EX-99.1 2 d713206dex991.htm EX-99.1 EX-99.1

Exhibit 99.1

WOORI BANK AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2018 AND 2017

ATTACHMENT: INDEPENDENT AUDITORS’ REPORT

WOORI BANK


INDEPENDENT AUDITORS’ REPORT

English Translation of a Report Originally Issued in Korean on March 19, 2019

To the Shareholders and the Board of Directors of Woori Bank

Report on the Audited Consolidated Financial Statements

Our Opinion

We have audited the accompanying consolidated financial statements of Woori Bank and its subsidiaries (the “Group”), which comprise the consolidated statement of financial position as of December 31, 2018 and December 31, 2017, respectively, and the consolidated statement of comprehensive income, consolidated statement of changes in shareholders’ equity and consolidated statement of cash flows, for the years then ended, and a summary of significant accounting policies and other explanatory information.

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2018 and December 31, 2017, respectively, and its financial performance and its cash flows for the years then ended in accordance with Korean International Financial Reporting Standards (“K-IFRS”).

Basis for Audit Opinion

We conducted our audits in accordance with the Korean Standards on Auditing (“KSAs”). Our responsibilities under those standards are further described in the Auditors Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Group in accordance with the ethical requirements, including those related to independence, that are relevant to our audit of the consolidated financial statements in the Republic of Korea as required by prevailing audit regulations. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

The key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our audit opinion thereon, and we do not provide a separate opinion on these matters.


Allowance for credit loss in accordance with K-IFRS 1109 ‘Financial Instruments’

Key audit matter description

As a result of the adoption of K-IFRS 1109 in the current year, the Group estimates and records an allowance for loans based on expected credit losses, as opposed to the previous method based on incurred credit losses under K-IFRS 1039 as described in notes 2, 3, 4 and 10. In order to estimate expected credit losses, the Group segregated its portfolio in retail, corporate and credit card loans. With the exception of a portion of the corporate loan book comprised of individually significant loans (amortized cost of KRW 875,791 million), the Group measures all portfolios (amortized cost of KRW 261,722,202 million) based on a collective assessment methodology. Both the collective and individual impairment methodologies in the amounts of KRW 1,402,408 million and KRW 375,668 million, respectively, must consider historical losses adjusted for forward looking information and include multiple scenarios for macroeconomic factors. The allowance for certain loans is measured, at least in part, based on the valuation of collaterals which must take into account an expectation of when and for how much the collateral will be sold.

There was a significant amount of judgment required by management when determining the appropriateness of the forward looking and macroeconomic information used in the calculation of the expected losses in its loan portfolio.

Given the level of subjectivity and judgment, auditing the estimated allowance for loan losses involved especially complex and subjective judgment.

How the scope of our audit responded to the key audit matter

Our audit procedures related to the assumptions and unobservable inputs used by management for the estimate of impaired loans including the following:

 

   

We tested the design and effectiveness of controls over the appropriateness of the cash-flows estimated to be collected in individually significant loans, including the estimates of collateral values.

 

   

We tested the design and effectiveness of the controls over the appropriateness of the models used to determine the calculation of the allowance for loan losses for collectively assessed loans and most importantly the determination of the relevant model and assumptions to incorporate forward looking and macro-economic information

 

   

We used our credit specialists to assist us in challenging the reasonableness of the methodologies and inputs used in the calculation of the allowance for loan losses for collectively assessed loans, most importantly in determining the appropriateness of forward looking and macro-economic scenarios used by management

 

   

We reperformed the calculation of the collective allowance taking into account forward looking and macroeconomic information determined to be appropriate in consultation with our credit specialists.


   

We selected samples of loans subject to individual assessments and performed the following:

 

   

Independently estimated future operating cash flows from borrowers with significant loans outstanding to determine the available cash flows to repay the loans.

 

   

With assistance of our appraisal specialists, evaluated the reasonableness of cash flow estimates based on the future sale of collateral.

