liabilities divided by total equity; both are from the financial statements.

Debt-equity ratio as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)             
     December 31,
2016
    December 31,
2015
 

Total liabilities

   15,181,233       13,207,291  

Total equity

     16,116,430       15,374,096  
  

 

 

   

 

 

 

Debt-equity ratios

     94.20     85.91
  

 

 

   

 

 

 

(3)    Fair value

 

1) Fair value and carrying amount of financial assets and liabilities including fair value hierarchy as of December 31, 2016 are as follows:

 

(In millions of won)      
    December 31, 2016  
    Carrying
amount
    Level 1     Level 2     Level 3     Total  

Financial assets that are measured at fair value:

         

Financial assets at fair value through profit or loss

  7,368             7,368             7,368  

Derivative financial assets

    207,402             207,402             207,402  

Available-for-sale financial assets

    741,285       526,363       107,364       107,558       741,285  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  956,055       526,363       322,134       107,558       956,055  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities that are measured at fair value:

         

Financial liabilities at fair value through profit or loss

  59,600             59,600             59,600  

Derivative financial liabilities

    87,153             87,153             87,153  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  146,753             146,753             146,753  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities that are not measured at fair value:

         

Borrowings

  175,521             177,600             177,600  

Debentures

    7,134,606             7,568,361             7,568,361  

Long-term payables — other

    1,926,363             2,103,788             2,103,788  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  9,236,490             9,849,749             9,849,749  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

2) Fair value and carrying amount of financial assets and liabilities including fair value hierarchy as of December 31, 2015 are as follows:

 

(In millions of won)      
    December 31, 2015  
    Carrying
amount
    Level 1     Level 2     Level 3     Total  

Financial assets that are measured at fair value:

         

Financial assets at fair value through profit or loss

  6,277             6,277             6,277  

Derivative financial assets

    160,122             160,122             160,122  

Available-for-sale financial assets

    1,076,291       897,958       47,262       131,071       1,076,291  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  1,242,690       897,958       213,661       131,071       1,242,690  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities that are measured at fair value:

         

Financial liabilities at fair value through profit or loss

  155,704             155,704             155,704  

Derivative financial liabilities

    89,296             89,296             89,296  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  245,000             245,000             245,000  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities that are not measured at fair value:

         

Borrowings

  415,134             416,702             416,702  

Debentures

    6,952,949             7,411,909             7,411,909  

Long-term payables — other

    701,882             767,010             767,010  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  8,069,965             8,595,621             8,595,621  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The above information does not include fair values of financial assets and liabilities of which fair values have not been measured as carrying amounts are reasonable approximation of fair values.

Available-for-sale financial assets amounting to ₩194,600 million and ₩223,197 million as of December 31, 2016 and December 31, 2015, respectively, are measured at cost in accordance with IAS 39 since they are equity instruments which do not have quoted price in an active market for the identical instruments (inputs for level 1) and for which fair value cannot be reliably measured using other valuation methods.

Fair value of the financial instruments that are traded in an active market (available-for-sale financial assets, financial liabilities at fair value through profit or loss, etc.) is measured based on the bid price at the end of the reporting date.

The Group uses various valuation methods for determination of fair value of financial instruments that are not traded in an active market. Fair value of available-for-sale securities is determined using the market approach methods and financial assets through profit or loss are measured using the option pricing model. In addition, derivative financial contracts and long-term liabilities are measured using the discounted present value methods. Inputs used to such valuation methods include swap rate, interest rate, and risk premium, and the Group performs valuation using the inputs which are consistent with natures of assets and liabilities measured.

Interest rates used by the Group for the fair value measurement as of December 31, 2016 are as follows:

 

     Interest rate

Derivative instruments

   1.50 ~ 2.52%

Borrowings and debentures

   1.90 ~ 2.16%

Long-term payables — other

   1.79 ~ 2.27%

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

3) There have been no transfers from Level 2 to Level 1 in 2016 and changes of financial assets classified as Level 3 for the year ended December 31, 2016 are as follows:

 

(In millions of won)                                 
     Balance  at
beginning
     Transfer      Other
comprehensive

loss
    Disposal     Balance at
ending
 

Available-for-sale financial assets

   131,071        4,591        (2,490     (25,614     107,558  

 

(4) Enforceable master netting agreement or similar agreement

Carrying amount of financial instruments recognized of which offset agreements are applicable as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)   2016  
    Gross financial
instruments
recognized
    Amount
offset
    Net financial
instruments
presented on the
statements of
financial position
    Relevant amount not offset
on the statements of
financial position
    Net
amount
 
        Financial
instruments
    Cash
collaterals
received
   

Financial assets:

           

Derivatives(*)

  87,566             87,566       (87,153           413  

Accounts receivable — trade and others

    114,135       (103,852     10,283                   10,283  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  201,701       (103,852     97,849       (87,153           10,696  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities:

           

Derivatives(*)

  87,153             87,153       (87,153            

Accounts payable — other and others

    103,852       (103,852                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  191,005       (103,852     87,153       (87,153            
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(In millions of won)    2015  
     Gross financial
instruments
recognized
     Amount
offset
    Net financial
instruments
presented on the
statements  of
financial position
     Relevant amount not offset
on the statements of
financial position
     Net
amount
 
           Financial
instruments
    Cash
collaterals
received
    

Financial assets:

               

Derivatives(*)

   55,673              55,673        (55,673             

Accounts receivable — trade and others

     129,527        (113,003     16,524                     16,524  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   185,200        (113,003     72,197        (55,673            16,524  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Financial liabilities:

               

Derivatives(*)

   89,734              89,734        (55,673            34,061  

Accounts payable — other and others

     113,003        (113,003                          
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   202,737        (113,003     89,734        (55,673            34,061  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

 

(*)

The Group entered into derivative contracts which include enforceable master netting arrangement in accordance with International Swap and Derivatives Association (ISDA). Generally, all contracts made with the

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

  identical currencies are settled from one party to another by combining one net amount. In this case, all contracts are liquidated and paid off at net amount by evaluating liquidation value if credit events such as bankruptcy occur.

ISDA agreements do not allow the Group to exercise rights of set-off unless credit events such as bankruptcy occur. Therefore, assets and liabilities recognized in accordance with the agreements cannot be offset as the Group does not have enforceable rights of set-off.

 

34. Transactions with Related Parties

(1) List of related parties

 

Relationship

  

Company

Ultimate Controlling Entity    SK Holdings Co., Ltd.
Joint ventures    Dogus Planet, Inc. and 4 others
Associates    SK hynix Inc. and 45 others
Others    The Ultimate Controlling Entity’s subsidiaries and associates, etc.

(2) Compensation for the key management

The Parent Company considers registered directors who have substantial role and responsibility in planning, operations, and relevant controls of the business as key management. The compensation given to such key management for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

(In millions of won)       
     2016      2015      2014  

Salaries

   1,645        1,971        2,600  

Defined benefits plan expenses

     424        626        907  
  

 

 

    

 

 

    

 

 

 
   2,069        2,597        3,507  
  

 

 

    

 

 

    

 

 

 

Compensation for the key management includes salaries, non-monetary salaries and retirement benefits made in relation to the pension plan.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(3) Transactions with related parties for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

(In millions of won)                                   
          2016  

Scope

  

Company

  Operating
revenue and
others
    Operating
expense and
others
    Acquisition of
property and
equipment
    Loans     Collection
of loans
 

Ultimate Controlling Entity

   SK Holdings Co., Ltd.(*1)   23,104       652,855       235,502              

Associates

  

F&U Credit information Co., Ltd.

    2,865       47,905                    
  

HappyNarae Co., Ltd.

    304       15,506       38,984              
  

SK hynix Inc.(*2)

    100,861       306                    
  

SK Wyverns Baseball Club., Ltd.

    1,934       17,878                   204  
  

KEB HanaCard Co., Ltd.

    19,730       14,804                    
  

Others(*3)

    6,084       3,975       1,573       1,100       2,990  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
       131,778       100,374       40,557       1,100       3,194  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Others

  

SK Engineering & Construction Co., Ltd.

    5,916       1,739       10,694              
  

SK Networks Co., Ltd.

    13,756       1,131,567                    
  

SK Networks Services Co., Ltd.

    1,248       94,906       6,793              
  

SK Telesys Co., Ltd.

    419       52,488       142,605              
  

SK TNS Co., Ltd.

    109       48,192       387,496              
  

SK Energy Co., Ltd.

    7,670       834                    
  

SK Innovation Co., Ltd.

    9,757       915       1,080              
  

SK Shipping Co., Ltd.

    5,435                          
  

Ko-one energy service Co., Ltd

    6,005       46                    
  

Infosec Co.,Ltd.

    230       53,068       19,882              
  

SKC INFRA SERVICE Co., Ltd.

    43       30,663       32,141              
  

Others

    15,937       17,630       246              
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
       66,525       1,432,048       600,937              
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     221,407       2,185,277       876,996       1,100       3,194  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*1) Operating expense and others include ₩203,635 million of dividends paid by the Parent Company.

 

(*2) Operating revenue and others include ₩73,050 million of dividends paid by the associate which was deducted from the investment in associates.

 

(*3) Operating revenue and others include ₩6,082 million of dividends received from the Korea IT Fund.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(In millions of won)                                   
          2015  

Scope

  

Company

  Operating
revenue and
others
    Operating
expense and
others
    Acquisition of
property and
equipment
    Loans     Collection
of loans
 

Ultimate Controlling Entity

  

SK Holdings Co., Ltd.

(formerly, SK C&C Co., Ltd.)(*1)

  20,260       324,078       236,414              
   SK Holdings Co., Ltd. (formerly, SK Holdings Co., Ltd.)(*2,3)     1,299       212,378       117              
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
       21,559       536,456       236,531              
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Associates

  

F&U Credit information Co., Ltd.

    2,510       43,967                    
  

HappyNarae Co., Ltd.

    297       6,886       13,495              
  

SK hynix Inc.(*4)

    55,949       2,384                    
  

SK Wyverns Baseball

Club., Ltd.

    3,849       18,544                   204  
  

KEB HanaCard Co., Ltd.

    21,414       16,057                    
  

Xian Tianlong Science and Technology Co., Ltd.

                      8,287        
  

Others(*5)

    6,397       11,917       1,864       690        
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
       90,416       99,755       15,359       8,977       204  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other

  

SK Engineering & Construction Co., Ltd.

    15,598       27,243       240,701              
  

SK Networks Co., Ltd.

    11,923       1,257,975       2              
  

SK Networks Services Co., Ltd.

    10,491       94,097       6,472              
  

SK Telesys Co., Ltd.

    397       48,900       141,870              
  

SK Energy Co., Ltd.

    9,930       978                    
  

SK Gas Co., Ltd.

    3,561       2                    
  

Others

    29,409       71,314       194,945              
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
       81,309       1,500,509       583,990              
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     193,284       2,136,720       835,880       8,977       204  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*1) On August 1, 2015, SK C&C Co., Ltd., the ultimate controlling entity of the Parent Company merged with SK Holdings Co., Ltd., its equity method investee, and changed its name to SK Holdings Co., Ltd.

 

(*2) These relates to transactions occurred before July 31, 2015, the date of merger with SK C&C Co., Ltd.

 

(*3) Operating expense and others include ₩191,416 million of dividends paid by the Parent Company.

 

(*4) Operating revenue and others include ₩43,830 million of dividends paid by SK hynix Inc. and was deducted from the investment in associates.

 

(*5) Operating revenue and others include ₩2,103 million and ₩457 million of dividends paid by Korea IT Fund and UniSK, respectively, and was deducted from the investments in associates.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(In millions of won)                                   
          2014  

Scope

  

Company

  Operating
revenue and
others
    Operating
expense and
others
    Acquisition of
property and
equipment
    Loans     Collection
of loans
 

Ultimate Controlling Entity

  

SK Holding Co., Ltd.(*1)

  530       226,772                    

Associates

  

F&U Credit information Co., Ltd.

    2,395       45,417                    
  

HappyNarae Co., Ltd.

    253       6,492       10,418              
  

SK hynix Inc.

    12,964       3,391                    
  

SK USA, Inc.

          2,153                    
  

SK Wyverns Baseball Club., Ltd.

    901       22,402                   204  
  

KEB HanaCard Co., Ltd.(*2)

    39,828       5,416                    
  

Others

    5,852       15,150             45        
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
       62,193       100,421       10,418       45       204  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other

  

SK Engineering & Construction Co., Ltd.

    3,385       42,964       460,783              
  

SK C&C Co., Ltd.

    18,309       360,842       168,778              
  

SK Networks Co., Ltd.

    16,230       1,509,017       5,388              
  

SK Networks Services Co., Ltd.

    13,017       106,273       2,583              
  

SK Telesys Co., Ltd.

    494       64,038       205,538              
  

SK Energy Co., Ltd.

    22,650       944                    
  

SK Gas Co., Ltd.

    10,115                          
  

Others

    25,537       38,868       12,628              
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
       109,737       2,122,946       855,698              
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     172,460       2,450,139       866,116       45       204  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*1) Operating expense and others include ₩191,416 million of dividends paid by the Parent Company.

 

(*2) During the year ended December 31, 2014, due to merger between Hana SK Card Co., Ltd., the Parent Company’s associate and KEB Card Co., Ltd., the Group returned 57,647,058 shares of Hana SK Card Co., Ltd., and received 67,627,587 shares of the merged company, KEB HanaCard Co., Ltd.

 

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Table of Contents

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(4) Account balances with related parties as of December 31, 2016 and 2015 are as follows:

 

(In millions of won)       
         December 31, 2016  
         Accounts receivable      Accounts payable  

Scope

  

Company

  Loans      Accounts
receivable-trade
and others
     Accounts
payable-other
and others
 

Ultimate Controlling Entity

   SK Holdings Co., Ltd.          3,519        149,574  

Associates

   HappyNarae Co., Ltd.            18        21,063  
  

F&U Credit information Co., Ltd.

           34        1,328  
   SK hynix Inc.            22,379        92  
  

SK Wyverns Baseball Club Co., Ltd.

    813        4,184         
  

Wave City Development Co., Ltd.

           38,412         
  

Daehan Kanggun BcN Co., Ltd.(*)

    22,147                
   KEB HanaCard Co., Ltd.            1,619        7,676  
  

Xian Tianlong Science and Technology Co., Ltd.

    8,287                
   Others            7        945  
    

 

 

    

 

 

    

 

 

 
       31,247        66,653        31,104  
    

 

 

    

 

 

    

 

 

 

Other

  

SK Engineering & Construction Co., Ltd.

           1,808        4,975  
   SK Networks. Co., Ltd.            3,254        247,728  
  

SK Networks Services Co., Ltd.

           13        13,913  
  

SK Telesys Co., Ltd.

           20        24,918  
   SK TNS Co., Ltd.            3        68,276  
   SK Innovation Co., Ltd.            1,350        892  
   SK Energy Co., Ltd.            1,213        113  
   Others            4,552        30,218  
    

 

 

    

 

 

    

 

 

 
              12,213        391,033  
    

 

 

    

 

 

    

 

 

 

Total

     31,247        82,385        571,711  
    

 

 

    

 

 

    

 

 

 

 

 

(*) The Parent Company has recognized allowances for doubtful accounts on the entire balance of loans to Daehan Kanggun BcN Co., Ltd as of December 31, 2016.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(In millions of won)                          
           December 31, 2015  
          Accounts receivable      Accounts payable  

Scope

  

Company

   Loans      Accounts
receivable-trade
and others
     Accounts
payable-other
and others
 

Ultimate Controlling Entity

  

SK Holdings Co., Ltd. (formerly, SK C&C Co., Ltd.) (*)

          1,836        160,133  

Associates

  

HappyNarae Co., Ltd.

            12        6,162  
  

F&U Credit information Co., Ltd.

            66        934  
  

SK hynix Inc.

            4,360        155  
  

SK Wyverns Baseball Club Co., Ltd.

     1,017        4,502         
  

Wave City Development Co., Ltd.

     1,890        38,412         
  

Daehan Kanggun BcN Co., Ltd.

     22,147                
  

KEB HanaCard Co., Ltd.

            1,771        9,042  
  

Xian Tianlong Science and Technology Co., Ltd.

     8,287                
  

Others

            299        964  
     

 

 

    

 

 

    

 

 

 
        33,341        49,422        17,257  
     

 

 

    

 

 

    

 

 

 

Other

  

SK Engineering & Construction Co., Ltd.

            1,005        14,877  
  

SK Networks. Co., Ltd.

            1,569        208,291  
  

SK Networks Services Co., Ltd.

                   9,414  
  

SK Telesys Co., Ltd.

            140        37,491  
  

SK TNS Co., Ltd

                   43,585  
  

SK Innovation Co., Ltd.

            2,159        1,424  
  

SK Energy Co., Ltd.

            1,681        173  
  

Others

            4,716        14,512  
     

 

 

    

 

 

    

 

 

 
               11,270        329,767  
     

 

 

    

 

 

    

 

 

 

Total

      33,341        62,528        507,157  
     

 

 

    

 

 

    

 

 

 

 

 

(*) On August 1, 2015, SK C&C Co., Ltd., the ultimate controlling entity of the Parent Company merged with SK Holdings Co., Ltd., its equity method investee, and changed its name to SK Holdings Co., Ltd.

 

(5) M&Service Co., Ltd., a subsidiary of the Parent Company, has entered into performance agreement with SK Energy Co., Ltd. and provided a blank note to SK Energy Co., Ltd., with regard to this transaction.

 

(6) There were additional investments in associates and joint ventures during the years ended December 31, 2016 and 2015 as presented in Note 11.

 

F-94


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

35. Commitments and Contingencies

(1) Collateral assets and commitments

SK Broadband Co., Ltd., a subsidiary of the Parent Company, has pledged its properties as collateral for leases on buildings in the amount of ₩6,674 million as of December 31, 2016.

SK Broadband Co., Ltd., has provided guarantees in connection with its employees’ borrowings relating to employee stock ownership and provided short-term financial instruments amounting to ₩728 million as collateral as of December 31, 2016.

(2) Legal claims and litigations

As of December 31, 2016, the Group is involved in various legal claims and litigation. Provision recognized in relation to these claims and litigation is immaterial. In connection with those legal claims and litigation for which no provision was recognized, management does not believe the Group has a present obligation, nor is it expected any of these claims or litigation will have a significant impact on the Group’s financial position or operating results in the event an outflow of resources is ultimately necessary.

(3) Accounts receivables from sale of handsets

The sales agents of the Parent Company sell handsets to the Parent Company’s subscribers on an installment basis. During the year ended December 31, 2016, the Parent Company entered into a comprehensive agreement to purchase the accounts receivables from handset sales with agents and to transfer the accounts receivables from handset sales to special purpose companies which were established with the purpose of liquidating receivables, respectively.

The accounts receivables from sale of handsets amounting to ₩681,466 million as of December 31, 2016, which the Parent Company purchased according to the relevant comprehensive agreement are recognized as accounts receivable- other and long-term accounts receivable- other.

 

F-95


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

36. Statements of Cash Flows

 

(1) Adjustments for income and expenses from operating activities for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

(In millions of won)                   
     2016     2015     2014  

Interest income

   (54,353     (45,884     (60,006

Dividend

     (19,161     (16,102     (13,048

Gain on foreign currency translation

     (5,085     (5,090     (6,277

Gain on disposal of long-term investment securities

     (459,349     (10,786     (13,994

Gain on valuation of derivatives

     (4,132     (1,927     (8,713

Gain on settlement of derivatives

                 (7,998

Gain relating to investments in associates and joint ventures, net

     (544,501     (786,140     (906,338

Gain on sale of accounts receivable — trade

     (18,638            

Gain on disposal of property and equipment and intangible assets

     (6,908     (7,140     (8,792

Gain relating to financial assets at fair value through profit or loss

     (25            

Gain related to financial liabilities at fair value through profit or loss

     (121     (5,188      

Other income

     (2,123     (7,577     (608

Interest expenses

     290,454       297,662       323,910  

Loss on foreign currency translation

     3,991       4,750       5,079  

Loss on disposal of long-term investment securities

     2,919       2,599       2,694  

Other finance costs

     5,255       21,787       24,533  

Loss on valuation of derivatives

                 10  

Loss on settlement of derivatives

     3,428       4,845       672  

Income tax expense

     436,038       519,480       454,508  

Expense related to defined benefit plan

     118,143       110,021       112,717  

Depreciation and amortization

     3,068,558       2,993,486       2,891,870  

Bad debt expense

     37,820       60,450       45,754  

Loss on disposal of property and equipment and intangible assets

     63,797       21,392       32,950  

Impairment loss on property and equipment and intangible assets

     24,506       35,845       47,489  

Loss relating to financial assets at fair value through profit or loss

                 1,352  

Loss relating to financial liabilities at fair value through profit or loss

     4,018       526       10,370  

Bad debt for accounts receivable — other

     40,312       15,323       17,943  

Loss on impairment of investment assets

     24,033       42,966       22,749  

Other expenses

     30,685       4,845       10,169  
  

 

 

   

 

 

   

 

 

 
   3,039,561       3,250,143       2,978,995  
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2016, 2015 and 2014

 

(2) Changes in assets and liabilities from operating activities for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

(In millions of won)                   
     2016     2015     2014  

Accounts receivable — trade

   88,549       7,554       (168,839

Accounts receivable — other

     (446,286     (11,108     (52,137

Accrued income

     445       116       14  

Advance payments

     47,615       (35,906     (62,873

Prepaid expenses

     (30,311     (40,464     (36,808

Value-Added Tax refundable

     (4,587     1,385       7,200  

Inventories

     798       (7,814     (171

Long-term accounts receivable — other

     (147,117           80  

Guarantee deposits

     4,844       (11,238     (12,699

Accounts payable — trade

     75,585       12,442       (37,790

Accounts payable — other

     316,464       (107,114     (296,875

Receipts in advance

     37,429       6,421       20,701  

Withholdings

     107,516       (191,209     306,515  

Deposits received

     (2,153     (9,661     (4,395

Accrued expenses

     173,072       (28,845     (79,831

Value-Added Tax payable

     (4,072     3,494       2,711  

Unearned revenue

     (36,209     (115,187     (140,295

Provisions

     20,235       (30,562     (38,469

Long-term provisions

     4,115       (4,447     29,532  

Plan assets

     (125,440     (67,831     (96,847

Retirement benefit payment

     (55,350     (58,513     (46,531

Others

     (11,378     2,753       474  
  

 

 

   

 

 

   

 

 

 
   13,764       (685,734     (707,333
  

 

 

   

 

 

   

 

 

 

 

(3) Significant non-cash transactions for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

(In millions of won)                     
     2016      2015      2014  

Increase of accounts payable — other related to acquisition of property and equipment and intangible assets

   1,511,913        39,973        (184,614

 

37. Cash Dividends paid to the Parent Company

Cash dividends paid to the Parent Company for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

(In millions of won)                     
     2016      2015      2014  

Cash dividends received from consolidated subsidiaries

   15,693                

Cash dividends received from associates

     79,132        46,390        939  
  

 

 

    

 

 

    

 

 

 
     ₩94,825        46,390        939  
  

 

 

    

 

 

    

 

 

 

 

F-97


Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

SK hynix, Inc.:

We have audited the accompanying consolidated statements of financial position of SK hynix, Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2016. These consolidated financial statements are the responsibility of SK hynix, Inc.’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SK hynix, Inc. and subsidiaries as of December 31, 2016 and 2015 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Seoul, Korea

April 24, 2017

 

G-1


Table of Contents

SK HYNIX, INC. and Subsidiaries

Consolidated Statements of Financial Position

As of December 31, 2016 and 2015

 

     Note      2016      2015  
            (In millions of won)  

Assets

        

Current assets

        

Cash and cash equivalents

     5,6      613,786        1,175,719  

Short-term financial instruments

     5,6,7        3,521,893        3,615,554  

Trade receivables, net

     5,6,8,32        3,251,652        2,628,448  

Loans and other receivables, net

     5,6,8,32        25,611        61,613  

Inventories, net

     9        2,026,198        1,923,376  

Current tax assets

        489        1,394  

Other current assets

     11        399,353        353,926  
     

 

 

    

 

 

 
        9,838,982        9,760,030  
     

 

 

    

 

 

 

Non-current assets

        

Equity-accounted investees

     12        131,016        122,609  

Available-for-sale financial assets

     5,6,13        147,779        131,354  

Loans and other receivables, net

     5,6,8,32        39,490        62,919  

Other financial assets

     5,6,7        423        430  

Property, plant and equipment, net

     14,33        18,777,402        16,966,252  

Intangible assets, net

     15,29        1,915,591        1,704,896  

Investment property, net

     14,16        2,573        2,679  

Deferred tax assets

     21,30        792,368        361,204  

Other non-current assets

     11        570,402        565,533  
     

 

 

    

 

 

 
        22,377,044        19,917,876  
     

 

 

    

 

 

 

Total assets

      32,216,026        29,677,906  
     

 

 

    

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

G-2


Table of Contents

SK HYNIX, INC. and Subsidiaries

Consolidated Statements of Financial Position,  continued

As of December 31, 2016 and 2015

 

     Note      2016     2015  
            (In millions of won)  

Liabilities

       

Current liabilities

       

Trade payables

     5,6      696,144       791,373  

Other payables

     5,6,32        1,606,417       1,337,803  

Other non-trade payables

     5,6        685,154       1,001,171  

Borrowings

     5,6,17,32        704,860       1,013,372  

Other financial liabilities

     5,6,22        288        

Provisions

     19,33        42,822       25,276  

Current tax liabilities

        374,666       627,260  

Other current liabilities

     18        50,498       44,443  
     

 

 

   

 

 

 
        4,160,849       4,840,698  
     

 

 

   

 

 

 

Non-current liabilities

       

Other non-trade payables

     5,6        27,426       89,891  

Borrowings

     5,6,17,32        3,631,118       2,805,223  

Other financial liabilities

     5,6,22              683  

Defined benefit liabilities, net

     20        306,488       484,977  

Deferred tax liabilities

     21        4,732       7,582  

Other non-current liabilities

     18        61,883       61,149  
     

 

 

   

 

 

 
        4,031,647       3,449,505  
     

 

 

   

 

 

 

Total liabilities

        8,192,496       8,290,203  
     

 

 

   

 

 

 

Equity

       

Equity attributable to owners of the Parent Company

       

Capital stock

     1,23        3,657,652       3,657,652  

Capital surplus

     23        4,143,736       4,143,736  

Other equity

     23        (771,913     (771,913

Accumulated other comprehensive loss

     24        (79,103     (1,600

Retained earnings

     25        17,066,583       14,358,988  
     

 

 

   

 

 

 

Total equity attributable to owners of the Parent Company

        24,016,955       21,386,863  

Non-controlling interests

        6,575       840  
     

 

 

   

 

 

 

Total equity

        24,023,530       21,387,703  
     

 

 

   

 

 

 

Total liabilities and equity

      32,216,026       29,677,906  
     

 

 

   

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

G-3


Table of Contents

SK HYNIX, INC. and Subsidiaries

Consolidated Statements of Comprehensive Income

For the years ended December 31, 2016, 2015 and 2014

 

     Note      2016     2015     2014  
           

(In millions of won, except per

share information)

 

Revenue

     4,32      17,197,975       18,797,998       17,125,566  

Cost of sales

     27,32        10,787,139       10,515,353       9,461,725  
     

 

 

   

 

 

   

 

 

 

Gross profit

        6,410,836       8,282,645       7,663,841  

Selling and administrative expense

     26,27        (3,134,090     (2,946,545     (2,554,375

Finance income

     28        814,892       846,752       678,570  

Finance expenses

     28        (846,328     (829,913     (799,771

Share of profit of equity-accounted investees

     12        22,752       24,642       23,145  

Other income

     29        52,371       40,479       618,684  

Other expenses

     29        (103,979     (148,939     (582,424
     

 

 

   

 

 

   

 

 

 

Profit before income tax

        3,216,454       5,269,121       5,047,670  

Income tax expense

     30        255,971       945,526       852,501  
     

 

 

   

 

 

   

 

 

 

Profit for the year

        2,960,483       4,323,595       4,195,169  

Other comprehensive income (loss)

         

Item that will never be reclassified to profit or loss:

         

Remeasurements of defined benefit liability, net of tax

     20        106,822       (21,871     (119,874

Items that are or may be reclassified to profit or loss:

         

Available-for-sale financial assets – unrealized net change in fair value, net of tax

     13,24                    (7,824

Foreign operations – foreign currency translation differences, net of tax

     24        (82,066     33,479       71,631  

Equity-accounted investees – share of other comprehensive income, net of tax

     12,24        4,088       6,487       3,706  
     

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) for the year, net of tax

        28,844       18,095       (52,361
     

 

 

   

 

 

   

 

 

 

Total comprehensive income for the year

      2,989,327       4,341,690       4,142,808  
     

 

 

   

 

 

   

 

 

 

Profit (loss) attributable to:

         

Owners of the Parent Company

      2,953,774       4,322,356       4,195,456  

Non-controlling interests

        6,709       1,239       (287

Total comprehensive income attributable to:

         

Owners of the Parent Company

        2,982,703       4,340,700       4,142,574  

Non-controlling interests

        6,624       990       234  

Earnings per share

         

Basic and diluted earnings per share (in won)

     31        4,184       6,002       5,842  

See accompanying notes to the consolidated financial statements.

 

G-4


Table of Contents

SK HYNIX, INC. and Subsidiaries

Consolidated Statements of Changes in Equity

For the year ended December 31, 2014

 

     Attributable to owners of the Parent Company              
     Capital stock      Capital
surplus
     Other
components
of equity
    Accumulated
other
comprehensive
income (loss)
    Retained
earnings
    Total     Non-
controlling
interests
    Total equity  
     (In millions of won)  

Balance at January 1, 2014

   3,568,645        3,406,083              (108,807     6,201,322       13,067,243       (384     13,066,859  

Total comprehensive income

                  

Profit for the year

                               4,195,456       4,195,456       (287     4,195,169  

Other comprehensive income (loss)

                         66,992       (119,874     (52,882     521       (52,361
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

                         66,992       4,075,582       4,142,574       234       4,142,808  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions with owners of the Parent Company

                  

Issue of ordinary shares related to acquisition of a subsidiary

     6,793        47,277                          54,070             54,070  

Exercise of conversion rights

     82,214        690,376                          772,590             772,590  

Acquisition of treasury shares

                   (24                 (24           (24
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total transactions with owners of the Parent Company

     89,007        737,653        (24                 826,636             826,636  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

   3,657,652        4,143,736        (24     (41,815     10,276,904       18,036,453       (150     18,036,303  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

G-5


Table of Contents

SK HYNIX, INC. and Subsidiaries

Consolidated Statements of Changes in Equity

For the years ended December 31, 2016 and 2015

 

     Attributable to owners of the Parent Company              
     Capital stock      Capital
surplus
     Other
components
of equity
    Accumulated
other
comprehensive
income (loss)
    Retained
earnings
    Total     Non-
controlling
interests
    Total equity  
     (In millions of won)  

Balance at January 1, 2015

   3,657,652        4,143,736        (24     (41,815     10,276,904       18,036,453       (150     18,036,303  

Total comprehensive income

                  

Profit for the year

                               4,322,356       4,322,356       1,239       4,323,595  

Other comprehensive income (loss)

                         40,215       (21,871     18,344       (249     18,095  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

                         40,215       4,300,485       4,340,700       990       4,341,690  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions with owners of the Parent Company

                  

Dividends paid

                               (218,401     (218,401           (218,401

Acquisition of treasury shares

                   (771,889                 (771,889           (771,889
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total transactions with owners of the Parent Company

                   (771,889           (218,401     (990,290           (990,290
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

     3,657,652        4,143,736        (771,913     (1,600     14,358,988       21,386,863       840       21,387,703  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2016

     3,657,652        4,143,736        (771,913     (1,600     14,358,988       21,386,863       840       21,387,703  

Total comprehensive income

                  

Profit for the year

                               2,953,774       2,953,774       6,709       2,960,483  

Other comprehensive income (loss)

                         (77,893     106,822       28,929       (85     28,844  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

                         (77,893     3,060,596       2,982,703       6,624       2,989,327  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions with owners of the Parent Company

                  

Dividends paid

                               (353,001     (353,001           (353,001

Disposal of a subsidiary

                         390             390       (889     (499
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total transactions with owners of the Parent Company

                         390       (353,001     (352,611     (889     (353,500
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

   3,657,652        4,143,736        (771,913     (79,103     17,066,583       24,016,955       6,575       24,023,530  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

G-6


Table of Contents

SK HYNIX, INC. and Subsidiaries

Consolidated Statements of Cash Flows

For the years ended December 31, 2016, 2015 and 2014

 

     Note      2016     2015     2014  
            (In millions of won)  

Cash flows from operating activities

         

Cash generated from operating activities

     34      6,486,781       10,357,267       6,305,229  

Interest received

        42,895       51,610       35,658  

Interest paid

        (125,818     (124,304     (151,551

Dividends received

        20,744       17,045       17,134  

Income tax paid

        (875,680     (982,098     (339,779
     

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

        5,548,922       9,319,520       5,866,691  
     

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

         

Decrease (increase) in short-term financial instruments, net

        109,803       39,533       (1,407,752

Collection of loans and other receivables

        15,422       10,692       3,501  

Increase in loans and other receivables

        (13,613     (14,134     (15,735

Proceeds from disposal of available-for-sale financial assets

        2,651       1,319       28,602  

Acquisition of available-for-sale financial assets

        (19,085     (5,359     (1,415

Decrease in other financial assets

        5             275,422  

Increase in other financial assets

        (2           (29,611

Cash inflows from derivative transactions

        1,077       1,672       2,371  

Cash outflows from derivative transactions

        (1,525     (2,088     (4,534

Proceeds from disposal of property, plant and equipment

        162,120       220,097       198,959  

Acquisition of property, plant and equipment

        (5,956,354     (6,774,625     (4,800,722

Proceeds from disposal of intangible assets

        1,585       7,963       286  

Acquisition of intangible assets

        (530,375     (623,743     (336,291

Proceeds from disposal of assets held for sale

              22,630        

Receipt of government grants

        133       406       20,241  

Cash outflows from business combinations

                    (19,682

Cash outflows from disposal of investments in a subsidiary

                    (1,467

Investments in associates

        (2,293     (9,893      
     

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

        (6,230,451     (7,125,530     (6,087,827
     

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

         

Proceeds from borrowings

        2,080,343       3,933,056       3,848,816  

Repayments of borrowings

        (1,610,466     (4,405,023     (3,820,449

Acquisition of treasury shares

              (771,889     (24

Dividends paid

        (353,001     (218,401      
     

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

        116,876       (1,462,257     28,343  
     

 

 

   

 

 

   

 

 

 

Effect of movements in exchange rates on cash and cash equivalents

        2,720       7,225       (2,313
     

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

        (561,933     738,958       (195,106

Cash and cash equivalents at beginning of the year

        1,175,719       436,761       631,867  
     

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of the year

      613,786       1,175,719       436,761  
     

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

G-7


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

1.    Reporting Entity

(1) General information about SK hynix, Inc. (the “Parent Company” or the “Company”) and its subsidiaries (collectively the “Group”) is as follows:

The Parent Company is engaged in the manufacture, distribution and sales of semiconductor products and its shares have been listed on the Korea Exchange since 1996. The Parent Company’s headquarters is located at 2091 Gyeongchung-daero, Bubal-eup, Icheon-si, Gyeonggi-do, South Korea, and the Group has manufacturing facilities in Icheon-si and Cheongju-si, South Korea, and Wuxi and Chongqing, China.

As of December 31, 2016, the shareholders of the Parent Company are as follows:

 

Shareholder

   Number of
shares
     Percentage
of ownership  (%)
 

SK Telecom Co., Ltd.

     146,100,000        20.07  

National Pension Service

     72,338,677        9.94  

Share Management Council1

     5,097,667        0.70  

Other investors

     482,465,451        66.27  

Treasury shares

     22,000,570        3.02  
  

 

 

    

 

 

 
     728,002,365        100.00  
  

 

 

    

 

 

 

 

1

As of December 31, 2016, the number of shares held by each member of Share Management Council is as follows:

 

Shareholder

   Number of
shares
     Percentage
of ownership  (%)
 

KEB Hana Bank

     5,092,500        0.70  

Other financial institutions

     5,167        0.00  
  

 

 

    

 

 

 
     5,097,667        0.70  
  

 

 

    

 

 

 

According to the share purchase agreement dated November 14, 2011, between SK Telecom Co., Ltd. and the Share Management Council, the Share Management Council should exercise its voting right on its shares following SK Telecom Co., Ltd.’s decision in designating officers of the Company or other matters unless this conflicts with the Share Management Council’s interest.

 

G-8


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

1.    Reporting Entity,  continued

 

 

(2) Details of the Group’s consolidated subsidiaries as of December 31, 2016 and 2015 are as follows:

 

               Ownership(%)  

Company

   Location    Business    2016      2015  

SK hyeng Inc.

   Korea    Domestic subsidiary      100.00        100.00  

SK hystec Inc.

   Korea    Domestic subsidiary      100.00        100.00  

Siliconfile Technologies Inc.

   Korea    Development and
manufacturing

of electronic component

     100.00        100.00  

Happymore Inc.1

   Korea    Domestic subsidiary      100.00         

SK hynix America Inc. (SKHYA)

   U.S.A.    Overseas sales subsidiary      97.74        97.74  

Hynix Semiconductor Manufacturing America Inc. (HSMA)2

   U.S.A.    Overseas manufacturing

subsidiary

            100.00  

SK hynix Deutschland GmbH (SKHYD)

   Germany    Overseas sales subsidiary      100.00        100.00  

SK hynix U.K. Ltd. (SKHYU)

   U.K.    Overseas sales subsidiary      100.00        100.00  

SK hynix Asia Pte. Ltd. (SKHYS)

   Singapore    Overseas sales subsidiary      100.00        100.00  

SK hynix Semiconductor India Pvt. Ltd. (SKHYIS)3

   India    Overseas sales subsidiary      100.00        100.00  

SK hynix Semiconductor Hong Kong Ltd. (SKHYH)

   Hong Kong    Overseas sales subsidiary      100.00        100.00  

SK hynix Semiconductor (Shanghai) Co., Ltd. (SKHYCS)

   China    Overseas sales subsidiary      100.00        100.00  

SK hynix Japan Inc. (SKHYJ)

   Japan    Overseas sales subsidiary      100.00        100.00  

SK hynix Semiconductor Taiwan Inc. (SKHYT)

   Taiwan    Overseas sales subsidiary      100.00        100.00  

SK hynix Semiconductor (China) Ltd. (SKHYCL)

   China    Overseas manufacturing
subsidiary
     100.00        100.00  

SK hynix Semiconductor (Wuxi) Ltd. (SKHYMC)

   China    Overseas manufacturing
subsidiary
     100.00        100.00  

SK hynix (Wuxi) Semiconductor Sales Ltd. (SKHYCW)

   China    Overseas sales subsidiary      100.00        100.00  

SK hynix Italy S.r.l (SKHYIT)

   Italy    Overseas R&D center      100.00        100.00  

SK hynix memory solutions Inc. (SKHMS)

   U.S.A.    Overseas R&D center      100.00        100.00  

SK hynix Flash Solution Taiwan (SKHYFST)

   Taiwan    Overseas R&D center      100.00        100.00  

SK APTECH Ltd. (SKAPTECH)

   Hong Kong    Holding company      100.00        100.00  

SK hynix Semiconductor (Chongqing) Ltd. (SKHYCQL)4

   China    Overseas manufacturing
subsidiary
     100.00        100.00  

Softeq Flash Solutions LLC.(SOFTEQ)

   Belarus    Overseas R&D center      100.00        100.00  

SK hynix Ventures Hong Kong Ltd. (SKH Ventures)5

   Hong Kong    Overseas investing
subsidiary
     100.00         

MMT (Money Market Trust)

   Korea    Money Market Trust      100.00        100.00  

 

1 

Happymore Inc. was established during the year ended December 31, 2016.

 

2 

HSMA is a subsidiary of SK Hynix America Inc. and its liquidation process was completed during the year ended December 31, 2016.

 

3 

Subsidiary of SK hynix Asia Pte. Ltd. (SKHYS)

 

4 

Subsidiary of SK APTECH Ltd. (SKAPTECH)

 

5 

The Group acquired SK hynix Venture Hong Kong Ltd. (SKH Ventures) during the year ended December 31, 2016.

 

G-9


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

1.    Reporting Entity,  continued

 

(3) Changes in the consolidated subsidiaries during the year ended December 31, 2016 are follows:

 

    

Company

  

Description

Acquisition

  

SK hynix Ventures Hong Kong Ltd. (SKH Ventures)

  

Included in Subsidiary by establishment

Acquisition

  

Happymore Inc.