Responsibilities of Management and the Audit Committee for the Financial Statements

Management is responsible for the preparation of the accompanying consolidated financial statements in accordance with K-IFRS, and for such internal control as they determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management of the Group is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

The audit committee is responsible for overseeing the Group’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with KSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with KSAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

 

   

Identify and assess the risks of material misstatement of the consolidated financial statements, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

 

   

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.


   

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

 

   

Conclude on the appropriateness of the management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.

 

   

Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

 

   

Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We are solely responsible for our audit opinion.

We communicate with the audit committee of the Group regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the audit committee of the Group with a statement that we have complied with relevant ethical requirements, including those related to independence, and to communicate with them all matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the audit committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter.

March 19, 2019

Notice to Readers

This report is effective as of March 19, 2019 the auditors’ report date. Certain subsequent events or circumstances may have occurred between the auditors’ report date and the time the auditors’ report is read. Such events or circumstances could significantly affect the consolidated financial statements and may result in modifications to the auditors’ report.


WOORI BANK AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2018 AND 2017

The accompanying consolidated financial statements including all footnote disclosures were

prepared by, and are the responsibility of, the management of Woori Bank.

Tae Seung Sohn

President and Chief Executive Officer

 

Main Office Address: (Road Name Address) 51, Sogong-ro, Jung-gu, Seoul
(Phone Number)    02-2002-3000


WOORI BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AS OF DECEMBER 31, 2018 AND 2017

 

     December 31,
2018 (*)
     December 31,
2017 (*)
 
     (Korean Won in millions)  
ASSETS      

Cash and cash equivalents (Note 6)

     6,712,623        6,908,286  

Financial assets at fair value through profit or loss (“FVTPL”) (K-IFRS 1109) (Notes 4, 7, 11, 12
and 26)

     6,126,183        —    

Financial assets at FVTPL (K-IFRS 1039) (Notes 4, 7, 11, 12, 18 and 26)

     —          5,843,077  

Financial assets at financial assets at fair value through other comprehensive income(“FVTOCI”) (Notes 4, 8, 11, 12, and 18)

     18,063,423        —    

Available-for-sale (“AFS”) financial assets (Notes 4,8,11,12 and 18)

     —          15,352,950  

Securities at amortized cost (Notes 4, 9, 11, 12 and 18)

     22,932,559        —    

Held to maturity (“HTM”) financial assets (Notes 4, 9, 11, 12 and 18)

     —          16,749,296  

Loans and other financial assets at amortized cost (Notes 4, 10, 11, 12, 18 and 45)

     282,448,315        —    

Loans and receivables (Notes 4,10,11,12,18 and 45)

     —          267,106,204  

Investments in joint ventures and associates (Note 13)

     361,427        417,051  

Investment properties (Note 14)

     378,069        371,301  

Premises and equipment (Notes 15 and 18)

     2,441,141        2,477,545  

Intangible assets and goodwill (Note 16)

     587,255        518,599  

Assets held for distribution (sale) (Note 17)

     93,502        48,624  

Current tax assets (Note 42)

     20,488        4,722  

Deferred tax assets (Note 42)

     49,863        280,130  

Derivative assets (Designated for hedging) (Notes 4,11,12 and 26)

     35,503        59,272  

Other assets (Notes 19 and 45)

     196,832        158,404  
  

 

 

    

 

 

 

Total assets

     340,447,183        316,295,461  
  

 

 

    

 

 

 
LIABILITIES      

Financial liabilities at FVTPL (K-IFRS 1109) (Notes 4, 11, 12, 20 and 26)

     2,282,686        —    

Financial liabilities at FVTPL (K-IFRS 1039) (Notes 4, 11, 12, 20 and 26)

     —          3,427,909  

Deposits due to customers (Notes 4,11,21 and 45)

     248,690,939        234,695,084  

Borrowings (Notes 4, 11, 12 and 22)

     16,202,986        14,784,706  

Debentures (Notes 4, 11 and 22)