  

Included in Subsidiary by establishment

Excluded from subsidiary

  

Hynix Semiconductor Manufacturing America Inc. (HSMA)

  

Excluded from subsidiary upon liquidation

(4) Major subsidiaries’ summarized separate statements of financial position as of December 31, 2016 and 2015 are as follows:

 

     2016     2015  
     Assets     Liabilities     Equity     Assets     Liabilities     Equity  
     (In millions of won)  

SK hynix America Inc. (SKHYA)

   1,584,043       1,279,493       304,550       1,504,882       1,333,291       171,591  

SK hynix Asia Pte. Ltd. (SKHYS)

     337,506       253,918       83,588       269,286       190,155       79,131  

SK hynix Semiconductor Hong Kong Ltd. (SKHYH)

     932,437       810,556       121,881       529,095       431,074       98,021  

SK hynix Semiconductor (Shanghai) Co., Ltd. (SKHYCS)

     46,177       18,595       27,582       68,196       45,998       22,198  

SK hynix Japan Inc. (SKHYJ)

     251,274       184,504       66,770       245,142       183,277       61,865  

SK hynix Semiconductor Taiwan Inc. (SKHYT)

     310,933       290,174       20,759       299,834       277,520       22,314  

SK hynix Semiconductor (China) Ltd. (SKHYCL)

     3,476,086       232,117       3,243,969       3,718,832       503,776       3,215,056  

SK hynix Deutschland GmbH (SKHYD)

     83,388       45,575       37,813       75,152       38,697       36,455  

SK hynix U.K. Ltd. (SKHYU)

     146,327       128,807       17,520       155,531       138,918       16,613  

SK hynix Semiconductor (Chongqing) Ltd. (SKHYCQL)

     350,305       171,088       179,217       406,552       224,672       181,880  

 

G-10


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

1.    Reporting Entity,  continued

 

(5) Major subsidiaries’ summarized separate statements of comprehensive income for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

     2016  
     Revenue      Profit      Total
comprehensive
income
 
     (In millions of won)  

SK hynix America Inc. (SKHYA)

   5,398,193        117,848        117,848  

SK hynix Asia Pte. Ltd. (SKHYS)

     1,497,869        1,929        1,929  

SK hynix Semiconductor Hong Kong Ltd. (SKHYH)

     5,655,093        20,019        20,019  

SK hynix Semiconductor (Shanghai) Co., Ltd. (SKHYCS)

     345,863        6,073        6,073  

SK hynix Japan Inc. (SKHYJ)

     673,127        867        804  

SK hynix Semiconductor Taiwan Inc. (SKHYT)

     1,742,632        2,676        2,676  

SK hynix Semiconductor (China) Ltd. (SKHYCL)

     2,137,576        123,753        123,753  

SK hynix Deutschland GmbH (SKHYD)

     321,309        1,747        1,747  

SK hynix U.K. Ltd. (SKHYU)

     532,661        374        374  

SK hynix Semiconductor (Chongqing) Ltd. (SKHYCQL)

     296,121        2,674        2,674  

 

     2015  
     Revenue      Profit      Total
comprehensive
income
 
     (In millions of won)  

SK hynix America Inc. (SKHYA)

   7,599,679        89,716        89,716  

SK hynix Asia Pte. Ltd. (SKHYS)

     1,612,550        1,303        1,303  

SK hynix Semiconductor Hong Kong Ltd. (SKHYH)

     4,181,208        6,909        6,909  

SK hynix Semiconductor (Shanghai) Co., Ltd. (SKHYCS)

     528,670        8,150        8,150  

SK hynix Japan Inc. (SKHYJ)

     934,001        1,116        1,322  

SK hynix Semiconductor Taiwan Inc. (SKHYT)

     1,915,465        5,852        5,852  

SK hynix Semiconductor (China) Ltd. (SKHYCL)

     2,273,536        206,446        206,446  

SK hynix Deutschland GmbH (SKHYD)

     414,489        1,072        1,072  

SK hynix U.K. Ltd. (SKHYU)

     702,329        1,289        1,289  

SK hynix Semiconductor (Chongqing) Ltd. (SKHYCQL)

     350,110        13,328        13,328  

 

     2014  
     Revenue      Profit      Total
comprehensive
income
 
     (In millions of won)  

SK hynix America Inc. (SKHYA)

   6,360,992        21,385        21,385  

SK hynix Asia Pte. Ltd. (SKHYS)

     1,638,396        2,773        2,773  

SK hynix Semiconductor Hong Kong Ltd. (SKHYH)

     3,714,085        12,941        12,941  

SK hynix Semiconductor (Shanghai) Co., Ltd. (SKHYCS)

     271,950        5,112        5,112  

SK hynix Japan Inc. (SKHYJ)

     843,383        9,890        10,478  

SK hynix Semiconductor Taiwan Inc. (SKHYT)

     2,176,739        7,599        7,599  

SK hynix Semiconductor (China) Ltd. (SKHYCL)

     1,914,452        381,729        381,729  

SK hynix Deutschland GmbH (SKHYD)

     551,528        6,197        6,197  

SK hynix U.K. Ltd. (SKHYU)

     575,959        1,813        1,813  

SK hynix Semiconductor (Chongqing) Ltd. (SKHYCQL)

     109,769        6,813        6,813  

 

G-11


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

1.    Reporting Entity,  continued

 

 

(6) There are no significant non-controlling interests to the Group as of December 31, 2016, 2015 and 2014.

2.     Basis of Preparation

(1)    Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (IASB).

The consolidated financial statements were authorized for issuance by the board of directors on January 25, 2017.

(2)    Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis, except for the following material items in the consolidated statements of financial position:

 

   

derivative financial instruments are measured at fair value

 

   

financial instruments at fair value through profit or loss are measured at fair value

 

   

liabilities for defined benefit plans are recognized at the net of the total present value of defined benefit obligations less the fair value of plan assets

(3)    Functional and presentation currency

Financial statements of entities within the Group are presented in functional currency and the currency of the primary economic environment in which each entity operates. Consolidated financial statements of the Group are presented in Korean won, which is the Parent Company’s functional and presentation currency.

(4)    Use of estimates and judgments

The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

(a)    Critical judgments

Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the separate financial statements is included in the following notes for financial instruments, classification of leases, recognition of deferred tax assets (liabilities) and others.

(b)    Assumptions and estimation uncertainties

Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next fiscal year are included in the following notes for reserves in accounts receivable, net realizable value of inventories, goodwill impairment, recognition and measurement of provisions, measurement of defined benefit obligations, recognition of deferred tax assets (liabilities) and others.

 

G-12


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

2.     Basis of Preparation,  continued

 

(c)    Fair value measurement

The Group establishes fair value measurement policies and procedures as its accounting policies and disclosures require fair value measurements for various financial and non-financial assets and liabilities. Such policies and procedures are executed by the valuation department, which is responsible for the review of significant fair value measurements including fair values classified as level 3 in the fair value hierarchy.

The valuation department regularly reviews unobservable significant inputs and valuation adjustments. If third party information such as prices available from an exchange, dealer, broker, industry group, pricing service or regulatory agency is used for fair value measurements, the valuation department reviews whether the valuation based on third party information includes classifications by levels within the fair value hierarchy and meets the requirements for the relevant standards.

The Group uses the best observable inputs in market when measuring fair values of assets or liabilities. Fair values are classified within the fair value hierarchy based on inputs used in valuation methods as follows:

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices)

Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs)

If various inputs used to measure fair value of assets or liabilities fall into different levels of the fair value hierarchy, the Group classifies the assets and liabilities at the lowest level of inputs among the fair value hierarchy which is significant to the entire measured value. The Group recognizes transfers between levels at the end of the reporting period of which such transfers occurred.

Information about assumptions used for fair value measurements are included in note 6.

3.    Significant Accounting Policies

The significant accounting policies applied by the Group in preparation of its consolidated financial statements are explained below. The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.

(1)    Operating Segments

An operating segment is a component of the Group that: 1) engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with other components of the Group, 2) whose operating results are reviewed regularly by the Group’s chief operating decision maker (“CODM”) in order to allocate resources and assess its performance, and 3) for which discrete financial information is available. The Group’s CODM is the board of directors, who do not receive and therefore do not review discrete financial information for any component of the Group. Consequently, no operating segment information is included in these consolidated financial statements. Entity wide disclosures of geographic, product and customer information are provided in note 4.

(2)    Basis of consolidation

(a)    Business combination

A business combination is accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

3.    Significant Accounting Policies,  continued

 

The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognized in profit or loss immediately. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities.

The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognized in profit or loss.

Any contingent consideration is measured at fair value at the date of acquisition. If an obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognized in profit or loss.

If share-based payment awards (replacement awards) are required to be exchanged for awards held by the acquiree’s employees (acquiree’s awards), then all or a portion of the amount of the acquirer’s replacement awards is included in measuring the consideration transferred in the business combination. This determination is based on the market-based measure of the replacement awards compared with the market-based measure of the acquiree’s awards and the extent to which the replacement awards relate to pre-combination service.

(b)    Non-controlling interests

Non-controlling interests are measured at their proportionate share of the acquiree’s identifiable net assets at the date of acquisition.

Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.

(c)    Subsidiaries

Subsidiaries are entities controlled by the Group. The Group controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Consolidation of an investee begins from the date the Group obtains control of the investee and cease when the Group loses control of the investee.

(d)    Loss of control

If the Group loses control of a subsidiary, the Group derecognizes the assets and liabilities of the former subsidiary from the consolidated statement of financial position and recognizes gain or loss associated with the loss of control attributable to the former controlling interest. Any investment retained in the former subsidiary is recognized at its fair value when control is lost.

(e)    Interests in equity-accounted investees

The Group’s interest in equity-accounted investees comprise interests in an associate and a joint venture. An associate is an entity in which the Group has significant influence, but not control or joint control, over the entity’s financial and operating policies. A joint venture is an arrangement in which the Group has joint control, whereby the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities.

Interests in an associate and a joint venture are initially recognized at cost including transaction costs. Subsequent to initial recognition, their carrying amounts are increased or decreased to recognize the Group’s share of the profit or loss and changes in equity of the associate or the joint venture. Distributions from equity-accounted investees are accounted for as deduction from the carrying amounts.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

3.    Significant Accounting Policies,  continued

 

(f)    Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. The Group’s share of unrealized gain incurred from transactions with equity-accounted investees are eliminated and unrealized loss are eliminated using the same basis if there are no evidence of asset impairments.

(g)    Business combinations under common control

The assets and liabilities acquired in the combination of entities or business under common control are recognized at the carrying amounts recognized previously in the consolidated financial statements of the ultimate parent. The difference between consideration transferred and carrying amounts of net assets acquired is added to or deducted from other capital adjustments.

(3)    Cash and cash equivalents

Cash and cash equivalents comprise cash balances and call deposits with maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments.

(4)    Inventories

Inventories are measured at the lower of cost and net realizable value. The cost of inventories is based on the weighted average method (except for goods in-transit that is based on the specific identification method), and includes expenditures incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing inventories to their existing location and condition. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and selling expenses. In the case of manufactured inventories and work-in-process, cost includes an appropriate share of production overheads based on the actual capacity of production facilities. However, the normal capacity is used for the allocation of fixed production overheads if the actual level of production is lower than the normal capacity.

(5)    Non-derivative financial assets

The Group recognizes and measures non-derivative financial assets by the following four categories: financial assets at fair value through profit or loss, held-to-maturity investments, loans and receivables and available-for-sale financial assets. The Group recognizes financial assets in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of the instrument.

Upon initial recognition, non-derivative financial assets not at fair value through profit or loss are measured at their fair value plus transaction costs that are directly attributable to the asset’s acquisition.

(a)    Financial assets at fair value through profit or loss

A financial asset is classified as financial assets at fair value through profit or loss if it is held for trading or designated as such upon initial recognition. Upon initial recognition, transaction costs are recognized in profit or loss when incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss.

(b)    Held-to-maturity investments

A non-derivative financial asset with a fixed or determinable payment and fixed maturity, for which the Group has the positive intention and ability to hold to maturity, is classified as held-to-maturity investments. Subsequent to initial recognition, held-to-maturity investments are measured at amortized cost using the effective interest rate method.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

3.    Significant Accounting Policies,  continued

 

(c)    Loans and receivables

Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest rate method.

(d)    Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified as financial assets at fair value through profit or loss, held-to-maturity investments or loans and receivables. Subsequent to initial recognition, they are measured at fair value, and changes in their fair value, net of any tax effect, are recorded in other comprehensive income. Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at cost.

(e)    De-recognition of financial assets

The Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. If the Group neither transfers nor retains substantially all of the risks and rewards of ownership of the financial assets, it derecognizes the financial assets when it does not retain control over the transferred financial assets. If the Group has retained control over the transferred financial assets, it continues to recognize the assets to the extent of its continuing involvement. If the Group retains substantially all the risks and rewards of ownership of the transferred financial assets, the Group continues to recognize the transferred financial assets and recognizes financial liabilities for the consideration received.

(f)    Offsetting between financial assets and financial liabilities

Financial assets and financial liabilities are offset and the net amount is presented in the consolidated statement of financial position only when the Group currently has a legally enforceable right to offset the recognized amounts, and there is the intention to settle on a net basis or to realize the asset and settle the liability simultaneously.

(6)    Derivative financial instruments

Derivatives are initially recognized at fair value. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below.

(a)    Embedded derivatives

Embedded derivatives are separated from the host contract and accounted for separately only if the following criteria have been met:

 

   

the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract;

 

   

a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and

 

   

the hybrid instrument is not measured at fair value with changes in fair value recognized in profit or loss.

Changes in the fair value of separable embedded derivatives are recognized immediately in profit or loss.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

3.    Significant Accounting Policies,  continued

 

(b)    Other derivative financial instruments

Changes in the fair value of other derivative financial instrument not designated as a hedging instrument are recognized immediately in profit or loss.

(7)    Impairment of financial assets

A financial asset not carried at fair value through profit or loss is assessed at the end of each reporting period to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. However, losses expected as a result of future events, regardless of likelihood, are not recognized.

Objective evidence that a financial asset is impaired includes:

 

   

significant financial difficulty of the issuer or obligor;

 

   

a breach of contract, such as default or delinquency in interest or principal payments;

 

   

the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider;

 

   

it becoming probable that the borrower will enter bankruptcy or other financial reorganization;

 

   

the disappearance of an active market for that financial asset because of financial difficulties; or

 

   

observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot be identified with the individual financial assets in the group

In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment.

If there is objective evidence that financial assets are impaired, impairment losses are measured and recognized.

(a)    Financial assets measured at amortized cost

An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of its estimated future cash flows discounted at the asset’s original effective interest rate. If it is not practicable to obtain the financial asset’s estimated future cash flows, impairment losses would be measured based on prices from any observable current market transactions. Impairment losses are deducted through an allowance account or directly from the carrying amount. 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 previously recognized impairment loss is reversed through profit or loss either directly or by adjusting an allowance account.

(b)    Financial assets carried at cost

The amount of the impairment loss is measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment losses are not reversed.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

3.    Significant Accounting Policies,  continued

 

(c)    Available-for-sale financial assets

When a decline in the fair value of an available-for-sale financial asset has been recognized in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss that had been recognized in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment even though the financial asset has not been derecognized. Impairment losses recognized in profit or loss for an investment in an equity instrument classified as available-for-sale are not 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, with the amount of the reversal recognized in profit or loss.

(8)    Property, plant and equipment

Property, plant and equipment are initially measured at cost. The cost of property, plant and equipment includes expenditures arising directly from the construction or acquisition of the asset, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management and the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

Subsequent to initial recognition, an item of property, plant and equipment is carried at its cost less any accumulated depreciation and any accumulated impairment losses.

Subsequent costs are recognized in the carrying amount of property, plant and equipment at cost or, if appropriate, as separate items if it is probable that future economic benefits associated with the cost will flow to the Group and it can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day repair and maintenance are recognized in profit or loss as incurred.

Property, plant and equipment, except for land, are depreciated on a straight-line basis over estimated useful lives that appropriately reflect the pattern in which the asset’s future economic benefits are expected to be consumed.

Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognized as other income or expenses.

The estimated useful lives of the Group’s property, plant and equipment are as follows:

 

     Useful lives (years)  

Buildings

     10 - 50  

Structures

     10 - 30  

Machinery

     4 - 15  

Vehicles

     4 - 10  

Other

     3 - 15  

Depreciation methods, useful lives, and residual values are reviewed at the end of each reporting period and, if appropriate, accounted for as changes in accounting estimates.

(9)    Borrowing costs

The Group capitalizes borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Other borrowing costs are recognized in expense as incurred. A qualifying asset is an asset that requires a substantial period of time to get ready for its intended use or sale. Financial assets and inventories that are manufactured or otherwise produced over a short period of time are not qualifying assets. Assets that are ready for their intended use or sale when acquired are not qualifying assets.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

3.    Significant Accounting Policies,  continued

 

To the extent that the Group borrows funds specifically for the purpose of obtaining a qualifying asset, the Group determines the amount of borrowing costs eligible for capitalization as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings. To the extent that the Group borrows funds generally and uses them for the purpose of obtaining a qualifying asset, the Group determines the amount of borrowing costs eligible for capitalization by applying a capitalization rate to the expenditures on that asset. The capitalization rate is the weighted average of the borrowing costs applicable to the borrowings of the Group that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs that the Group capitalizes during a period does not exceed the amount of borrowing costs incurred during that period.

(10)    Intangible assets

Intangible assets are measured initially at cost and, subsequently, are carried at cost less accumulated amortization and accumulated impairment losses.

Goodwill arising from business combinations is recognized as the excess of the consideration transferred in the acquisition over the net fair value of the identifiable assets acquired and liabilities assumed. Any deficit is a bargain purchase that is recognized in profit or loss. Goodwill is measured at cost less accumulated impairment losses.

Amortization of intangible assets except for goodwill is calculated on a straight-line basis over the estimated useful lives of intangible assets from the date that they are available for use. The residual value of intangible assets is zero. However, certain intangible assets are determined as having indefinite useful lives and not amortized as there is no foreseeable limit to the period over which the assets are expected to be available for use.

The estimated useful lives of the Group’s intangible assets are as follows:

 

     Useful lives (years)

Industrial rights

   5 - 10

Development costs

   2

Software

   5

Useful lives and the amortization methods for intangible assets with finite useful lives are reviewed at the end of each reporting period. The useful lives of intangible assets that are not being amortized are reviewed at the end of each reporting period to determine whether events and circumstances continue to support indefinite useful life assessments for those assets. Changes are accounted for as changes in accounting estimates.

Expenditures on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, are recognized in profit or loss as incurred. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Group intends to and has sufficient resources to complete development and to use or sell the asset. Other development expenditures are recognized in profit or loss as incurred.

Subsequent expenditures are capitalized only when they increase the future economic benefits embodied in the specific asset to which it relates. All other expenditures, including expenditures on internally generated goodwill and brands, are recognized in profit or loss as incurred.

(11)    Government grants

Government grants are not recognized unless there is reasonable assurance that the Group will comply with the grant’s conditions and that the grant will be received.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

3.    Significant Accounting Policies,  continued

 

(a)    Grants related to assets

Government grants whose primary condition is that the Group purchases, constructs or otherwise acquires non-current assets are deducted in calculating the carrying amount of the asset. The grant is recognized in profit or loss over the useful lives of depreciable assets.

(b)    Grants related to income

Government grants which are intended to compensate the Group for expenses incurred are recognized in profit or loss by as deduction of the related expenses.

(12)    Investment property

Property held for the purpose of earning rental income or benefiting from capital appreciation is classified as investment property. Investment property is initially measured at its cost. Transaction costs are included in the initial measurement. Subsequently, investment property is carried at cost less accumulated depreciation and impairment losses.

Subsequent costs are recognized in the carrying amount of investment property at cost or, if appropriate, as separate items if it is probable that future economic benefits associated with the cost will flow to the Group and it can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day repair and maintenance are recognized in profit or loss as incurred.

Investment property except for land, are depreciated on a straight-line basis over estimated useful lives.

Depreciation methods, useful lives and residual values are reviewed at the end of each reporting period and, if appropriate, accounted for as changes in accounting estimates.

(13)    Impairment of non-financial assets

The carrying amounts of the Group’s non-financial assets, other than assets arising from employee benefits, inventories, deferred tax assets and non-current assets held for sale, are reviewed at the end of the reporting period to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill and intangible assets that have indefinite useful lives or that are not yet available for use, irrespective of whether there is any indication of impairment, are tested for impairment annually by comparing their recoverable amount to their carrying amount.

The Group estimates the recoverable amount of an individual asset; however if it is impossible to measure the individual recoverable amount of an asset, the Group estimates the recoverable amount of cash-generating unit (“CGU”). A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. The value in use is estimated by applying a pre-tax discount rate that reflect current market assessments of the time value of money and the risks specific to the asset or CGU for which estimated future cash flows have not been adjusted, to the estimated future cash flows expected to be generated by the asset or CGU.

An impairment loss is recognized in profit or loss if the carrying amount of an asset or a CGU exceeds its recoverable amount.

Goodwill acquired in a business combination is allocated to each CGU that is expected to benefit from the synergies arising from business combination. Any impairment identified at the CGU level will first reduce the carrying value of goodwill and then be used to reduce the carrying amount of the other assets in the CGU on a pro rata basis.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

3.    Significant Accounting Policies,  continued

 

Except for impairment losses in respect of goodwill which are never reversed, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

(14)    Leases

The Group classifies and accounts for leases as either a finance or operating lease, depending on the terms. Leases where the Group assumes substantially all of the risks and rewards of ownership are classified as finance leases. All other leases are classified as operating leases.

(a)    Finance leases

At the commencement of the lease term, the Group recognizes as finance lease assets and finance lease liabilities in its consolidated statements of financial position, the lower amount of the fair value of the leased property and the present value of the minimum lease payments, each determined at the inception of the lease. Any initial direct costs are added to the amount recognized as an asset.

Minimum lease payments are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is 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. Contingent rents are charged as expenses in the periods in which they are incurred.

The depreciable amount of a leased asset is allocated to each accounting period during the period of expected use on a systematic basis consistent with the depreciation policy the lessee adopts for depreciable assets that are owned. If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the asset is fully depreciated over the shorter of the lease term and its useful life. The Group reviews whether the leased asset is impaired.

(b)    Operating leases

Leases where the lessor retains a significant portion of the risks and rewards of ownership are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are recognized in profit or loss on a straight-line basis over the period of the lease.

(c)    Determining whether an arrangement contains a lease

Determining whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether fulfillment of the arrangement is dependent on the use of a specific asset or assets (the asset) and the arrangement conveys a right to use the asset.

At inception or reassessment of the arrangement, the Group separates payments and other consideration required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the Group concludes for a financial lease that it is impracticable to separate the payments reliably, the Group recognizes an asset and a liability at an amount equal to the fair value of the underlying asset that was identified as the subject of the lease. Subsequently, the liability is reduced as payments are made and an imputed finance expense on the liability recognized using the purchaser’s incremental borrowing rate of interest.

(15)    Non-current assets held for sale

Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. In order to be classified as

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

3.    Significant Accounting Policies,  continued

 

held for sale, the asset (or disposal group) must be available for immediate sale in its present condition and its sale must be highly probable. The assets or disposal group that are classified as non-current assets held for sale are measured at the lower of their carrying amount and fair value less cost to sell. The Group recognizes an impairment loss for any initial or subsequent write-down of an asset (or disposal group) to fair value less costs to sell, and a gain for any subsequent increase in fair value less costs to sell, up to the cumulative impairment loss previously recognized.

A non-current asset that is classified as held for sale or part of a disposal group classified as held for sale is not depreciated (or amortized).

(16)    Non-derivative financial liabilities

The Group classifies non-derivative financial liabilities into financial liabilities at fair value through profit or loss or other financial liabilities in accordance with the substance of the contractual arrangement and the definitions of financial liabilities. The Group recognizes financial liabilities in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of the financial liability.

(a)    Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss include financial liabilities held for trading or designated as such upon initial recognition. Subsequent to initial recognition, financial liabilities at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. Upon initial recognition, any directly attributable transaction costs are recognized in profit or loss as incurred.

(b)    Other financial liabilities

Non-derivative financial liabilities other than financial liabilities at fair value through profit or loss are classified as other financial liabilities. At the date of initial recognition, other financial liabilities are measured at fair value less any directly attributable transaction costs. Subsequent to initial recognition, other financial liabilities are measured at amortized cost using the effective interest rate method. The Group derecognizes a financial liability from the consolidated statements of financial position when it is extinguished (i.e. when the obligation specified in the contract is discharged, canceled or expires).

(17)    Employee benefits

(a)    Short-term employee benefits

Short-term employee benefits are employee benefits that are due to be settled within 12 months after the end of the reporting period in which the employees render the related service. When an employee has rendered service to the Group during an accounting period, the Group recognizes the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service.

(b)    Other long-term employee benefits

Other long-term employee benefits include employee benefits that are settled beyond 12 months after the end of the reporting period in which the employees render the related service, and are calculated at the present value of the amount of future benefit that employees have earned in return for their service in the current and prior periods. Any changes from remeasurements are recognized through profit or loss in the period in which they arise.

(c)    Retirement benefits: defined benefit plans

As of the end of reporting period, defined benefits liabilities relating to defined benefit plans are recognized as present value of defined benefit obligations, net of fair value of plan assets.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

3.    Significant Accounting Policies,  continued

 

The calculation is performed annually by an independent actuary using the projected unit credit method. When the fair value of plan assets exceeds the present value of the defined benefit obligation, the Group recognizes an asset, to the extent of the present value of any economic benefits available in the form of refunds from the plan or reduction in the future contributions to the plan.

Remeasurements of the net defined benefit liability comprise of actuarial gains and losses, the return on plan assets excluding amounts included in net interest on the net defined benefit liability, and any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability, and are recognized in other comprehensive income. The Group determines net interests on net defined benefit liability (asset) by multiplying discount rate determined at the beginning of the annual reporting period and considers changes in net defined benefit liability (asset) from contributions and benefit payments. Net interest costs and other costs relating to the defined benefit plan are recognized through profit or loss.

When the plan amendment or curtailment occurs, gains or losses on amendment or curtailment in benefits for the past service provided are recognized through profit or loss. The Group recognizes gain or loss on a settlement when the settlement of defined benefit plan occurs.

(d)    Retirement benefits: defined contribution plans

When an employee has provided service for a certain period of time in relation to the defined contribution plan, the contribution to the defined contribution plan is recognized in profit or loss except to be included in the cost of the asset. The contributions to be paid are recognized as liabilities (accrued expenses) less the contributions that have been already paid.

(e)    Termination benefits

The Group recognizes a liability and expense for termination benefits at the earlier of the period when the Group can no longer withdraw the offer of those benefits and the period when the Group recognizes costs for a restructuring. If benefits are not payable within 12 months after the end of the reporting period, then they are discounted to their present value.

(18)    Provisions

Provisions are recognized when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

The risks and uncertainties that inevitably surround many events and circumstances are taken into account in reaching the best estimate of a provision. Where the effect of the time value of money is material, provisions are determined at the present value of the expected future cash flows.

Where some or all of the expenditures required to settle a provision are expected to be reimbursed by another party, the reimbursement is recognized when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The reimbursement is treated as a separate asset.

Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimates. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed.

A provision is used only for expenditures for which the provision was originally recognized.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

3.    Significant Accounting Policies,  continued

 

(19)    Foreign currencies

(a)    Foreign currency transactions

Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated to the functional currency using the reporting date’s exchange rate. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to the functional currency at the exchange rate at the date that the fair value was determined.

Foreign currency differences arising on the settlement or retranslation of monetary items are recognized in profit or loss, except for differences arising on the retranslation of the net investment in a foreign operation, which are recognized in other comprehensive income. When a gain or loss on a non-monetary item is recognized in other comprehensive income, any exchange component of that gain or loss is recognized in other comprehensive income. Conversely, when a gain or loss on a non-monetary item is recognized in profit or loss, any exchange component of that gain or loss is recognized in profit or loss.

(b)    Foreign operations

If the presentation currency of the Group is different from a foreign operation’s functional currency, the financial statements of the foreign operation are translated into the presentation currency using the following methods:

The assets and liabilities of foreign operations, whose functional currency is not the currency of a hyperinflationary economy, are translated to presentation currency at exchange rates at the reporting date. The income and expenses of foreign operations are translated to functional currency at exchange rates at the dates of the transactions. Foreign currency differences are recognized in other comprehensive income.

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation is treated as assets and liabilities of the foreign operation. Thus they are expressed in the functional currency of the foreign operation and translated at exchange rates at the reporting date.

When a foreign operation is disposed of, the relevant amount in the translation is transferred to profit or loss as part of the profit or loss on disposal. On the partial disposal of a subsidiary that includes a foreign operation, the relevant proportion of such cumulative amount is reattributed to non-controlling interest. In any other partial disposal of a foreign operation, the relevant proportion is reclassified to profit or loss.

(20)    Equity capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issuance of ordinary shares is recognized as a deduction from equity, net of any tax effects.

When the Group repurchases its share capital, the amount of the consideration paid is recognized as a deduction from equity and classified as treasury shares. The profits or losses from the purchase, disposal, reissue, or retirement of treasury shares are not recognized as current profit or loss. If the Group acquires and retains treasury shares, the consideration paid or received is directly recognized in equity.

(21)    Revenue

Revenue from the sale of goods, rendering of services or use of assets is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

3.    Significant Accounting Policies,  continued

 

(a)    Sale of goods

Revenue is recognized when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably.

(b)    Sale of services

Revenue from services rendered is recognized in profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to surveys of work performed.

(22)    Finance income and finance expenses

Finance income comprises interest and dividend income on funds invested (including available-for-sale financial assets), gains on the disposal of available-for-sale financial assets, and changes in the fair value of financial instruments at fair value through profit or loss. Interest income is recognized as it accrues in profit or loss, using the effective interest rate method. Dividend income is recognized in profit or loss on the date that the Group’s right to receive dividend is established.

Finance expenses comprise interest expense on borrowings, unwinding of the discount on provisions, and changes in the fair value of financial instruments at fair value through profit or loss. Interest expense on borrowings and debentures are recognized in profit or loss using the effective interest rate method.

(23)    Income taxes

Income tax expense comprises current and deferred tax. Current and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.

(a)    Current tax

Current tax is the expected tax payable or refundable on the taxable profit or loss for the year, using tax rates enacted or substantively enacted at the end of the reporting period and any adjustment to tax payable in respect of previous years. The taxable profit is different from the accounting profit for the period since the taxable profit is calculated excluding the temporary differences, which will be taxable or deductible in determining taxable profit (tax loss) of future periods, and non-taxable or non-deductible items from the accounting profit. The tax expense is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period.

(b)    Deferred tax

Deferred tax is recognized, using the asset-liability method, in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.

The Group recognizes a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures except to the extent that the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The Group recognizes deferred tax assets for all deductible temporary differences including unused tax loss and tax credit to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

3.    Significant Accounting Policies,  continued

 

The carrying amount of a deferred tax asset is reviewed at the end of each reporting period and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

The measurement of deferred tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset only if there is a legally enforceable right to offset the related current tax liabilities and assets, and they relate to income taxes levied by the same tax authority and they intend to settle current tax liabilities and assets on a net basis. If there are any additional income tax expense incurred in accordance with dividend payments, such income tax expense is recognized when liabilities relating to the dividend payments are recognized.

(24)    Earnings per share

The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Parent Company by the weighted average number of ordinary shares outstanding during the period, adjusted for own shares held. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding, adjusted for own shares held, for the effects of all dilutive potential ordinary shares including convertible notes.

(25)    Standards issued but not yet adopted

The following new standards, amendments to standards and interpretations are effective for annual periods beginning after January 1, 2016 and earlier application is permitted; however, the Group has not early adopted them in preparing these consolidated financial statements.

IFRS 9, ‘Financial Instruments’ published in July 2014, is effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. It replaces existing guidance in IAS 39, ‘Financial Instruments: Recognition and Measurement’. The Group plans to adopt IFRS 9 for the year beginning on January 1, 2018.

IFRS 9 will generally be applied retrospectively; however the Group plans to take advantage of the exemption allowing it not to restate the comparative information for prior periods with respect to classification and measurement including impairment changes. New hedge accounting requirements will generally be applied prospectively except for certain exemptions including the accounting for the time value of options.

Key features of the new standard, IFRS 9, are 1) classification and measurement of financial assets that reflects the business model in which the assets are managed and their cash flow characteristics, 2) impairment methodology that reflects ‘expected credit loss’ (ECL) model for financial assets, and 3) expanded scope of hedged items and hedging instruments which qualify for hedge accounting and changes in assessment method for effect of hedging relationships.

IFRS 9 will require the Group to assess the financial impact from application of IFRS 9 and revise its accounting processes and internal controls related to financial instruments. Actual impact of adopting IFRS 9 will be dependent on the financial instruments the Group holds and economic conditions at that time as well as accounting policy elections and judgment that it will make in the future.

 

G-26


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

3.    Significant Accounting Policies,  continued

 

The Group is preparing for changes in internal controls processes or accounting processing systems, and analyzing an assessment of the financial impact resulting from the application of IFRS 9. The Group expects to disclose additional quantitative information in the notes to the consolidated financial statements for the year ending December 31, 2017. Expected impacts on the financial statements are generally categorized as follows:

(i)    Classification and measurement of financial assets

Under IFRS 9, financial assets are classified into three principal categories; measured at amortized cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL) based on the business model in which assets are managed and their cash flow characteristics, as detailed in the below table.

Under IFRS 9, derivatives embedded in hybrid contracts where the host is a financial asset are not bifurcated. Instead, the hybrid financial instrument as a whole is assessed for classification.

 

Business model

  

Contractual cash flows are
solely payments of
principal and interests

    

All other cases

To collect contractual cash flows

   At amortized cost1     

Both to collect contractual cash flows and sell financial assets

   At FVOCI1      FVTPL2

For trading, and others

   At FVOCI     

 

1

The Group may irrevocably designate as at FVTPL to eliminate or significantly reduce an accounting mismatch.

 

2

The Group may irrevocably designate equity investments that is not held for trading as at FVOCI.

As there are additional requirements for a financial asset to be classified as measured at amortized costs or FVOCI under IFRS 9 compared to the existing guidance in IAS 39, the adoption of IFRS 9 would potentially increase the proportion of financial assets that are measured at FVTPL, increasing volatility in the Group’s profit or loss.

As of December 31, 2016, the Group has loans and receivables amounting to ₩5,882,683 million, available-for-sale financial assets amounting to ₩147,779 million, and financial assets at fair value through profit or loss amounting to ₩1,570,172 million.

Under IFRS 9, a financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as at FVTPL: 1) the asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and 2) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. As of December 31, 2016, the Group has loans and receivables which amount to ₩5,882,683 million, and measured them at amortized costs.

Under IFRS 9, a financial asset is measured at FVOCI if it meets both of the following conditions and is not designated as at FVTPL: 1) the asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and 2) the contractual terms of the financial asset give rise on specified dates to cash flow that are solely payments of principal and interest on the principal amount outstanding. As of December 31, 2016, the Group has debt instruments of ₩716 million classified as available-for-sale, where the host is a financial asset.

Under IFRS 9, on initial recognition of equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in fair value in OCI, and will not reclassify(recycle) the those items in OCI to profit or loss subsequently. As of December 31, 2016, the Group has equity investment that is classified as available-for-sale which amounts to ₩147,063 million, and there was no accumulated fair value reserve related to available-to-sale financial assets.

 

G-27


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

3.    Significant Accounting Policies,  continued

 

Under IFRS 9, a financial asset is measured at FVTPL if the contractual terms of the financial asset give rise to specified dates to cash flows that are not solely payments of principal and interest on the principal amount outstanding, the debt instrument is held within a business model whose objective is to sell the asset, or the equity instruments that are not elected to be designated as measured at FVOCI. As of December 31, 2016, the Group has debt instruments measured at FVTPL which amount to ₩1,570,172 million.

(ii)    Classification and measurement of financial liabilities

Under IFRS 9, the amount of change in the fair value attributable to the changes in the credit risk of the financial liabilities is presented in OCI, not recognized in profit or loss, and the OCI amount will not be reclassified (recycled) to profit or loss. However, if doing so creates or increase an accounting mismatch, the amount of change in the fair value is recognized in profit or loss.

As a portion of fair value change which was recognized in profit or loss under the existing standard, IAS 39, will be presented in OCI under IFRS 9, profit or loss related to valuation of financial liabilities is likely to decrease. As of December 31, 2016, there was no financial liabilities measured at FVTPL.

(iii)    Impairment: Financial assets and contract assets

IFRS 9 replaces the ‘incurred loss’ model in the existing standard with a forward-looking ‘expected credit loss’ (ECL) model for debt instruments, lease receivables, contractual assets, loan commitments, financial guarantee contracts.

Under IFRS 9, impairment losses are likely to be recognized earlier than using the incurred loss model under the existing guidance in IAS 39 as loss allowances will be measured on either of the 12-month or lifetime ECL based on the extent of increase in credit risk since inception as shown in the below table.

 

Classification1

  

Loss allowances

Stage 1

  

Credit risk has not increased

significantly since the initial

recognition2

   12-month ECL: ECLs that resulted from possible default events within the 12 months after the reporting date

Stage 2

  

Credit risk has increase significantly

since the initial recognition

   Lifetime ECL: ECL that resulted from all possible default events over the expected life of a financial instrument

Stage 3

   Credit-impaired   

 

1

Under IFRS 15, for trade receivables and contract assets arising with no significant credit risk, loss allowances are recognized at an amount equal to lifetime expected credit losses. However, for trade receivables and contract assets with a significant financing component arising under IFRS 15, the Group may choose as its accounting policy to recognize loss allowances at an amount equal to lifetime expected credit losses. In addition, for receivables under lease arrangement, the Group may choose to recognize loss allowances at an amount equal to lifetime expected credit losses.

2

The Group may determine that a financial asset’s credit risk has not increased significantly if the asset has low credit risk at the end of reporting period.

Under IFRS 9, financial assets of which the credit was impaired at the initial recognition, cumulative changes in lifetime ECL since the initial recognition are recognized as loss allowances.

As of December 31, 2016, the Group has debt instruments (loans and receivables) measured at amortized cost amounting to ₩5,887,367 million, debt instruments measured at FVOCI as they are classified as available for sale amounting to ₩716 million, and has recognized loss allowances of ₩4,684 million.

 

G-28


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

3.    Significant Accounting Policies,  continued

 

IFRS 15 ‘Revenue from Contracts from Customers’, published in May 2014, is effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts SIC 31 Revenue- Barter transactions involving advertising services, IFRIC 13 Customer Loyalty Programs, IFRIC 15 Agreements for the construction of real estate, IFRIC 18 Transfers of assets from customers. The Group plans to adopt IFRS 15 in its consolidated financial statements for the year ending December 31, 2018, and retrospectively adjust the comparative periods presented in the set of financial statements, in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. However, the Group has not yet decided whether to apply the practical expedient and which method to use in applying the practical expedient.

Existing IFRS standards and interpretations including IAS 18 provide revenue recognition guidance by transaction types such as sales of goods, rendering of services, interest income, royalty income, dividend income and construction revenue; however, under the new standard, IFRS 15, the five-step approach (Step 1: Identify the contract(s) with a customer, Step 2: Identify the performance obligations in the contract, Step 3: Determine the transaction price, Step 4: Allocate the transaction price to the performance obligations in the contract, Step 5: Recognize revenue when the entity satisfied a performance obligation) is applied for all types of contracts or agreements.

The new standard will require the Group to revise its internal controls and accounting processing systems related to reporting revenue. The Group is preparing for changes and analyzing an assessment of the impact resulting from the application of IFRS 15, and the Group expects to disclose additional quantitative information in the notes to the financial statements for the year ending December 31, 2017. Expected impacts on the consolidated financial statements are generally categorized as follows:

(i)    Identifying the performance obligations in the contract

The Group is engaged in the research and development, manufacture, distribution and sales of semiconductor products (DRAM and NAND flash and others), and the most of revenue generated from these operation.

Under IFRS 15, the Group determines whether the goods and services per the contracts are distinct and identify separate performance obligations in the contracts such as (a) the software license; (b) an installation service; (c) software updates; and (d) technical support. Timing of revenue recognition would change depending on whether the each of the performance obligations are satisfied at a point of time or over time.

(ii)    Variable consideration

As the contract allows a customer to return the products, the consideration received from the customer is variable. Under IFRS 15, the Group estimates an amount of variable consideration by using the method the Group expects to better predict the amount of consideration to which it will be entitled. The Group includes an amount of variable consideration in the transaction price only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the return period expires. The Group recognize the amounts received or receivable for which the Group does not expect to be entitled as a refund liability.

(iii)    Allocating the transaction price to performance obligations

In applying the IFRS 15, the Group allocates the transaction price to each performance obligation on a relative stand-alone selling price basis. To estimate the stand-alone selling price, ‘adjusted market assessment approach’ will be used; however, for certain transactions, ‘expected cost plus a margin approach’ will be used exceptionally.

IFRS 16, published in January 2016, replaces the existing guidance in IAS 17, Leases. IFRS 16 eliminates the current dual accounting model for lessees, which distinguishes between on-balance sheet finance leases and

 

G-29


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

3.    Significant Accounting Policies,  continued

 

off-balance sheet operating leases. Instead, there is a single, on-balance sheet accounting model that is similar to current finance lease accounting. IFRS 16 is effective for annual reporting periods beginning on or after January 1, 2019, with early adoption permitted. The Group is preparing for changes in internal controls processes or accounting processing systems, and analyzing an assessment of the financial impact resulting from the application of IFRS 16.

4.    Geographic, Product and Customer Information

The Group has a single reportable segment that is engaged in the manufacture and sale of semiconductor products.

(1) Details of the Group’s revenue for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

     2016      2015      2014  
     (In millions of won)  

Sale of goods

   17,146,961        18,739,177        17,054,031  

Sale of services

     51,014        58,821        71,535  
  

 

 

    

 

 

    

 

 

 
   17,197,975        18,797,998        17,125,566  
  

 

 

    

 

 

    

 

 

 

(2) Details of the Group’s revenue by product and service types for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

     2016      2015      2014  
     (In millions of won)  

DRAM

   12,340,767        14,045,339        13,311,628  

NAND Flash

     4,347,535        4,148,315        3,320,658  

Other

     509,673        604,344        493,280  
  

 

 

    

 

 

    

 

 

 
   17,197,975        18,797,998        17,125,566  
  

 

 

    

 

 

    

 

 

 

(3) The Group’s revenue information by region based on the location of selling entities for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

      2016      2015      2014  
     (In millions of won)  

Korea

   1,099,426        1,204,642        1,179,949  

China

     5,960,235        4,496,357        3,825,747  

Taiwan

     1,732,573        1,899,649        2,155,005  

Asia (other than China and Taiwan)

     2,165,201        2,536,009        2,482,716  

U.S.A.

     5,397,944        7,549,622        6,359,461  

Europe

     842,596        1,111,719        1,122,688  
  

 

 

    

 

 

    

 

 

 
   17,197,975        18,797,998        17,125,566  
  

 

 

    

 

 

    

 

 

 

 

G-30


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

4.    Geographic, Product and Customer Information,  continued

 

(4) The Group’s non-current assets (excluding financial assets, equity-accounted investees and deferred tax assets) information by region based on the location of subsidiaries as of December 31, 2016 and 2015 are as follows:

 

      2016      2015  
     (In millions of won)  

Korea

   18,078,337        15,648,779  

China

     2,805,712        3,208,908  

Taiwan

     6,835        7,007  

Asia (other than China and Taiwan)

     1,522        770  

U.S.A.