     28,725,862        27,869,651  

Provisions (Notes 23, 44 and 45)

     389,862        410,470  

Net defined benefit liability (Note 24)

     138,682        43,264  

Liabilities of a disposal group classified as held for distribution (Note 17)

     72,660        —    

Current tax liabilities (Note 42)

     156,559        232,600  

Deferred tax liabilities (Note 42)

     18,156        22,681  

Derivative liabilities (Designated for hedging) (Notes 4,11,12 and 26)

     51,408        67,754  

Other financial liabilities (Notes 4,11,12, 25 and 45)

     21,426,064        13,892,461  

Other liabilities (Notes 25 and 45)

     338,275        283,981  
  

 

 

    

 

 

 

Total liabilities

     318,494,139        295,730,561  
  

 

 

    

 

 

 

(Continued)


WOORI BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AS OF DECEMBER 31, 2018 AND 2017  (CONTINUED)

 

     December 31,
2018 (*)
    December 31,
2017 (*)
 
     (Korean Won in millions)  

EQUITY

    

Owners’ equity:

     21,739,931       20,365,892  

Capital stock (Note 28)

     3,381,392       3,381,392  

Hybrid securities (Note 29)

     3,161,963       3,017,888  

Capital surplus (Note 28)

     285,889       285,880  

Other equity (Note 30)

     (2,213,970     (1,939,274

Retained earnings and other reserves (Notes 31 and 32)

    

(Regulatory reserve for credit loss as of December 31, 2018 and 2017 is 2,578,457 million Won and 2,438,191 million Won, respectively

    

Regulatory reserve for credit loss to be reversed (reserved) as of December 31, 2018 and 2017 is 222,211 million Won and (-)140,266 million Won, respectively

    

Planned provision reversed (reserved) of regulatory reserve for credit loss as of December 31, 2018 and 2017 is 222,211 million Won and (-)140,266 million Won, respectively

     17,124,657       15,620,006  

Non-controlling interests

     213,113       199,008  
  

 

 

   

 

 

 

Total equity

     21,953,044       20,564,900  
  

 

 

   

 

 

 

Total liabilities and equity

     340,447,183       316,295,461  
  

 

 

   

 

 

 

 

(*)

The consolidated statements of financial position as of December 31, 2018 was prepared in accordance with K-IFRS 1109; however, the comparative consolidated statements of financial position as of December 31, 2017 was not retrospectively restated in accordance with K-IFRS 1109.

See accompanying notes


WOORI BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

     2018(*)     2017(*)  
     (Korean Won in millions,
except for per share data)
 

Interest income

     9,684,499       8,550,687  

Financial assets at FVTPL (K-IFRS 1109)

     54,243       —    

Financial assets at FVTOCI

     280,371       —    

Financial assets at amortized cost

     9,349,885       —    

Financial assets at FVTPL (K-IFRS 1039)

     —         53,348  

AFS financial assets

     —         239,030  

HTM financial assets

     —         307,965  

Loans and receivables

     —         7,950,344  

Interest expense

     (4,033,548     (3,330,037
  

 

 

   

 

 

 

Net interest income (Notes 11, 34 and 45)

     5,650,951       5,220,650  

Fees and commissions income

     1,680,764       2,069,198  

Fees and commissions expense

     (610,790     (998,732
  

 

 

   

 

 

 

Net fees and commissions income (Notes 11, 35 and 45)

     1,069,974       1,070,466  

Dividend income (Notes 36 and 45)

     90,552       124,992  

Net gain on financial instruments at FVTPL (K-IFRS 1109) (Notes 11, 37 and 45)

     214,443       —    

Net loss on financial instruments at FVTPL

(K-IFRS 1039) (Notes 11, 37 and 45)

     —         (104,827

Net gain on financial assets at FVTOCI (Notes 11 and 38)

     2,047       —    

Net gain on AFS financial assets (Notes 11 and 38)

     —         192,708  

Net gain on disposals of financial assets at amortized cost (Note 11)