     364,188        365,024  

Europe

     9,374        8,874  
  

 

 

    

 

 

 
   21,265,968        19,239,362  
  

 

 

    

 

 

 

(5) Revenue from customer A constituting more than 10% of the Group’s consolidated revenue for the year ended December 31, 2016 amounts to ₩2,195,935 million (2015: ₩3,485,795 million, 2014: ₩2,959,663 million) and revenue from customer B constituting more than 10% of the Group’s consolidated revenue for the year ended December 31, 2015 amounted to ₩2,078,835 million (2016: ₩1,503,256 million, 2014: ₩1,710,833 million), respectively.

5.    Categories of Financial Instruments

(1) Categories of financial assets as of December 31, 2016 and 2015 are as follows:

 

     2016  
     Financial
assets at fair
value through
profit or loss
     Available-
for-sale
financial
assets
     Loans and
receivables
     Total  
     (In millions of won)  

Cash and cash equivalents

                 613,786        613,786  

Short-term financial instruments

     1,570,172               1,951,721        3,521,893  

Trade receivables

                   3,251,652        3,251,652  

Loans and other receivables

                   65,101        65,101  

Other financial assets

                   423        423  

Available-for-sale financial assets

            147,779               147,779  
  

 

 

    

 

 

    

 

 

    

 

 

 
   1,570,172        147,779        5,882,683        7,600,634  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     2015  
     Financial
assets at fair
value through
profit or loss
     Available-
for-sale
financial
assets
     Loans and
receivables
     Total  
     (In millions of won)  

Cash and cash equivalents

                 1,175,719        1,175,719  

Short-term financial instruments

     1,047,277               2,568,277        3,615,554  

Trade receivables

                   2,628,448        2,628,448  

Loans and other receivables

                   124,532        124,532  

Other financial assets

                   430        430  

Available-for-sale financial assets

            131,354               131,354  
  

 

 

    

 

 

    

 

 

    

 

 

 
   1,047,277        131,354        6,497,406        7,676,037  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

G-31


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

5.    Categories of Financial Instruments,  continued

 

(2) Categories of financial liabilities as of December 31, 2016 and 2015 are as follows:

 

     2016  
     Financial liabilities
at fair value through
profit or loss
     Financial liabilities
measured at
amortized cost
     Total  
     (In millions of won)  

Trade payables

          696,144        696,144  

Other payables

            1,606,417        1,606,417  

Other non-trade payables1

            712,580        712,580  

Borrowings

            4,335,978        4,335,978  

Other financial liabilities

     288               288  
  

 

 

    

 

 

    

 

 

 
   288        7,351,119        7,351,407  
  

 

 

    

 

 

    

 

 

 

 

     2015  
     Financial liabilities
at fair value through
profit or loss
     Financial liabilities
measured at
amortized cost
     Total  
     (In millions of won)  

Trade payables

          791,373        791,373  

Other payables

            1,337,803        1,337,803  

Other non-trade payables1

            1,091,062        1,091,062  

Borrowings

            3,818,595        3,818,595  

Other financial liabilities

     683               683  
  

 

 

    

 

 

    

 

 

 
   683        7,038,833        7,039,516  
  

 

 

    

 

 

    

 

 

 

 

1 

Details of other non-trade payables as of December 31, 2016 and 2015 are as follows:

 

     2016      2015  
     (In millions of won)  

Current

     

Accrued expenses

   685,154        1,001,171  

Non-current

     

Long-term other payables

     24,872        87,036  

Rent deposits payable

     2,554        2,855  
  

 

 

    

 

 

 
     27,426        89,891  
  

 

 

    

 

 

 
   712,580        1,091,062  
  

 

 

    

 

 

 

 

G-32


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

5.    Categories of Financial Instruments,  continued

 

(3) Details of gain and loss on financial assets and liabilities by category for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

     2016     2015     2014  
     (In millions of won)  

Loans and receivables

      

Interest income

   34,174       40,715       50,804  

Foreign exchange differences

     167,736       300,163       200,390  

Reversal of impairment (loss)

     5,617       82       (5,463
  

 

 

   

 

 

   

 

 

 
     207,527       340,960       245,731  
  

 

 

   

 

 

   

 

 

 

Available-for-sale financial assets

      

Gain on disposal

                 6,553  

Dividend income

     18       1,265       1,233  
  

 

 

   

 

 

   

 

 

 
     18       1,265       7,786  
  

 

 

   

 

 

   

 

 

 

Held-to-maturity financial assets

      

Interest income

                 1,318  

Financial assets at fair value through profit or loss

      

Gain on valuation

     1,133       2,280       6,920  

Gain on disposal

     15,348       33,814       28,493  
  

 

 

   

 

 

   

 

 

 
     16,481       36,094       35,413  
  

 

 

   

 

 

   

 

 

 

Financial liabilities measured at amortized cost

      

Interest expenses

     (120,122     (118,505     (170,363

Loss on redemption of debentures

                 (2,924

Foreign exchange differences

     (129,670     (242,532     (71,870
  

 

 

   

 

 

   

 

 

 
     (249,792     (361,037     (245,157
  

 

 

   

 

 

   

 

 

 

Financial liabilities at fair value through profit or loss

      

Gain (Loss) on valuation from derivative instruments

     395       25       (171,781

Gain (Loss) on transaction from derivative instruments

     (448     (386     27  
  

 

 

   

 

 

   

 

 

 
     (53     (361     (171,754
  

 

 

   

 

 

   

 

 

 
   (25,819     16,921       (126,663
  

 

 

   

 

 

   

 

 

 

6.    Financial Risk Management

(1)    Financial risk management

The Group’s activities are exposed to a variety of financial risks: market risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to hedge certain risk exposures.

Risk management is carried out by the Parent Company’s corporate finance division in accordance with policies approved by the board of directors. The Parent Company’s corporate finance division identifies, evaluates and hedges financial risks in close cooperation with the Group’s operating units. The board of directors provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, and credit risk; use of derivative financial instruments and non-derivative financial instruments; and the investment of excess liquidity.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

6.    Financial Risk Management,  continued

 

(a)    Market risk

(i)    Foreign exchange risk

The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar, Euro and Japanese Yen. Foreign exchange risk arises from future commercial transactions; recognized assets and liabilities in foreign currencies; and net investments in foreign operations.

Monetary foreign currency assets and liabilities as of December 31, 2016 are as follows:

 

     Assets      Liabilities  
     Foreign
currencies
     Korean won
equivalent
     Foreign
currencies
     Korean won
equivalent
 
     (In millions of won and millions of foreign currencies)  

USD

     4,392      5,308,315        3,875      4,682,724  

EUR

     1        11        85        108,342  

JPY

     1,894        19,638        33,601        348,380  

As of December 31, 2016, effects on profit before income tax as a result of change in exchange rate by 10% are as follows:

 

     If increased by 10%     If decreased by 10%  
     (In millions of won)  

USD

   62,559       (62,559

EUR

     (10,833     10,833  

JPY

     (32,874     32,874  

(ii)    Interest rate risk

Interest rate risk of the Group is defined as the risk that the interest expenses arising from borrowings will fluctuate because of changes in future market interest rate. The interest rate risk mainly arises through floating rate borrowings, and is partially offset by interests received from floating rate financial assets.

The Group manages its interest rate risk by using floating-to-fixed interest rate swaps. Such interest rate swaps have the economic effect of converting borrowings from floating rates to fixed rates. Generally, the Group raises long-term borrowings at floating rates and swaps them into fixed rates. Under the interest rate swaps, the Group agrees with other parties to exchange, at specified intervals (primarily quarterly), the difference between interests of fixed rates and floating rates, which are calculated based on the agreed notional amounts.

As of December 31, 2016, the Group is partially exposed to a risk of increase in interest rates. If interest rates on borrowings were 100 basis points higher/lower with all other variables held constant, profit before income tax for the following year would be ₩22,277 million (2015: ₩17,771 million) lower/higher, mainly as a result of higher/lower interest expense on floating rate borrowings and interest income on floating rate financial assets.

(iii)    Price risk

As of December 31, 2016, there are no available-for-sale equity securities measured at fair value held by the Group. Accordingly, the Group is not exposed to any equity securities price risk.

(b)    Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises mainly from operating and investing activities. In order to manage

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

6.    Financial Risk Management,  continued

 

credit risk, the Group periodically evaluates the creditworthiness of each customer or counterparty through the analysis of its financial information, historical transaction records and other factors, based on which the Group establishes credit limits for each customer or counterparty.

(i)    Trade and other receivables

For each new customer, the Group individually analyzes its credit worthiness before standard payment and delivery terms and conditions are offered. In addition, the Group is consistently managing trade and other receivables by reevaluating the customer’s credit worthiness and securing collaterals in order to limit its credit risk exposure.

The Group reviews at the end of each reporting period whether trade and other receivables are impaired and maintains credit insurance policies to manage credit risk exposure from oversea customers. The maximum exposure to credit risk as of December 31, 2016 is the carrying amount of trade and other receivables.

(ii)    Other financial assets

Credit risk also arises from other financial assets such as cash and cash equivalents; short-term financial instruments; and deposits with banks and financial institutions as well as short-term and long-term loans mainly due to the bankruptcy of each counterparty to those financial assets. The maximum exposure to credit risk as of December 31, 2016 is the carrying amount of those financial assets. The Group transacts only with banks and financial institutions with high credit ratings including Shinhan Bank, and accordingly management does not expect any losses from non-performance by these counterparties.

(c)    Liquidity risk

Liquidity risk is defined as the risk that the Group is unable to meet its short-term payment obligations on time due to deterioration of its business performance or inability to access financing. The Group forecasts its cash flow and liquidity status and sets action plans on a regular basis to manage liquidity risk proactively.

The Group invests surplus cash in interest-bearing current accounts, time deposits, demand deposits, marketable available-for-sale securities, choosing instruments with appropriate maturities or sufficient liquidity to provide sufficient head-room as determined by the above-mentioned forecasts.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

6.    Financial Risk Management,  continued

 

Contractual maturities of financial liabilities as of December 31, 2016 and 2015 are as follows:

 

     2016  
     Less than
1 year
     1 - 2 years      2 - 5 years      More than
5 years
     Total  
     (In millions of won)  

Borrowings (other than finance lease liabilities)

   785,989        706,827        2,853,218        235,562        4,581,596  

Finance lease liabilities

     27,043        5,350        16,050        18,725        67,168  

Trade payables

     696,144                             696,144  

Other payables

     1,610,757                             1,610,757  

Other non-trade payables

     667,485        25,224        2,554               695,263  

Derivatives

     288                             288  

Financial guarantee contract

     8                             8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   3,787,714        737,401        2,871,822        254,287        7,651,224  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2015  
     Less than
1 year
     1 - 2 years      2 - 5 years      More than
5 years
     Total  
     (In millions of won)  

Borrowings (other than finance lease liabilities)

   1,012,385        735,424        2,025,522        156,995        3,930,326  

Finance lease liabilities

     98,927        26,654        16,050        24,075        165,706  

Trade payables

     791,373                             791,373  

Other payables

     1,346,469                             1,346,469  

Other non-trade payables

     1,001,077        83,536        10,877               1,095,490  

Derivatives

     683                             683  

Financial guarantee contract

     8                             8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   4,250,922        845,614        2,052,449        181,070        7,330,055  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The table above analyzes the Group’s non-derivative financial liabilities and net-settled derivative financial liabilities into relevant maturity groups based on the remaining period at the statement of financial position date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows and includes estimated interest payments. The Group’s derivative instruments have been included at their fair value of ₩288 million (2015: ₩683 million) within the less than one-year time bucket as of December 31, 2016. These contracts are managed on a net-fair value basis rather than by maturity date. Net settled derivatives comprise interest rate swaps used by the Group to manage the Group’s interest rate risk.

(2)    Capital management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends to shareholders, proceeds and repayments of borrowings, issue new shares or sell assets to reduce debt.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

6.    Financial Risk Management,  continued

 

The debt-to-equity ratio and net borrowing ratio as of December 31, 2016 and 2015 are as follows:

 

     2016      2015  
     (In millions of won)  

Total liabilities (A)

   8,192,496        8,290,203  

Total equity (B)

     24,023,530        21,387,703  

Cash and cash equivalents and short-term financial instruments (C)

     4,135,679        4,791,273  

Total borrowings (D)

     4,335,978        3,818,595  

Debt-to-equity ratio (A/B)

     34%        39%  

Net borrowing ratio (D-C)/B

     1%        N/A  

(3)    Fair value

(a) The following table presents the carrying amounts and fair values of financial instruments by categories, including their levels in the fair value hierarchy, as of December 31, 2016 and 2015:

 

            2016  
     Carrying
amounts
     Level 1      Level 2      Level 3      Total  
     (In millions of won)  

Financial assets measured at fair value

              

Short-term financial instruments

   1,570,172               1,570,172               1,570,172  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     1,570,172               1,570,172               1,570,172  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial assets not measured at fair value

              

Cash and cash equivalents1

     613,786                              

Short-term financial instruments1

     1,951,721                              

Trade receivables1

     3,251,652                              

Loans and other receivables1

     65,101                              

Other financial assets1

     423                              

Available-for-sale financial assets1,2

     147,779                              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     6,030,462                              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities measured at fair value

              

Other financial liabilities

     288               288               288  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     288               288               288  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities not measured at fair value

              

Trade payables1

     696,144                              

Other payables1

     1,606,417                              

Other non-trade payables1

     712,580                              

Borrowings

     4,335,978               4,366,234               4,366,234  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   7,351,119               4,366,234               4,366,234  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

6.    Financial Risk Management,  continued

 

            2015  
     Carrying amounts      Level 1      Level 2      Level 3      Total  
     (In millions of won)  

Financial assets measured at fair value

              

Short-term financial instruments

   1,047,277                —        1,047,277                —        1,047,277  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     1,047,277               1,047,277               1,047,277  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial assets not measured at fair value

              

Cash and cash equivalents1

     1,175,719                              

Short-term financial instruments1

     2,568,277                              

Trade receivables1

     2,628,448                              

Loans and other receivables1

     124,532                              

Other financial assets1

     430                              

Available-for-sale financial assets1,2

     131,354                              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     6,628,760                              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities measured at fair value

              

Other financial liabilities

     683               683               683  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     683               683               683  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities not measured at fair value

              

Trade payables1

     791,373                              

Other payables1

     1,337,803                              

Other non-trade payables1

     1,091,062                              

Borrowings

     3,818,595               3,869,536               3,869,536  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   7,038,833               3,869,536               3,869,536  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1 

Does not include fair values of financial assets and liabilities of which fair values have not been measured as carrying amounts are close to the reasonable approximate fair values.

 

2

Equity instruments which do not have quoted price in an active market for the identical instruments (inputs for level 1) are measured at cost in accordance with IAS 39, ‘Financial Instrument: Recognition and Measurement’ as fair values of such equity instruments cannot be reliably measured using other valuation methods.

(b) Valuation Techniques

The valuation techniques of recurring and non-recurring fair value measurements and quoted prices classified as level 2 are as follows:

 

     Fair value      Level     

Valuation Techniques

     (In millions of won)              

Short-term financial instruments:

        

Financial assets at fair value through profit or loss

   1,570,172        2      The present value method

Derivative financial Liabilities:

        

Interest swap

     288        2      The present value method

(c) There was no transfer between fair value hierarchy levels for the year ended December 31, 2016.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

 

7.    Restricted Financial Instruments

Details of restricted financial instruments as of December 31, 2016 and 2015 are as follows:

 

     2016      2015     

Description

     (In millions of won)       

Short-term financial instruments

   77,500        77,500      Restricted for supporting small business
            22,190      Pledged for borrowings
     6,220        5,832      Pledged for consumption tax
            2,843      Deposit for import duties
  

 

 

    

 

 

    
     83,720        108,365     
  

 

 

    

 

 

    

Other financial assets

     308        308      Pledged for borrowings
     12        12      Bank overdraft guarantee deposit
     104        110      Others
  

 

 

    

 

 

    
     424        430     
  

 

 

    

 

 

    
   84,144        108,795     
  

 

 

    

 

 

    

8.    Trade Receivables and Loans and Other Receivables

(1) Details of loans and other receivables as of December 31, 2016 and 2015 are as follows:

 

     2016      2015  
     (In millions of won)  

Current

     

Other receivables

   11,571        37,427  

Accrued income

     9,732        18,126  

Short-term loans

     3,145        3,786  

Short-term guarantee and other deposits

     1,163        2,274  
  

 

 

    

 

 

 
     25,611        61,613  
  

 

 

    

 

 

 

Non-current

     

Long-term other receivables

     60        22,921  

Long-term loans

     6,008        6,104  

Guarantee deposits

     33,261        33,637  

Long-term deposits

     161        257  
  

 

 

    

 

 

 
     39,490        62,919  
  

 

 

    

 

 

 
   65,101        124,532  
  

 

 

    

 

 

 

(2) Trade receivables and loans and other receivables, net of provision for impairment, as of December 31, 2016 and 2015 are as follows:

 

     2016  
     Gross
amount
     Provision for
impairment
    Carrying
amount
 
     (In millions of won)  

Trade receivables

   3,253,489        (1,837     3,251,652  

Current loans and other receivables

     26,982        (1,371     25,611  

Non-current loans and other receivables

     40,966        (1,476     39,490  
  

 

 

    

 

 

   

 

 

 
   3,321,437        (4,684     3,316,753  
  

 

 

    

 

 

   

 

 

 

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

8.    Trade Receivables and Loans and Other Receivables,  continued

 

     2015  
     Gross
amount
     Provision for
impairment
    Carrying
amount
 
     (In millions of won)  

Trade receivables

   2,631,422        (2,974     2,628,448  

Current loans and other receivables

     63,046        (1,433     61,613  

Non-current loans and other receivables

     69,062        (6,143     62,919  
  

 

 

    

 

 

   

 

 

 
   2,763,530        (10,550     2,752,980  
  

 

 

    

 

 

   

 

 

 

(3) Details of provision for impairment

Movements in the provision for impairment of trade receivables for the years ended December 31, 2016 and 2015 are as follows:

 

      2016     2015  
     (In millions of won)  

Beginning balance

   2,974       2,919  

Provision for receivables impairment

           88  

Unused amounts reversed

     (836      

Receivables written off during the year as uncollectible

     (306      

Foreign exchange difference

     5       (33
  

 

 

   

 

 

 

Ending balance

   1,837       2,974  
  

 

 

   

 

 

 

Movements in the provision for impairment of current loans and other receivables for the years ended December 31, 2016 and 2015 are as follows:

 

      2016     2015  
     (In millions of won)  

Beginning balance

   1,433       1,668  

Unused amounts reversed

     (62     (234

Foreign exchange difference

           (1
  

 

 

   

 

 

 

Ending balance

   1,371       1,433  
  

 

 

   

 

 

 

Movements in the provision for impairment of non-current loans and other receivables for the years ended December 31, 2016 and 2015 are as follows:

 

      2016     2015  
     (In millions of won)  

Beginning balance

   6,143       6,034  

Provision for receivables impairment

     34       68  

Unused amounts reversed

     (4,753     (4

Receivables written off during the year as uncollectible

           (6

Foreign exchange difference

     52       51  
  

 

 

   

 

 

 

Ending balance

   1,476       6,143  
  

 

 

   

 

 

 

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

8.    Trade Receivables and Loans and Other Receivables,  continued

 

(4) The aging analysis of trade receivables and loans and other receivables as of December 31, 2016 and 2015 are as follows:

 

     2016  
     Not impaired                
            Overdue                
     Not Past
due
     Less than
3 months
     Over 3
months
and less than
6 months
     Over
6 months
     Impaired      Total  
     (In millions of won)  

Trade receivables

   3,252,891        598                             3,253,489  

Current loans and other receivables

     25,692                             1,290        26,982  

Non-current loans and other receivables

     40,864                             102        40,966  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   3,319,447        598                      1,392        3,321,437  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     2015  
     Not impaired                
            Overdue                
     Not Past
due
     Less than
3 months
     Over
3 months
and less  than
6 months
     Over
6 months
     Impaired      Total  
     (In millions of won)  

Trade receivables

   2,606,603        24,819                             2,631,422  

Current loans and other receivables

     61,753                             1,293        63,046  

Non-current loans and other receivables

     43,953                             25,109        69,062  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   2,712,309        24,819                      26,402        2,763,530  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

9.     Inventories

(1) Details of inventories as of December 31, 2016 and 2015 are as follows:

 

     2016      2015  
     (In millions of won)  

Finished goods

   391,503        613,382  

Work-in-process

     1,130,493        848,199  

Raw materials

     260,677        222,742  

Supplies

     194,678        164,156  

Goods in transit

     48,847        74,897  
  

 

 

    

 

 

 
   2,026,198        1,923,376  
  

 

 

    

 

 

 

(2) The amount of the inventories recognized as cost of sales is as follows:

 

     2016      2015      2014  
     (In millions of won)  

Inventories recognized as cost of sales

   10,787,034        10,514,640        9,460,486  

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

9.     Inventories,  continued

 

(3) The changes in inventory valuation allowance during the years ended December 31, 2016 and 2015 are as follows:

 

     2016     2015  
     (In millions of won)  

Beginning balance

   188,246       68,528  

Charged to cost of sales

     13,192       119,764  

Utilization upon sales

     (137,238     (46
  

 

 

   

 

 

 

Ending balance

   64,200       188,246  
  

 

 

   

 

 

 

There were no significant reversals of inventory write-downs recognized during 2016 and 2015.

10.     Non-current assets held for sale

Details of changes in non-current assets held for sale for the years ended December 31, 2016 and 2015 are as follows:

 

     2016      2015  
     (In millions of won)  

Beginning balance

    —        27,661  

Disposal1

            (27,661

Other

             
  

 

 

    

 

 

 

Ending balance

           
  

 

 

    

 

 

 

 

1 

The Group disposed assets held for sale during the year ended December 31, 2015 and recognized loss on disposal of assets held for sale as other expenses for the amount of ₩5,844 million.

11.     Other Current and Non-current Assets

Details of other current and non-current assets as of December 31, 2016 and 2015 are as follows:

 

     2016      2015  
     (In millions of won)  

Current

     

Advance payments

   1,853        2,033  

Prepaid expenses

     238,831        212,766  

Value added tax refundable

     148,756        131,673  

Others

     9,913        7,454  
  

 

 

    

 

 

 
     399,353        353,926  
  

 

 

    

 

 

 

Non-current

     

Long-term prepaid expenses

     568,907        558,058  

Others

     1,495        7,475  
  

 

 

    

 

 

 
     570,402        565,533  
  

 

 

    

 

 

 
   969,755        919,459  
  

 

 

    

 

 

 

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

 

12.    Investments in Associates and Joint Ventures

(1) Details of investments in associates and joint ventures as of December 31, 2016 and 2015 are as follows:

 

                  2016      2015  

Type

  

Investee

   Ownership
(%)
     Net asset
value
     Carrying
amount
     Carrying
amount
 
          (In millions of won)  

Associate

   Stratio, Inc.1      9.10      151        2,151        2,171  
   Gemini Partners Pte. Ltd.2      20.00        3,484        5,199        7,976  
   TCL Fund3      11.06        2,219        2,219         

Joint venture

   HITECH Semiconductor
(Wuxi) Co., Ltd. (HITECH)
     45.00           121,447        112,462  
           

 

 

    

 

 

 
                131,016        122,609  
           

 

 

    

 

 

 

 

1 

In 2015, the Parent Company acquired 1,136,013 preferred shares of Stratio, Inc. Stratio, Inc. is classified as an associate because the Parent Company has significant influence over Stratio, Inc.’s financial and operating policies through its right to appoint a member of the board of directors.

 

2 

In 2015, the Parent Company acquired 20% of shares of Gemini Partners Pte. Ltd. and classified it as an associate because the Parent Company has significant influence over Gemini Partners Pte. Ltd.

 

3 

In 2016, the Parent Company acquired 11.06% of shares of TCL Fund and classified it as an associate because the Parent Company has significant influence over TCL Fund’s financial and operating policies through its right to appoint a member of the board of directors.

(2) Changes in investments in associates and joint ventures for the years ended December 31, 2016 and 2015 are as follows:

 

     2016  
     Beginning
balance
     Acquisition      Share of
profit
(loss)
    Other
equity
movement
    Dividend     Ending
balance
 
     (In millions of won)  

Stratio, Inc.

   2,171               (24     4             2,151  

Gemini Partners Pte. Ltd.

     7,976               (2,909     132             5,199  

TCL Fund

            2,293        50       (124           2,219  

HITECH

     112,462               25,635       4,076       (20,726     121,447  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
   122,609        2,293        22,752       4,088       (20,726     131,016  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

     2015  
     Beginning
balance
     Acquisition      Share  of
profit

(loss)
    Other
equity
movement
     Dividend     Ending
balance
 
     (In millions of won)  
               

Stratio, Inc.

          2,194        (35     12              2,171  

Gemini Partners Pte. Ltd.

            7,976                           7,976  

HITECH

     97,090               24,677       6,475        (15,780     112,462  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
   97,090        10,170        24,642       6,487        (15,780     122,609  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

G-43


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

12.    Investments in Associates and Joint Ventures,  continued

 

(3) Associate and joint venture’s statements of financial position as of December 31, 2016 and 2015 are as follows:

 

     2016  
     Current
assets
     Non-current
assets
     Current
liabilities
     Non-current
liabilities
 
     (In millions of won)  

Stratio, Inc.

   998        686        27         

Gemini Partners Pte. Ltd.

     13,047        4,467        93         

TCL Fund

     16,388        3,993        329         

HITECH

     184,048        350,094        82,581        181,679  

 

     2015  
     Current
assets
     Non-current
assets
     Current
liabilities
     Non-current
liabilities
 
     (In millions of won)  

Stratio, Inc.

   962        921               1  

Gemini Partners Pte. Ltd.

     27,762        14,694        3,444        7,867  

HITECH.

     270,959        314,464        89,034        246,478  

(4) Summary of associate and joint venture’s statements of comprehensive income (loss) for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

     2016     2015     2014  
     Revenue      Profit (loss)
for the year
    Revenue      Profit (loss)
for the year
    Revenue      Profit (loss)
for the year
 
     (In millions of won)  

Stratio, Inc.

   4        (198            (385             

Gemini Partners Pte. Ltd.

            (5,848            (747             

TCL Fund

            (4                          

HITECH

     566,893        55,346       677,284        54,835       608,300        29,077  

Siliconfile Technologies Inc.1

                               40,339        (2,072

 

1 

Siliconfile Technologies Inc. was reclassified as a subsidiary due to the Group’s additional acquisition of the remaining interest on April 22, 2014. Accordingly, the information presented in the above table includes the results of Siliconfile Technologies Inc. only for the period from January 1 to April 22, 2014.

 

G-44


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

 

13.    Available-for-sale Financial Assets

(1) Details of available-for-sale financial assets as of December 31, 2016 and 2015 are as follows:

 

     2016      2015  
     Ownership
(%)/  Type
     Acquisition
cost
     Book
value
     Book
value
 
     (In millions of won)  

ProMOS

     7.93      21,847                

JNT Frontier Private Equity Unit

     Certificate        971        971        1,213  

SV M&A No.1 Equity Unit

     Certificate        805        805        1,120  

Daishin Aju IB Investment Co., Ltd. Equity Unit

     Certificate        483        483        699  

Seoul Investment Early & Green Venture Fund

     Certificate        1,648        1,648        1,678  

TS 2011-4 Technology Transfer & Business Equity Unit

     Certificate        566        566        1,262  

IMM Investment Equity Unit

     Certificate        224        224        620  

L&S Venture Capital Equity Unit

     Certificate        1,170        1,170        1,849  

KTC-NP-Growth Equity Unit

     Certificate        2,956        2,956        2,271  

Intellectual Discovery, Ltd.

     7.05        4,000        4,000        4,000  

SKY Property Mgmt. Ltd.

     15.00        112,360        112,360        112,360  

China Walden Venture Investments II

     Certificate        6,188        6,188        3,573  

Exnodes Inc.

     Convertible Bond        716        716         

Netspeed

     6.07        3,083        3,083         

Keyssa, Inc.

     2.29        6,174        6,174         

MEMS DRIVE, INC.

     2.94        2,246        2,246         

Equity investment in a construction guarantee association

     0.01        709        709        709  

Information and communication guarantee association

     0.01        15        15         

Starblaze

     6.51        3,465        3,465         
     

 

 

    

 

 

    

 

 

 
      169,626        147,779        131,354  
     

 

 

    

 

 

    

 

 

 

(2) Changes in the carrying amount of available-for-sale financial assets for the years ended December 31, 2016 and 2015 are as follows:

 

     2016     2015  
     (In millions of won)  

Beginning balance

   131,354       127,314  

Acquisition

     19,085       5,359  

Disposal

     (2,652     (1,319

Foreign exchange difference

     (8      
  

 

 

   

 

 

 

Ending balance

   147,779       131,354  
  

 

 

   

 

 

 

 

G-45


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

 

14.    Property, Plant and Equipment

(1) Changes in property, plant and equipment for the years ended December 31, 2016 and 2015 are as follows:

 

    2016  
    Land     Buildings     Structures     Machinery     Vehicles     Others     Construction
-in-progress
    Total  
    (In millions of won)  

Beginning net book amount

  567,614       2,525,041       424,609       11,639,208       1,369       395,938       1,412,473       16,966,252  

Changes during 2016

               

Additions

    567       35,972       116,419       4,690,241       54       131,975       1,221,974       6,197,202  

Receipt of government grants

                      (133                       (133

Disposals

    (2,824     (53     (45     (147,960           (396     (7,063     (158,341

Depreciation

          (100,250     (34,907     (3,866,582     (381     (131,660           (4,133,780

Transfers

    10,018       61,213       18,264       957,016             40,771       (1,087,282      

Impairments

          (264     (2,814     (668                       (3,746

Exchange differences

    380       (7,283     (5,381     (74,614     (1     (985     (2,168     (90,052
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending net book amount

  575,755       2,514,376       516,145       13,196,508       1,041       435,643       1,537,934       18,777,402  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acquisition cost

    575,755       3,287,424       909,991       43,439,176       3,555       1,085,379       1,537,934       50,839,214  

Accumulated depreciation

          (749,076     (374,742     (29,993,593     (2,514     (649,669           (31,769,594

Accumulated impairment

          (23,698     (19,104     (243,540           (59           (286,401

Government grants

          (274           (5,535           (8           (5,817
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  575,755       2,514,376       516,145       13,196,508       1,041       435,643       1,537,934       18,777,402  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    2015  
    Land     Buildings     Structures     Machinery     Vehicles     Others     Construction
-in-progress
    Total  
    (In millions of won)  

Beginning net book amount

  542,952       1,433,541       282,191       9,974,301       863       254,129       1,602,357       14,090,334  

Changes during 2015

               

Additions

                907       48,005       94       11,030       6,699,838       6,759,874  

Receipt of government grants

                      (378                       (378

Disposals

    (4     (71     (271     (204,220           (12,759     (7,665     (224,990

Depreciation

          (88,013     (27,851     (3,476,825     (371     (101,385           (3,694,445

Transfers1

    23,908       1,198,576       167,970       5,271,980       783       243,497       (6,881,650     25,064  

Impairments

          (22,050                       (5           (22,055

Exchange differences

    758       3,058       1,663       26,345             1,431       (407     32,848  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending net book amount

  567,614       2,525,041       424,609       11,639,208       1,369       395,938       1,412,473       16,966,252  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acquisition cost

    567,614       3,243,654       792,270       39,376,245       3,659       966,111       1,412,473       46,362,026  

Accumulated depreciation

          (672,563     (348,493     (27,479,837     (2,290     (568,466           (29,071,649

Accumulated impairment

          (45,749     (19,168     (250,883           (1,509           (317,309

Government grants

          (301           (6,317           (198           (6,816
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  567,614       2,525,041       424,609       11,639,208       1,369       395,938       1,412,473       16,966,252  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

1 

₩25,064 million was transferred from investment property during the year ended December 31, 2015.

 

G-46


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

14.    Property, Plant and Equipment,  continued

 

(2) Details of depreciation expense allocation for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

     2016      2015      2014  
     (In millions of won)  

Cost of sales

   3,797,210        3,365,460        3,040,674  

Selling and administrative expenses

     276,969        263,938        197,196  

Other expenses

     5,307        8,050        4,902  

Development costs and other

     54,294        56,997        25,694  
  

 

 

    

 

 

    

 

 

 
   4,133,780        3,694,445        3,268,466  
  

 

 

    

 

 

    

 

 

 

(3) Certain property, plant and equipment are pledged as collaterals for borrowings as of December 31, 2016 (note 33).

(4) During 2016, the Group capitalized borrowing costs amounting to ₩14,663 million (2015: ₩18,892 million and 2014: ₩20,762 million) on qualifying assets. Borrowing costs were calculated using a capitalization rate of 3.59% (2015: 4.83% and 2014: 5.08%) for the year ended December 31, 2016.

(5) The Group leases certain machinery and others from ME Semiconductor Rental First L.L.C. and other under finance lease agreements.

The book value of the machinery and others subject to finance lease agreement amounted to: ₩67,245 million as of December 31, 2016 (as of December 31, 2015: ₩138,514 million). The machinery and others are pledged as collateral for the finance lease liabilities.

The Group leases certain machinery and others from Macquarie Capital and others under operating lease agreements. The payment schedule of minimum lease payments under operating lease agreements as of December 31, 2016 is as follows:

 

     Minimum lease payments  
     (In millions of won)  

No later than 1 year

   155,110  

Later than 1 year

     206,023  
  

 

 

 
   361,133  
  

 

 

 

(6) As of December 31, 2016, certain inventories; property, plant and equipment; and investment properties are insured and details of insured assets is as follows:

 

    

Insured assets

   Insured
amount
    

Insurance Company

          (In millions of won)       

Package insurance

   Property, plant and equipment, investment property, inventories and others Business interruption    53,572,053      Hyundai Marine & Fire Insurance Co., Ltd. and others

Fire insurance

   Property, plant and equipment, investment property      88,960     

Erection all risks insurance

   Property, plant and equipment      3,015,309     
     

 

 

    
      56,676,322     
     

 

 

    

 

G-47


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

14.    Property, Plant and Equipment,  continued

 

In addition to the assets stated above, vehicle and delivery equipment are insured by vehicle comprehensive insurance and liability insurance.

15.    Intangible Assets

(1) Changes in intangible assets for the years ended December 31, 2016 and 2015 are as follows:

 

     2016  
     Goodwill      Industrial
property
rights
    Development
costs
    Others1     Total  
     (In millions of won)  

Beginning net book amount

   720,755        89,787       483,330       411,024       1,704,896  

Changes during 2016

           

Internal development

                  352,022             352,022  

Separate acquisition

            28,269             150,352       178,621  

Disposals

            (5,208           (1,595     (6,803

Impairment

                  (272     (98     (370

Amortization

            (14,299     (205,198     (103,072     (322,569

Others

     9,449        414             (69     9,794  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending net book amount

     730,204        98,963       629,882       456,542       1,915,591  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Acquisition cost

     730,204        171,873       1,797,606       718,765       3,418,448  

Accumulated amortization and impairment

            (72,910     (1,167,724     (227,262     (1,467,896

Government grants

                        (34,961     (34,961
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
   730,204        98,963       629,882       456,542       1,915,591  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
        
     2015  
     Goodwill      Industrial
property
rights
    Development
costs
    Others1     Total  
     (In millions of won)  

Beginning net book amount

   704,185        83,750       319,824       228,921       1,336,680  

Changes during 2015

           

Internal development

                  349,264             349,264  

Separate acquisition

            31,604             242,875       274,479  

Disposals

            (12,859           (597     (13,456

Impairment

            (2     (1,606     (163     (1,771

Amortization

            (12,800     (184,167     (61,111     (258,078

Others

     16,570        94       15       1,099       17,778  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending net book amount

     720,755        89,787       483,330       411,024       1,704,896  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Acquisition cost

     720,755        160,180       1,126,505       585,500       2,592,940  

Accumulated amortization and impairment

            (70,393     (643,175     (137,621     (851,189

Government grants

                        (36,855     (36,855
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
   720,755        89,787       483,330       411,024       1,704,896  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

1

Others include software and club memberships.

 

G-48


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

15.    Intangible Assets,  continued

 

(2) Amortization of ₩28,877 million (2015: ₩12,811 million and 2014: ₩3,106 million) is included in the cost of sales and ₩293,316 million (2015: ₩244,978 million and 2014: ₩171,169 million) in selling and administrative expenses in the statements of comprehensive income for the year ended December 31, 2016. Amortization of ₩376 million (2015: ₩289 and 2014 : nil) is capitalized as development cost.

(3) Among costs associated with development activities, ₩352,022 million (2015: ₩349,264 million and 2014:₩181,287 million) that met capitalization criteria, were capitalized as development cost for the year ended December 31, 2016. In addition, costs associated with research activities and other development expenditures that did not meet the criteria and amounted to ₩1,744,711 million (2015: ₩1,620,324 million and 2014: ₩1,409,530 million) were recognized as expenses for the year ended December 31, 2016.

(4) Goodwill impairment tests

Goodwill impairment tests are undertaken annually. As the Group has only one CGU, goodwill was allocated to one CGU. Recoverable amount of the CGU was determined based on fair value less costs to sell, which was determined using the current stock price as of December 31, 2016. No impairment loss of goodwill was recognized since the recoverable amount is higher than carrying value of the CGU as of December 31, 2016.

16.    Investment Property

Changes in investment property during the years ended December 31, 2016 and 2015 are as follows:

 

     2016     2015  
     (In millions of won)  

Beginning net book amount

   2,679       28,456  

Changes for the year

    

Depreciation

     (106     (713

Transfer1

           (25,064
  

 

 

   

 

 

 

Ending net book amount

     2,573       2,679  
  

 

 

   

 

 

 

Acquisition cost

     5,170        

Accumulated depreciation

     (2,597      
  

 

 

   

 

 

 
   2,573       2,679  
  

 

 

   

 

 

 

 

1 

Transfer to property, plant and equipment by ₩25,604 million during the year ended December 31, 2015

The depreciation expense of ₩106 million was charged to cost of sales for the year ended December 31, 2016 (2015: ₩713 million and 2014: ₩1,239 million).

Rental income from investment property during the year ended December 31, 2016 was ₩500 million

(2015: ₩2,627 million and 2014: ₩4,534 million).

 

G-49


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

 

17.    Borrowings

(1) Details of borrowings as of December 31, 2016 and 2015 are as follows:

 

     2016      2015  
     (In millions of won)  

Current

     

Short-term borrowings

          147,948  

Current portion of long-term borrowings

     384,124        465,561  

Current portion of debentures

     320,736        399,863  
  

 

 

    

 

 

 
     704,860        1,013,372  
  

 

 

    

 

 

 

Non-current

     

Long-term borrowings

     2,095,737        1,512,003  

Debentures

     1,535,381        1,293,220  
  

 

 

    

 

 

 
     3,631,118        2,805,223  
  

 

 

    

 

 

 
   4,335,978        3,818,595  
  

 

 

    

 

 

 

(2) Details of short-term borrowings as of December 31, 2016 and 2015 are as follows:

 

    

Financial

Institutions

   Interest rate
per  annum

in 2016 (%)
     2016      2015  
                 (In millions of won)  

Borrowings on trade
receivables collateral

   Shinhan Bank and others                  1,160  
   NongHyup Bank                    1,916  

Refinancing and others

   China Construction Bank and others                    144,872  
        

 

 

    

 

 

 
                147,948  
        

 

 

    

 

 

 

 

G-50


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

17.    Borrowings,  continued

 

(3) Details of long-term borrowings as of December 31, 2016 and 2015 are as follows:

 

   

Financial institutions

  Interest rate per  annum
in 2016 (%)1
    2016     2015  
              (In millions of won)  

Local currency borrowings:

       

Borrowings for childcare facilities

  NongHyup Bank     2.00     62       123  

Funds for equipment

  Korea Development Bank (formerly Korea Finance Corporation)     3.98       83,333       166,667  

Funds for equipment2

  KEB Hana Bank     CD (91 days) +1.31       30,000       40,000  

Funds for equipment

  Korea Development Bank     2.02       200,000        

Finance lease liabilities

  Hansu Technical Service Ltd.     3.70       38,948       42,775  

Finance lease liabilities

  ME Semiconductor Rental First L.L.C.     5.00       8,688       74,898  
     

 

 

   

 

 

 
        361,031       324,463  
     

 

 

   

 

 

 

Foreign currency borrowings:

       

General borrowings

  Export-Import Bank of Korea     3M LIBOR + 1.00 ~ 3.15       825,808       488,333  

General borrowings

  Woori Bank     3M LIBOR + 1.25       120,850        
      3M LIBOR + 0.98       181,275       175,800  

Funds for equipment

  Korea Development Bank    
Exchange equalization
fund rate + 0.60
 
 
    120,850       117,200  
      3M LIBOR + 0.95       181,275       175,800  
      3M LIBOR + 1.25       241,700        

Funds for equipment

  KEB Hana Bank    
Exchange equalization
fund rate + 0.63
 
 
    96,680       93,760  

Funds for equipment

  NongHyup Bank    
Exchange equalization
fund rate + 0.63
 
 
    96,680       93,760  
      3M LIBOR + 3.19       120,850       234,400  

Finance lease liabilities

  Goodmemory First L.L.C.     4.70       12,671       36,020  

Funds for equipment

  Standard Chartered Bank Korea Ltd.     3M LIBOR + 3.45       120,191       172,688  

Syndicated loans

  Development Bank of China and others                 65,340  
     

 

 

   

 

 

 
        2,118,830       1,653,101  
     

 

 

   

 

 

 
        2,479,861       1,977,564  
     

 

 

   

 

 

 

Less:

       

 Current maturities

        (384,124     (465,561
      2,095,737       1,512,003  
     

 

 

   

 

 

 

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

17.    Borrowings,  continued

 

 

1 

As of December 31, 2016, the interest rates are as follows:

 

Type

   Interest rate per annum as of
December 31, 2016 (%)
 

Exchange equalization fund rate

     1.33  

CD (91 days)

     1.52  

3M LIBOR

     1.00  

 

2 

The Group entered into interest swap contracts with KEB Hana Bank to hedge interest rate risk from the local currency loans.