     79,532       —    

Net gain on disposals of securities at amortized cost

     431       —    

Net gain on disposals of loans and other financial assets at amortized cost

     79,101       —    

Impairment losses due to credit loss

(Notes 11, 39 and 45)

     (329,574     (785,133
  

 

 

   

 

 

 

General and administrative expenses

(Notes 40 and 45)

     (3,624,033     (3,530,801

Other net operating expenses

(Notes 40 and 45)

     (394,591     (31,313

Operating income

     2,759,301       2,156,742  

Share of gain (loss) on subsidiaries and associates (Note 13)

     3,019       (101,514

Net other non-operating income(expense)

     42,552       (105,722
  

 

 

   

 

 

 

Non-operating income (expense) (Note 41)

     45,571       (207,236

Net income before income tax expense

     2,804,872       1,949,506  

Income tax expense (Note 42)

     (753,223     (419,418

(Continued)


WOORI BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017  (CONTINUED)

 

     2018(*)     2017(*)  
     (Korean Won in millions,
except for per share data)
 

Net income

    

(Net income after the provision for regulatory reserve for credit loss for the years ended December 31, 2018 and 2017, is 2,010,774 million won and 1,389,822 million won, respectively) (Note 32)

     2,051,649       1,530,088  
  

 

 

   

 

 

 

Net loss on valuation of equity securities at FVTOCI

     (30,855     —    

Net gain on valuation of financial liabilities designated as at FVTPL due to own credit risk

     100       —    

Items out of share of other comprehensive gain of joint ventures and associates that will not be reclassified to profit or loss

     —         (2,993

Remeasurement gain (loss) related to defined benefit plan

     (71,432     10,497  

Other comprehensive income related to assets held for distribution

     (13,197     —    
  

 

 

   

 

 

 

Items that will not be reclassified to profit or loss

     (115,384     7,504  

Net gain on valuation of debt securities at FVTOCI

     33,360       —    

Net loss on valuation of AFS financial assets

     —         (84,498

Share of other comprehensive gain of joint ventures and associates

     2,958       3,605  

Net loss on foreign currency translation of foreign operations

     (4,379     (208,329

Net gain (loss) on valuation of cash flow hedge

     (4,646     777  

Other comprehensive income related to assets held for sale

     (4,145     4,145  
  

 

 

   

 

 

 

Items that may be reclassified to profit or loss

     23,148       (284,300

Other comprehensive loss, net of tax

     (92,236     (276,796

Total comprehensive income

     1,959,413       1,253,292  
  

 

 

   

 

 

 

Net income attributable to:

    

Net income attributable to shareholders

     2,033,182       1,512,148  

Net income attributable to non-controlling interests

     18,467       17,940  

Total comprehensive income attributable to:

    

Comprehensive income attributable to shareholders

     1,943,885       1,249,057  

Comprehensive income attributable to non-controlling interests

     15,528       4,235  

Net income per share (Note 43)

    

Basic and diluted earnings per share (In Korean Won)

     2,796       1,999  

 

(*)

The consolidated statements of comprehensive income for the year ended December 31, 2018 was prepared in accordance with K-IFRS 1109; however, the comparative consolidated statements of comprehensive income for the year ended December 31, 2017 was not retrospectively restated in accordance with K-IFRS 1109.

See accompanying notes


WOORI BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR YEARS ENDED DECEMBER 31, 2018 AND 2017

 

     Capital
Stock
     Hybrid
securities
    Capital
surplus
    Other
equity
    Retained
earnings and
other reserves
    Owners’
equity
    Non-
controlling
interests
    Total
equity
 
     (Korean Won in millions)  

January 1, 2017

     3,381,392        3,574,896       286,331       (1,468,025     14,611,566       20,386,160       159,793       20,545,953  

Net income

     —          —         —         —         1,512,148       1,512,148       17,940       1,530,088  

Dividends to common stocks

     —          —         —         —         (336,636     (336,636     (1,554     (338,190

Capital increase of subsidiaries

     —          —         (451     —         —         (451     36,534       36,083  

Net gain (loss) on valuation of available-for-sale financial assets

     —          —         —         (85,051     —         (85,051     553       (84,498

Changes in equity of joint ventures and associates

     —          —         —         612       —         612       —         612  

Loss on foreign currency translation of foreign operations

     —          —         —         (194,347     —         (194,347     (13,982     (208,329

Gain on valuation of cash flow hedge

     —          —         —         777       —         777       —         777  

Remeasurement gain (loss) related to defined benefit plan

     —          —         —         10,773       —         10,773       (276     10,497  

Other comprehensive income related to assets held for sale

     —          —         —         4,145       —         4,145       —         4,145  

Dividends to hybrid securities

     —          —         —         —         (167,072     (167,072     —         (167,072

Issuance of hybrid securities

     —          559,565       —         —         —         559,565       —         559,565  

Redemption of hybrid securities

     —          (1,116,573     —         (208,158     —         (1,324,731     —         (1,324,731
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2017 (*)

     3,381,392        3,017,888       285,880       (1,939,274     15,620,006       20,365,892       199,008       20,564,900  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

January 1, 2018

     3,381,392        3,017,888       285,880       (1,939,274     15,620,006       20,365,892       199,008       20,564,900  

Cumulative effect of change in accounting policy (Note 2)

     —          —         —         (392,176     177,091       (215,085     723       (214,362

Adjusted balance, beginning of period

     3,381,392        3,017,888       285,880       (2,331,450     15,797,097       20,150,807       199,731       20,350,538  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     —          —         —         —         2,033,182       2,033,182       18,467       2,051,649  

Dividends to common stocks

     —          —         —         —         (336,636     (336,636     (2,128     (338,764

Capital decrease of subsidiaries

     —          —         9       —         —         9       (18     (9

Net gain on valuation of financial liabilities designated as at FVTPL due to own credit risk

     —          —         —         100       —         100       —         100  

Changes in other comprehensive income due to redemption of financial liabilities designated as at FVTPL

     —          —         —         (4     4       —         —         —    

Net gain (loss) on valuation of financial assets at FVTOCI

     —          —         —         2,733       —         2,733       (228     2,505  

Changes in other comprehensive income due to disposal of equity securities at FVTOCI

     —          —         —         (1,009     1,009       —         —         —    

Share of other comprehensive gain of joint ventures and associates

     —          —         —         2,958       (10,647     (7,689     —         (7,689

Loss on foreign currency translation of foreign operations

     —          —         —         (1,929     —         (1,929     (2,450     (4,379

Loss on valuation of cash flow hedge

     —          —         —         (4,646     —         (4,646     —         (4,646

Remeasurement loss related to defined benefit plan

     —          —         —         (71,171     —         (71,171     (261     (71,432

Other comprehensive income related to assets held for distribution (sale)

     —          —         —         (17,342     —         (17,342     —         (17,342

Dividends to hybrid securities

     —          —         —         —         (151,194     (151,194     —         (151,194

Issuance of hybrid securities

     —          398,707       —         —         —         398,707       —         398,707  

Redemption of hybrid securities

     —          (254,632     —         (368     —         (255,000     —         (255,000

Appropriation of retained earnings

     —          —         —         208,158       (208,158     —         —         —    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2018 (*)

     3,381,392        3,161,963       285,889       (2,213,970     17,124,657       21,739,931       213,113       21,953,044  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(*)

The consolidated statements of changes in equity for the year ended December 31, 2018 was prepared in accordance with K-IFRS 1109; however, the comparative consolidated statements of changes in equity for the year ended December 31, 2017 was not retrospectively restated in accordance with K-IFRS 1109.