(4) Details of debentures as of December 31, 2016 and 2015 are as follows:

 

     Maturity date      Interest rate per
annum in 2016 (%)
     2016     2015  
                   (In millions of won)  

Unsecured notes in local currency:

          

211th

     May 6, 2016        6.20            400,000  

212th

     May 30, 2019        5.35        450,000       450,000  

213th

     Sep. 4, 2017        3.72        200,000       200,000  

214-1st

     Aug. 26, 2020        2.27        210,000       210,000  

214-2nd

     Aug. 26, 2022        2.63        140,000       140,000  

215-1st

     Nov. 25, 2018        2.26        70,000       70,000  

215-2nd

     Nov. 25, 2020        2.56        100,000       100,000  

215-3rd

     Nov. 25, 2022        2.75        10,000       10,000  

216-1st

     Feb. 19, 2018        1.74        70,000        

216-2nd

     Feb. 19, 2021        2.22        180,000        

216-3rd

     Feb. 19, 2023        2.53        80,000        

217-1st

     May 27, 2018        1.73        80,000        

217-2nd

     May 27, 2021        2.30        150,000        

Secured notes in foreign currency

          

Foreign 8th1

     Jun. 20, 2017        3M LIBOR + 2.85        120,850       117,200  
        

 

 

   

 

 

 
           1,860,850       1,697,200  

Less: Discounts on debentures

           (4,733     (4,117

 Current portion

           (320,736     (399,863
        

 

 

   

 

 

 
         1,535,381       1,293,220  
        

 

 

   

 

 

 

 

1 

The Group is provided with USD100 million of payment guarantee from Shinhan Bank as of December 31, 2016.

 

G-52


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

17.    Borrowings,  continued

 

(5) Finance lease liability

Lease liabilities are effectively secured as the rights to the leased asset belong to the lessor.

Details of future minimum lease payments to the lessor as of December 31, 2016 and 2015 are as follows:

 

     2016     2015  
     (In millions of won)  

Total minimum lease payment

    

No later than 1 year

   27,043       98,927  

Between 1 and 5 years

     21,400       42,704  

Later than 5 years

     18,725       24,075  
  

 

 

   

 

 

 
     67,168       165,706  
  

 

 

   

 

 

 

Discount on present value

     (6,861     (12,013

Net minimum lease payment

    

No later than 1 year

     26,603       96,116  

Between 1 and 5 years

     19,136       39,182  

Later than 5 years

     14,568       18,395  
  

 

 

   

 

 

 
   60,307       153,693  
  

 

 

   

 

 

 

18.    Other Current and Non-current Liabilities

Details of other current and non-current liabilities as of December 31, 2016 and 2015 are as follows:

 

     2016      2015  
     (In millions of won)  

Current

     

Advance receipts

   3,781        2,867  

Unearned income

     228        374  

Withholdings

     42,622        35,938  

Deposits received

     1,539        1,256  

Others

     2,328        4,008  
  

 

 

    

 

 

 
     50,498        44,443  

Non-current

     

Other long-term employee benefits

     61,883        61,149  
  

 

 

    

 

 

 
   112,381        105,592  
  

 

 

    

 

 

 

 

G-53


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

 

19.    Provisions

(1) Details of changes in provisions for the years ended December 31, 2016 and 2015 are as follows:

 

     2016  
     Beginning
balance
     Increase      Utilization     Reversal     Other      Ending
balance
 
     (In millions of won)  

Warranty

   2,936        38,584        (38,523                  2,997  

Sales returns

     14,736        33,284        (34,703                  13,317  

Legal claims

     1,523        400        (1,097     (426            400  

Emission allowances

     6,081        21,366        (1,339                  26,108  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
   25,276        93,634        (75,662     (426            42,822  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
     2015  
     Beginning
balance
     Increase      Utilization     Reversal     Other1      Ending
balance
 
     (In millions of won)  

Warranty

   6,886        2,910        (4,346     (2,514            2,936  

Sales returns

     14,646        53,642        (53,552                  14,736  

Legal claims

     4,400        1,440        (4,370     (30     83        1,523  

Emission allowances

            6,081                           6,081  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
   25,932        64,073        (62,268     (2,544     83        25,276  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

1 

Others include foreign exchange rate differences.

(2)    Provisions for warranty

The Group estimates the expected warranty costs based on historical results and accrues provisions for warranty.

(3)    Provisions for sales returns

The Group estimates the expected sales returns based on historical results and adjusts sales and cost of sales, respectively. Accordingly, related gross profit and estimated expenses related to the return (such as transportation costs) are recorded as provisions for sales returns.

(4)    Provisions for legal claims

The Group recognizes provisions for legal claims when the Group has a present legal or constructive obligation as a result of past events and an outflow of resources required to settle the obligation is probable and the amount can be reliably estimated.

(5)    Provision for emission allowances

The Group recognizes estimated future payment for the number of emission certificates required to settle the Group’s obligation exceeding the actual number of certificates on hand as emission allowances according to the Act on Allocation and Trading of Greenhouse Gas Emission Permits.

 

G-54


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

 

20.    Defined Benefit Liabilities

Under the defined benefit plan, the Group pays employee benefits to retired employees in the form of a lump sum that are based on their salaries and years of service at the time of their retirement. Accordingly, the Group is exposed to a variety of actuarial assumption risks such as risk associated with expected years of service, interest risk, and market (investment) risk.

(1) Details of defined benefit liabilities as of December 31, 2016 and 2015 are as follows:

 

     2016     2015  
     (In millions of won)  

Present value of defined benefit obligations

   1,195,047       1,055,340  

Fair value of plan assets

     (888,559     (570,363
  

 

 

   

 

 

 
   306,488       484,977  
  

 

 

   

 

 

 

(2) Principal actuarial assumptions as of December 31, 2016 and 2015 are as follows:

 

     2016 (%)    2015 (%)

Discount rate for defined benefit obligations1

   3.09 ~ 4.10    2.89 ~ 4.10

Expected rate of salary increase

   2.20 ~ 5.48    2.20 ~ 5.52

 

 

1 

As of December 31, 2016, discount rate of 3.09% was applied for SK hystec Inc., which comprises 0.7% of total defined benefit obligations, and 3.40% to 4.10% was applied for the others in defined benefit obligations. As of December 31, 2015, discount rate of 2.89% was applied for SK hystec Inc., which comprises 0.7% of total defined benefit obligations, and 3.30% to 4.10% was applied for the others in defined benefit obligations.

(3) Weighted average durations of defined benefit obligations as of December 31, 2016 and 2015 are 12.10 and 12.39 years, respectively.

(4) Changes in defined benefit obligations for the years ended December 31, 2016 and 2015 are as follows:

 

     2016     2015  
     (In millions of won)  

Beginning balance

   1,055,340       887,277  

Current service cost

     159,190       139,486  

Past service cost

     33,198        

Interest cost

     41,148       39,243  

Business combinations and disposal of a subsidiary

     (2,440     576  

Remeasurements:

    

Demographic assumption

           (1,860

Financial assumption

     5,792       33,632  

Adjustment based on experience

     (53,609     (18,561

Benefits paid

     (43,602     (24,459

Effect of movements in exchange rates

     30       6  
  

 

 

   

 

 

 

Ending balance

   1,195,047       1,055,340  
  

 

 

   

 

 

 

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

20.    Defined Benefit Liabilities,  continued

 

(5) Changes in plan assets for the years ended December 31, 2016 and 2015 are as follows:

 

     2016     2015  
     (In millions of won)  

Beginning balance

   570,363       421,927  

Contributions

     327,640       153,566  

Interest income

     20,204       18,545  

Benefits paid

     (19,151     (15,137

Remeasurements

     (9,166     (8,661

Transfer from associates

     (1,331     123  
  

 

 

   

 

 

 

Ending balance

   888,559       570,363  
  

 

 

   

 

 

 

(6) The amounts recognized in profit or loss for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

     2016      2015      2014  
     (In millions of won)  

Current service cost

   159,190        139,486        109,403  

Past service cost

     33,198                

Net interest expense

     20,944        20,698        34,029  
  

 

 

    

 

 

    

 

 

 
   213,332        160,184        143,432  
  

 

 

    

 

 

    

 

 

 

(7) The amounts in which defined benefit plan related expenses are included for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

     2016      2015      2014  
     (In millions of won)  

Cost of sales (manufacturing costs)

   136,744        88,415        82,922  

Selling and administrative expenses

     76,588        71,769        60,510  
  

 

 

    

 

 

    

 

 

 
   213,332        160,184        143,432  
  

 

 

    

 

 

    

 

 

 

(8) Details of plan assets as of December 31, 2016 and 2015 are as follows:

 

     2016      2015  
     (In millions of won)  

Deposits

   887,074        568,790  

Other

     1,485        1,573  
  

 

 

    

 

 

 
   888,559        570,363  
  

 

 

    

 

 

 

Actual return on plan assets for the year ended December 31, 2016 amounted to ₩11,038 million (2015: ₩9,884 million and 2014: ₩1,014 million).

(9) As of December 31, 2016, the Group funded defined benefit obligations through insurance plans with Mirae Asset Life Insurance Co., Ltd. and other insurance companies. The Group’s reasonable estimation of contribution to the plan assets for the year ending December 31, 2017 is ₩306,722 million under the assumption that the Group maintains the defined benefit plan.

 

G-56


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

20.    Defined Benefit Liabilities,  continued

 

(10) The sensitivity analysis of the defined benefit obligations as of December 31, 2016 to changes in the principal assumptions is as follows:

 

     Effects on defined benefit obligation  
     Increase of rate     Decrease of rate  
     (In millions of won)  

Discount rate (if changed by 1%)

   (127,551     149,704  

Expected rate of salary increase (if changed by 1%)

     149,789       (129,905

The sensitivity analysis does not consider dispersion of all cash flows that are expected from the plan and provides approximate values of sensitivity for the assumptions used.

(11) Information about the maturity profile of the defined benefit obligation as of December 31, 2016 is as follows:

 

     2016  
     Less than
1 year
     1 - 5
years
     5 - 10
years
     10 - 20
years
     Total  
     (In millions of won)  

Benefits paid

   35,432        250,323        660,051        2,703,924        3,649,730  

Information about the maturity profile is based on undiscounted amount of defined benefit obligation and classified to employee’s expected years of remaining services.

(12) The Group adopted defined contribution retirement pension for the employees subject to peak wage system. Contributions to defined contribution plans amounting to ₩12 million was recognized as cost of sales for the year ended December 31, 2016.

 

G-57


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

 

21.    Deferred Tax Assets and Liabilities

(1) Changes in deferred income tax assets and liabilities for the years ended December 31, 2016 and 2015 without taking into consideration the offsetting of balances within the same tax jurisdiction, are as follows:

 

     2016  
     January 1,
2016
    Profit or
loss
    Equity      Currency
translation
differences
    Total  
     (In millions of won)  

Loss on valuation of inventories

   40,335       (23,388            23       16,970  

Valuation of equity-method investments

     237,609       (23,641                  213,968  

Accumulated depreciation

     78,899       5,557              (1,262     83,194  

Defined benefits liabilities

     92,709       (100,485     68,171              60,395  

Deemed investments and others

     161,995       (4,547                  157,448  

Available-for-sale financial assets

     42,247       14                    42,261  

Employee benefits

     24,660       3,138                    27,798  

Provisions

     21,702       14,607                    36,309  

Advanced depreciation provision

     (55,666                        (55,666

Others

     144,472       (95,648            (5,096     43,728  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Deferred tax assets for temporary differences, net

     788,962       (224,393     68,171        (6,335     626,405  

Deferred tax assets not recognized

     (597,648     218,508                    (379,140

Tax credit carryforwards recognized

     129,888       231,881              105       361,874  

Tax loss carryforwards recognized

     32,420       139,323              6,754       178,497  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Deferred tax assets recognized

   353,622       365,319       68,171        524       787,636  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

     2015  
     January 1,
2015
    Profit or
loss
    Equity      Currency
translation
differences
    Total  
     (In millions of won)  

Loss on valuation of inventories

   18,001       22,329              5       40,335  

Valuation of equity-method investments

     250,682       (17,550            4,477       237,609  

Accumulated depreciation

     79,819       (757            416       79,478  

Defined benefits liabilities

     89,725       2,968              16       92,709  

Deemed investments and others

     161,995                          161,995  

Available-for-sale financial assets

     42,985       (738                  42,247  

Employee benefits

     23,801       859                    24,660  

Provisions

     64,885       (43,183                  21,702  

Advanced depreciation provision

     (55,666                        (55,666

Others

     140,028       (5,953            9,818       143,893  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Deferred tax assets for temporary differences, net

     816,255       (42,025            14,732       788,962  

Deferred tax assets not recognized

     (750,313     165,453              (12,788     (597,648

Tax credit carryforwards recognized

     179,116       (49,440            212       129,888  

Tax loss carryforwards recognized

     23,581       7,277              1,562       32,420  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Deferred tax assets recognized

   268,639       81,265              3,718       353,622  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

(2) Deferred tax assets are recognized for deductible temporary differences, tax loss carryforwards and tax credit carryforwards to the extent that the realization of the related tax benefit through future taxable profits is

 

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SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

21.    Deferred Tax Assets and Liabilities,  continued

 

probable. As of December 31, 2016 the Group did not recognize deferred tax assets associated with deductible temporary differences amounting to ₩1,567,088 million (2015: ₩2,469,626 million). As of December 31, 2016, there were no unused tax credits carry- forwarded that were not recognized as deferred tax assets. (₩234,632 million in 2015).

22.    Derivative Financial Instruments

(1) Details of derivative financial liabilities as of December 31, 2016 and 2015 are as follows:

 

     2016      2015  
     (In millions of won)  

Current

     

Interest rates swap

   288         

Non-current

     

Interest rates swap

            683  
  

 

 

    

 

 

 
   288        683  
  

 

 

    

 

 

 

(2) Details of gains and losses from derivative instruments for the years ended December 31, 2016, 2015 and 2014 are follows:

 

     2016  
     Gain on
valuation
     Loss on
valuation
     Gain on
transaction
     Loss on
transaction
 
     (In millions of won)  

Interest rates swap

   395               1,077        1,525  

 

     2015  
     Gain on
valuation
     Loss on
valuation
     Gain on
transaction
     Loss on
transaction
 
     (In millions of won)  

Interest rates swap

   25               1,672        2,058  

 

     2014  
     Gain on
valuation
     Loss on
valuation
     Gain on
transaction
     Loss on
transaction
 
     (In millions of won)  

Interest rates swap

   215        980        2,955        237  

Embedded derivative instruments1

            171,016               2,691  
  

 

 

    

 

 

    

 

 

    

 

 

 
   215        171,996        2,955        2,928  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

1 

The Group bifurcated convertible options and separately accounted for them as derivative instruments which were embedded in the foreign-currency convertible bond. These convertible options were measured at fair value and changes in therein were recognized in profit or loss.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

 

23.    Capital Stock, Capital Surplus and Other Equity

(1) Details of capital stock, capital surplus and other equity as of December 31, 2016 and 2015 are as follows:

 

     2016     2015  
    

(In millions of won,

thousands of shares)

 

Authorized shares

     9,000,000       9,000,000  

Issued shares1

     731,530       731,530  

Capital stock:

    

Common stock

   3,657,652       3,657,652  

Capital surplus:

    

Additional paid in capital

     3,625,797       3,625,797  

Consideration for conversion rights

     42,928       42,928  

Others

     475,011       475,011  
  

 

 

   

 

 

 
     4,143,736       4,143,736  

Other equity

    

Acquisition cost of treasury shares

   (771,913     (771,913

Number of treasury shares

     22,001       22,001  

 

1 

As of December 31, 2016, the number of outstanding shares is 728,002 thousand shares, which differs from total issued shares due to the result of stock retirement.

(2) Changes in number of outstanding shares as of December 31, 2016 and December 31, 2015 are as follows:

 

     2016      2015  
     (In thousands of shares)  

Beginning

     706,002        728,002  

Acquisition of treasury shares

            (22,000
  

 

 

    

 

 

 

Ending

     706,002        706,002  
  

 

 

    

 

 

 

24.    Accumulated Other Comprehensive Loss

(1) Details of accumulated other comprehensive loss as of December 31, 2016 and 2015 are as follows:

 

     2016     2015  
     (In millions of won)  

Equity-accounted investees — share of other comprehensive income

   5,944       1,856  

Foreign operations — foreign currency translation differences

     (85,047     (3,456
  

 

 

   

 

 

 
   (79,103     (1,600
  

 

 

   

 

 

 

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

24.    Accumulated Other Comprehensive Loss,  continued

 

(2) Changes in accumulated other comprehensive income (loss) for the years ended December 31, 2016 and 2015 are as follows:

 

      2016  
     Beginning     Change     Ending  
     (In millions of won)  

Equity-accounted investees — share of other comprehensive income

   1,856       4,088       5,944  

Foreign operations — foreign currency translation differences

     (3,456     (81,591     (85,047
  

 

 

   

 

 

   

 

 

 
   (1,600     (77,503     (79,103
  

 

 

   

 

 

   

 

 

 
      2015  
     Beginning     Change     Ending  
     (In millions of won)  

Equity-accounted investees — share of other comprehensive income (loss)

   (4,631     6,487       1,856  

Foreign operations — foreign currency translation differences

     (37,184     33,728       (3,456
  

 

 

   

 

 

   

 

 

 
   (41,815     40,215       (1,600
  

 

 

   

 

 

   

 

 

 

25.    Retained Earnings and Dividends

(1) Details of retained earnings as of December 31, 2016 and 2015 are as follows:

 

      2016      2015  
     (In millions of won)  

Legal reserve1

   65,994        30,694  

Discretionary reserve2

     235,506        235,506  

Unappropriated retained earnings

     16,765,083        14,092,788  
  

 

 

    

 

 

 
   17,066,583        14,358,988  
  

 

 

    

 

 

 

 

1 

The Commercial Code of the Republic of Korea requires the Company to appropriate for each financial year, as a legal reserve, an amount equal to a minimum of 10% of cash dividends paid until such reserve equals 50% of its issued capital stock. The reserve is not available for cash dividends payment, but may be transferred to capital stock or used to reduce accumulated deficit.

 

2 

Discretionary reserve is a reserve for technology development.

(2) Dividends of the Parent Company

(a) Details of dividends for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

     2016      2015      2014  
     (In millions of won and In thousands of shares)  

Type of dividends

     Cash Dividends        Cash Dividends        Cash Dividends  

Outstanding ordinary shares

     706,002        706,002        728,002  

Par value (in won)

   5,000        5,000        5,000  

Dividend rate

     12%        10%        6%  

Total dividends

   423,601        353,001        218,401  

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

25.    Retained Earnings and Dividends,  continued

 

(b) Dividend payout ratio for the years ended December 31, 2016, 2015 and 2014 is as follows:

 

      2016      2015      2014  
     (In millions of won)  

Dividends

   423,601        353,001        218,401  

Profit attributable to owners of the Parent Company

     2,953,774        4,322,356        4,195,456  

Dividend payout ratio

     14.34%        8.17%        5.21%  

(c) Dividend yield ratio for the years ended December 31, 2016, 2015 and 2014 is as follows:

 

     2016      2015      2014  
     (In won)  

Dividends per share

   600        500        300  

Closing stock price

     44,700        30,750        47,750  

Dividend yield ratio

     1.34%        1.63%        0.63%  

26.    Selling and Administrative Expenses

Selling and administrative expenses for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

     2016     2015     2014  
     (In millions of won)  

Selling and administrative expenses:

      

Salaries

   348,571       385,281       351,318  

Defined benefit plan related

     30,135       25,499       22,801  

Employee benefits

     86,721       81,606       60,277  

Commission

     230,903       212,129       211,111  

Depreciation

     82,461       89,879       58,608  

Amortization

     282,392       239,227       169,844  

Freight and custody charge

     31,821       41,999       37,453  

Legal cost

     9,286       7,722       7,210  

Rental

     14,571       18,698       11,521  

Taxes and dues

     18,160       18,436       15,145  

Training

     19,503       20,314       17,810  

Advertising

     47,055       43,411       26,393  

Utility

     14,204       13,595       5,673  

Supplies

     56,067       51,630       42,737  

Repair

     6,185       9,629       9,994  

Travel and transportation

     10,459       12,854       13,102  

Sales promotion cost

     42,170       46,169       31,018  

Product warranties

     38,584       396       10,861  

Other

     20,131       7,747       41,969  
  

 

 

   

 

 

   

 

 

 
     1,389,379       1,326,221       1,144,845  
  

 

 

   

 

 

   

 

 

 

Research and development:

      

Expenditure on research and development

     2,096,733       1,969,588       1,590,817  

Development cost capitalized

     (352,022     (349,264     (181,287
  

 

 

   

 

 

   

 

 

 
     1,744,711       1,620,324       1,409,530  
  

 

 

   

 

 

   

 

 

 
   3,134,090       2,946,545       2,554,375  
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

 

27.    Expenses by Nature

Nature of expenses for the years ended December 31, 2016, 2015 and 2014 is as follows:

 

     2016     20152     20142  
     (In millions of won)  

Changes in finished goods and work-in-process

   (60,415     (290,904     (216,403

Raw materials and consumables

     3,386,007       3,503,378       2,733,745  

Employee benefit

     2,333,622       2,562,340       2,413,097  

Depreciation and amortization

     4,396,478       3,887,900       3,413,384  

Royalty

     229,422       210,902       167,167  

Commission

     985,869       895,991       705,661  

Utility

     840,129       742,000       699,103  

Repair

     605,682       614,342       748,658  

Outsourcing

     785,755       982,457       1,018,057  

Other

     418,680       353,492       333,631  
  

 

 

   

 

 

   

 

 

 

Total1

   13,921,229       13,461,898       12,016,100  
  

 

 

   

 

 

   

 

 

 

 

1 

Total expenses consist of cost of sales and selling and administrative expenses.

 

2 

Expenses for the years ended December 31, 2015 and 2014 were reclassified to conform with the classification for the year ended December 31, 2016.

28.    Finance Income and Expenses

Finance income and expenses for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

     2016     2015      2014  
     (In millions of won)  

Finance income:

       

Interest income

   34,174       40,715        52,122  

Dividend income

     18       1,265        1,233  

Gain on disposal of available-for-sale financial assets

                  10,054  

Gain on disposal of financial assets at fair value through profit or loss

     15,348       33,814        28,493  

Foreign exchange differences

     762,747       766,981        576,577  

Gain from derivative instruments

     1,472       1,697        3,170  

Gain on valuation of financial assets at fair value through profit or loss

     1,133       2,280        6,921  
  

 

 

   

 

 

    

 

 

 
     814,892       846,752        678,570  
  

 

 

   

 

 

    

 

 

 

Finance expenses:

       

Interest expenses

     120,122       118,505        170,363  

Loss on disposal of available-for-sale financial assets

                  3,500  

Foreign exchange differences

     724,681       709,350        448,060  

Loss on redemption of debentures

                  2,924  

Loss from derivative instruments

     1,525       2,058        174,924  
  

 

 

   

 

 

    

 

 

 
     846,328       829,913        799,771  
  

 

 

   

 

 

    

 

 

 

Net finance income (expense)

   (31,436     16,839        (121,201
  

 

 

   

 

 

    

 

 

 

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

 

29.    Other Income and Expenses

Other income for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

     2016      2015      2014  
     (In millions of won)  

Gain on disposal of property, plant and equipment

   13,167        16,554        5,611  

Insurance compensation1

                   587,429  

Other

     39,204        23,925        25,644  
  

 

 

    

 

 

    

 

 

 
   52,371        40,479        618,684  
  

 

 

    

 

 

    

 

 

 

Other expenses for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

     2016      2015      2014  
     (In millions of won)  

Loss on disposal of property, plant and equipment

   6,566        19,540        11,522  

Loss on disposal of intangible assets

     5,218        5,493        9,522  

Donation

     51,629        55,131        16,111  

Loss on disposal of trade receivables

     3,137        1,413        3,756  

Loss on impairment of property, plant and equipment

     3,746        22,055        25,397  

Loss on impairment of intangible assets

     98        1,771        529  

Casualty losses1

                   123,957  

Other2

     33,585        43,536        391,630  
  

 

 

    

 

 

    

 

 

 
   103,979        148,939        582,424  
  

 

 

    

 

 

    

 

 

 

 

1 

For the year ended December 31, 2014, the Group recognized casualty losses of ₩123,957 million caused by a fire in the manufacturing facilities located in Wuxi, China, which includes impairment losses on property, plant and equipment, impairment losses on inventories, depreciation of temporarily idle property, plant and equipment and others. In 2014, the Group and insurance companies reached an agreement about the insurance compensation amounting to USD 560 million (₩587,429 million equivalent), which was recognized as other income.

 

2

For the year ended December 31, 2014, expenses related to settlement of trade secret lawsuit alleged by Toshiba Corporation amounting to USD 278 million (₩306,161 million equivalent) are included.

30.    Income Tax Expense

(1) Income tax expense for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

      2016     2015     2014  
     (In millions of won)  

Current tax:

      

Current tax on profits for the year

   543,594       1,026,791       922,228  

Adjustments in respect of prior years

     77,696             (551
  

 

 

   

 

 

   

 

 

 
     621,290       1,026,791       921,677  
  

 

 

   

 

 

   

 

 

 

Deferred tax:

      

Origination and reversal of temporary differences

     (365,319     (81,265     (69,176
  

 

 

   

 

 

   

 

 

 

Income tax expense

   255,971       945,526       852,501  
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

30.    Income Tax Expense,  continued

 

(2) The relationship between income tax expense and accounting profit for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

      2016     2015     2014  
     (In millions of won)  

Profit before tax

   3,216,454       5,269,121       5,047,670  

Tax calculated at domestic tax rates applicable to profits in the respective countries

     777,920       1,266,293       1,181,621  

Tax effects of:

      

Tax-exempt income

     (2,669     (24     (13

Non-deductible expenses

     3,981       6,614       71,531  

Tax credit

     (101,843     (104,425     (148,052

Changes in unrecognized deferred tax assets

     (453,140     (252,088     (260,437

Adjustments for prior years’ tax liabilities due to changes in estimates

     77,696              

Others

     (45,974     29,156       7,851  
  

 

 

   

 

 

   

 

 

 

Income tax expense

   255,971       945,526       852,501  
  

 

 

   

 

 

   

 

 

 

(3) The income taxes recorded directly in equity for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

      2016      2015      2014  
     (In millions of won)  

Recognized in other comprehensive income: Gains on valuation of available-for-sale financial assets

   68,171                

31.    Earnings Per Share

(1) Basic earnings per share for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

     2016      2015      2014  
     (In millions of won, except for
shares and per share amounts)
 

Profit attributable to ordinary shareholders

   2,953,774        4,322,356        4,195,456  

Weighted average number of outstanding ordinary shares1

     706,001,795        720,143,294        718,197,377  

Basic earnings per share (in Won)

     4,184        6,002        5,842  

 

1 

Weighted average number of outstanding ordinary shares is calculated as follows:

 

     2016     2015     2014  
     (In shares)  

Outstanding ordinary shares

     728,002,365       728,002,365       710,200,891  

Exercise of conversion rights

                 7,051,443  

Issue of ordinary shares related to the acquisition of a subsidiary

                 945,393  

Acquisition of treasury shares

     (22,000,570     (7,859,071     (350
  

 

 

   

 

 

   

 

 

 

Weighted average number of outstanding ordinary shares

     706,001,795       720,143,294       718,197,377  
  

 

 

   

 

 

   

 

 

 

(2) There is no potential ordinary shares with dilutive effect during the years ended December 31, 2016, 2015 and 2014. Accordingly, diluted earnings per share for the years ended December 31, 2016, 2015 and 2014 are the same as basic earnings per share.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

 

32.    Transactions with Related Parties

(1) Details of joint venture and other related parties as of December 31, 2016 are as follows:

 

Type

  

Name of related parties

Associates

   Stratio, Inc., Gemini Partners Pte. Ltd. TCL Fund

Joint venture

   HITECH Semiconductor (Wuxi) Co., Ltd.

Other related parties

   SK Telecom Co., Ltd., which has significant influence over the Group, SK Holdings Co., Ltd., which has control over SK Telecom Co., Ltd., and their subsidiaries

(2) Significant transactions for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

    

2016

 
    

Company

   Operating
revenue and
others
     Operating
expense
and others
     Asset
acquisition
     Dividend
income
 
          (In millions of won)  

Joint venture

   HITECH Semiconductor (Wuxi) Co., Ltd.    1,171        568,526        17,678        20,726  

Other related parties

   SK Telecom Co., Ltd.1      375        81,125        12,181         
   SK Holdings Co., Ltd.2      907        133,441        146,823         
   ESSENCORE Limited      571,639                       
   SK Engineering & Construction Co., Ltd.      2,512        21,838        659,312         
   SK Energy Co., Ltd.      4,683        47,768                
   SK Networks Co., Ltd.             4,747                
   SK Materials Co., Ltd.             43,213                
   SKC Solmics Co., Ltd.             34,433        432         
   Chungcheong energy service Co., Ltd.      10        16,460                
   HAPPYNARAE Co., Ltd.      30        173,948        13,595         
   Others      432        125,662        17,528         
     

 

 

    

 

 

    

 

 

    

 

 

 
      581,759        1,251,161        867,549        20,726  
     

 

 

    

 

 

    

 

 

    

 

 

 

 

1 

Operating expense and others include dividend payments of ₩73,050 million.

 

2 

The Group entered into a contract with SK Holdings Co., Ltd. under which the Group pays royalty for the use of SK brand in proportion to sales amount. For the year ended December 31, 2016, royalty paid for the use of the SK brand amounted to ₩37,887 million.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

32.    Transactions with Related Parties,  continued

 

    

2015

 
    

Company

   Operating
revenue and
others
     Operating
expense
and others
     Asset
acquisition
     Dividend
income
 
          (In millions of won)  

Joint venture

   HITECH Semiconductor
(Wuxi) Co., Ltd.
   1,364        675,112               15,780  

Other related parties

   SK Telecom Co., Ltd.1      2,384        52,944        3,984         
   SK Holdings Co., Ltd.2,3      199        81,997        76,398         
   ESSENCORE Limited      147,992                       
   SK Engineering & Construction Co., Ltd.      1,923        1,378        1,084,554         
   SK Energy Co., Ltd.      5,245        44,893                
   SK Networks Co., Ltd.             3,627                
   Ko-one energy service Co., Ltd.             2,685        7         
   SKC Solmics Co., Ltd.             36,055        269         
   Chungcheong energy service Co., Ltd.             24,292                
   HAPPYNARAE Co., Ltd.      3,176        83,258        21,448         
   Others      493        63,845        14,516         
     

 

 

    

 

 

    

 

 

    

 

 

 
      162,776        1,070,086        1,201,176        15,780  
     

 

 

    

 

 

    

 

 

    

 

 

 

 

1 

Operating expense and others include dividend payments of ₩43,830 million.

 

2 

The Group entered into a contract with SK Holdings Co., Ltd. under which the Group pays royalty for the use of SK brand in proportion to sales amount. For the year ended December 31, 2015, royalty paid for the use of the SK brand amounted to ₩34,597 million.

 

3 

Meanwhile, on August 1, 2015, SK C&C Co., Ltd. merged with SK Holdings Co., Ltd. and changed its name to SK Holdings Co., Ltd.

 

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SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

32.    Transactions with Related Parties,  continued

 

    

2014

 
    

Company

   Operating
revenue and
others
     Operating
expense
and others
     Dividend
Income
     Asset
acquisition
 
          (In millions of won)  

Associate

   Siliconfile Technologies Inc. 1    25,109        411        236         

Joint venture

   HITECH Semiconductor (Wuxi) Co., Ltd.      1,734        612,890        15,664         

Other related parties

   SK Telecom Co., Ltd.      3,391        7,493               2,685  
   SK Holdings Co., Ltd. 2             33,273                
   SK C&C Co., Ltd. 3      70        5,879               12,225  
   SK Engineering & Construction Co., Ltd.      481        44,928               959,985  
   SK Energy Co., Ltd.      5,121        44,664                
   SK Networks Co., Ltd.             2,777               2,772  
   Ko-one energy service Co., Ltd.             3,074                
   SKC Solmics Co., Ltd.             28,023               718  
   Chungcheong energy service Co., Ltd.             27,496                
   HAPPYNARAE Co., Ltd.      53        63,398               10,187  
   Others      427        19,837               1,548  
     

 

 

    

 

 

    

 

 

    

 

 

 
      36,386        894,143        15,900        990,120  
     

 

 

    

 

 

    

 

 

    

 

 

 

 

1

Siliconfile Technologies Inc. became a subsidiary through the Parent Company’s additional acquisition of the remaining interest on April 22, 2014.

 

2 

The Group entered into a contract with SK Holdings Co., Ltd. under which the Group pays royalty for the use of SK brand in proportion to sales amount. For the year ended December 31, 2014, royalty paid for the use of the SK brand amounted to ₩28,780 million.

 

3 

SK C&C Co., Ltd. was excluded from related party after April 2014 due to change in CEO.

 

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SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

32.    Transactions with Related Parties,  continued

 

(3) The balances of significant transactions as of December 31, 2016 and December 31,2015 are as follows:

 

    

2016

 
    

Company

   Trade
receivables
and others
     Other
payables and
others
 
          (In millions of won)  

Joint venture

   HITECH Semiconductor (Wuxi) Co., Ltd.           99,328  

Other related parties

   SK Telecom Co., Ltd.      92        4,281  
   SK Holdings Co., Ltd.      6,343        98,396  
   ESSENCORE Limited      72,507         
   SK Engineering & Construction Co., Ltd.      2,016        530,940  
   SK Energy Co., Ltd.      417        6,544  
   SK Materials Co., Ltd.             9,205  
   SK Networks Co., Ltd.             1,143  
   SKC Solmics Co., Ltd.             10,067  
   Chungcheong energy service Co., Ltd.             1,804  
   HAPPYNARAE Co., Ltd.      3        23,046  
   Others      5        45,656  
     

 

 

    

 

 

 
      81,383        830,410  
     

 

 

    

 

 

 

 

     

2015

 
    

Company

   Trade
receivables
and others
     Other
payables and
others
 
          (In millions of won)  

Joint venture

   HITECH Semiconductor (Wuxi) Co., Ltd.1    15,628        108,519  

Other related parties

   SK Telecom Co., Ltd.      155        2,797  
   SK Holdings Co., Ltd.      103        98,798  
   ESSENCORE Limited      142         
   SK Engineering & Construction Co., Ltd.      1,049        236,875  
   SK Energy Co., Ltd.      474        5,962  
   SK Networks Co., Ltd.             954  
   SKC Solmics Co., Ltd.             9,544  
   Chungcheong energy service Co., Ltd.             1,425  
   HAPPYNARAE Co., Ltd.      275        24,148  
   Others      102        29,339  
     

 

 

    

 

 

 
      17,928        518,361  
     

 

 

    

 

 

 

 

1 

The Parent Company repaid remaining balance of borrowings from HITECH Semiconductor (Wuxi) Co., Ltd. in the amount of ₩22,552 million for the year ended December 31, 2015.

 

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SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

32.    Transactions with Related Parties,  continued

 

(4) Key management compensation

Key management includes the Parent Company’s directors, members of the board of directors, chief financial officer, and internal auditors. The compensation paid to key management for employee services for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

Details

   2016      2015      2014  
     (In millions of won)  

Salaries

   68,504        60,024        65,057  

Defined benefit plan related expenses

     8,184        7,025        5,381  

Others

     21        15        18  
  

 

 

    

 

 

    

 

 

 
   76,709        67,064        70,456  
  

 

 

    

 

 

    

 

 

 

33.    Commitments and Contingencies

(1)    Significant pending litigations and claims of the Group as of December 31, 2016 are as follows:

(a)    Lawsuit from Netlist, Inc.

Netlist, Inc. filed a lawsuit alleging infringement of multiple patents to the US District Court for the Central District of California, USA, on August 31, 2016 and to the US lnternational Trade Commission on September 1, 2016 against SK hynix, the Parent Company, and SK hynix America Inc., SK hynix memory solutions Inc., which are subsidiaries of the Parent Company. No provisions have been made as the final outcome of this matter cannot be determined or predicted given that the lawsuit is in its early stage and the amount of lawsuit is not determined as of December 31, 2016.

(b)    Other patent infringement claims and litigations

In addition to the above litigations, the Group has responded to various disputes related to intellectual property rights and has recognized a liability when it is probable that an outflow of resources will arise and a loss can be reliably estimated.

(2)    Technology and patent license agreements

The Group has entered into a number of patent license agreements with several companies. The related royalties are paid on a lump-sum or running basis in accordance with the respective agreements. The lump-sum royalties are expensed over the contract period using the straight-line method.

(3)    Contract for supply of industrial water

The Group has entered into a contract with Veolia Water Industrial Development Co., Ltd. (“VWID”) under which the Group purchases industrial water from VWID through March 2018. According to the contract, the Group is obligated to pay base service charges which are predetermined and additional service charges which are variable according to the amount of water used.

(4)    Post-process service contract with HITECH

The Group has entered into an agreement with HITECH to be provided with post-process service by HITECH. The conditions of the service provided includes package, package test, modules and others. According to the agreement, the Group guarantees a certain level of margin to HITECH.

 

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SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

33.    Commitments and Contingencies,  continued

 

(5)    Assets provided as collateral

Details of assets provided as collateral as of December 31, 2016 are as follows:

 

     Book value      Pledged amount     

Remark

     (In millions of won)       

Land

   44,561        

Buildings

     103,977        1,609,053      Borrowings for equipment and others

Machinery

     1,232,762        
  

 

 

    

 

 

    
   1,381,300        1,609,053     
  

 

 

    

 

 

    

Other than the above assets provided as collateral, the finance lease assets of the Group are pledged as collateral for the finance lease liabilities in accordance with the finance lease contracts.

(6)    Financing agreements

Details of credit lines with financial institutions as of December 31, 2016 are as follows:

 

    Financial
Institution
  Commitment   Currency   Amount  
           

(In millions of won and

millions of foreign currencies)

 

The Parent Company

  KEB Hana   Import finance including usance   USD     275  
  Bank and others   Export finance including bills bought   USD     350  
    Comprehensive limit contract
for import and export
  USD     1,080  

SK hynix Semiconductor (China) Ltd. (SKHYCL)

  Agricultural
Bank of China
and others
  Import finance including usance   RMB     1,300  
      USD     267  

SK hynix America Inc. (SKHYA) and other sales entities

  Citibank and
others
  Accounts receivable factoring
contracts which have no right to
recourse
  USD     315  

Domestic subsidiaries

  KEB Hana Bank   Export finance including bills bought   KRW     2,000  
    Guarantee   KRW     1,000  
    Agent contract for procurement
payment
  KRW     11,000  

The Group has entered into trade receivables discounting agreements with several financial institutions. There were no outstanding discounted trade receivables as of December 31, 2016 (as of December 31, 2015: ₩3,076 million). The Group is obliged to redeem discounted receivables to financial institutions in case of the default of the counterparties and accordingly, accounted for the above transactions as collateralized borrowings.

(7)    Details of guarantees provided to others as of December 31, 2016 are as follows:

 

     Amount     

Remark

     (In millions of won)       

Employees

   8      Guarantees for employees’ borrowings relating to employee stock ownership

 

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SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2016, 2015 and 2014

33.    Commitments and Contingencies,  continued

 

(8)    Capital commitments

As of December 31, 2016, the Group has ₩293,730 million (as of December 31, 2015: ₩300,041 million) of commitments in relation to the capital expenditures on property, plant and equipment.

34.    Cash Generated from Operating Activities

(1) Reconciliations between profit for the year and net cash inflow from operating activities for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

      2016     2015     2014  
     (In millions of won)  

Profit for the year

     ₩2,960,483       4,323,595       4,195,169  

Adjustment

      

Income tax expense

     255,971       945,526       852,501  

Defined benefit plan related expenses

     213,332       160,184       143,432  

Depreciation of property, plant and equipment and investment property

     4,133,886       3,695,158       3,269,705  

Amortization

     322,569       258,078       174,275  

Loss on impairment of property, plant and equipment

     3,746       22,055        

Loss on foreign currency translation

     116,500       143,768       116,726  

Interest expense

     120,122       118,505       170,363  

Gain on foreign currency translation

     (106,840     (58,658     (79,678

Interest income

     (34,174     (40,715     (52,122

Loss on derivative instruments, net

     53       361       171,754  

Gain on equity method investments, net

     (22,752     (24,642     (12,506

Others, net

     (17,069     (18,231     13,072  

Changes in operating assets and liabilities

      

Decrease (increase) in trade receivables

     (470,792     1,260,172       (1,628,665

Decrease (increase) in loans and other receivables

     62,758       724,149       (753,278

Increase in inventories

     (110,769     (414,830     (314,547

Increase in other assets

     (55,760     (177,316     (10,210

Increase (decrease) in trade payables

     (208,439     (156,074     69,290  

Decrease in other payables

     (23,558     (60,252     (105,971

Increase (decrease) in other non-trade payables

     (328,871     (147,392     498,152  

Increase (decrease) in provisions

     17,521       (6,889     (26,793

Increase (decrease) in other liabilities

     5,018       (29,327     51,598  

Payment of defined benefit liabilities

     (18,514     (6,392     (34,144

Contribution to plan assets

     (327,640     (153,566     (402,894
  

 

 

   

 

 

   

 

 

 

Cash generated from operating activities

   6,486,781       10,357,267       6,305,229  
  

 

 

   

 

 

   

 

 

 

(2) Details of significant transactions without inflows and outflows of cash for the years ended December 31, 2016, 2015 and 2014 are as follows:

 

     2016      2015      2014  
     (In millions of won)  

Other payables related to acquisition of property, plant and equipment

   224,412               588,435  

Issue of ordinary shares related to the acquisition of a subsidiary

                   54,070  

Exercise of conversion rights

                   772,590  

 

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Table of Contents

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

SK TELECOM CO., LTD.

(Registrant)

/s/    Sung Hyung Lee
Name:   Sung Hyung Lee
Title:   Senior Vice President
  Financial Strategy & Management

Date: April 27, 2017