See accompanying notes


WOORI BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

     2018 (*)     2017 (*)  
     (Korean Won in millions)  

Cash flows from operating activities:

    

Net income

     2,051,649       1,530,088  

Adjustments to net income:

    

Income tax expense

     753,223       419,418  

Interest income

     (9,684,499     (8,550,687

Interest expense

     4,033,548       3,330,037  

Dividend income

     (90,552     (124,992
  

 

 

   

 

 

 
     (4,988,280     (4,926,224
  

 

 

   

 

 

 

Additions of expenses not involving cash outflows:

    

Impairment losses due to credit loss

     329,574       785,133  

Loss on valuation of financial instruments at FVTPL

     —         15,267  

Loss on financial assets at FVTOCI

     1,053       —    

Share of losses of investments in joint ventures and associates

     22,772       185,020  

Loss on disposal of investments in joint ventures and associates

     2,931       38,713  

Loss on transaction and valuation of derivatives (Designated for hedging)

     36,483       109,569  

Loss on hedged items (fair value hedge)

     17,299       —    

Loss on provision

     28,350       107,028  

Retirement benefits

     142,712       142,902  

Depreciation and amortization

     272,550       235,795  

Loss on disposal of premises and equipment, intangible assets and other assets

     1,160       9,994  

Impairment loss on premises and equipment, intangible assets and other assets

     87       390  
  

 

 

   

 

 

 
     854,971       1,629,811  
  

 

 

   

 

 

 

Deductions of income not involving cash inflows:

    

Gain on valuation of financial assets at FVTPL (K-IFRS 1109)

     215,711       —    

Gain on redemption of debentures

     1,597       —    

Gain on financial assets at FVTOCI

     3,100       —    

Gain on AFS financial assets

     —         192,708  

Gain on disposal of securities at amortized cost

     431       —    

Share of gains of investments in joint ventures and associates

     25,791       83,506  

Gain on disposal of investments in joint ventures and associates

     50,511       39,932  

Gain on transaction and valuation of derivatives (Designated for hedging)

     35,810       122  

Gain on hedged items (fair value hedge)

     42,797       53,532  

Reversal on provisions

     2,014       2,567  

Gain on disposal of premises and equipment, intangible assets and other assets

     30,278       5,028  

Reversal of impairment loss on premises and equipment, intangible assets and other assets

     761       666  
  

 

 

   

 

 

 
     408,801       378,061  
  

 

 

   

 

 

 

Changes in operating assets and liabilities:

    

Financial assets at FVTPL (K-IFRS 1109)

     670,872       —    

Financial instruments at FVTPL (K-IFRS 1039)

     —         (583,068

Loans and other financial assets at amortized cost

     (15,754,102     —    

Loans and receivables

     —         (9,647,563

Other assets

     32,328       35,953  

Deposits due to customers

     13,995,747       13,634,873  

Provisions

     (11,920     (122,711

Net defined benefit liability

     (135,313     (46,789

Other financial liabilities

     7,411,753       (7,966,786

Other liabilities

     89,399       (27,550
  

 

 

   

 

 

 
     6,298,764       (4,723,641
  

 

 

   

 

 

 

Cash received from operating activities:

    

Interest income received

     9,617,307       8,570,715  

Interest expense paid

     (3,847,411     (3,404,608

Dividends received

     90,651       127,343  

Income tax paid

     (544,058     (404,428
  

 

 

   

 

 

 
     5,316,489       4,889,022  
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     9,124,792       (1,979,005
  

 

 

   

 

 

 

(Continued)


WOORI BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017  (CONTINUED)

 

     2018 (*)     2017 (*)  
     (Korean Won in millions)  

Cash flows from investing activities:

    

Cash in-flows from investing activities:

    

Disposal of financial assets at FVTPL (K-IFRS 1109)

     11,919,335       —    

Disposal of financial assets at FVTOCI

     9,146,307       —    

Disposal of AFS financial assets

     —         24,912,752  

Redemption of securities at amortized cost

     9,426,757       —    

Redemption of HTM financial assets

     —         8,587,092  

Disposal of investments in joint ventures and associates

     51,435       70,180  

Disposal of subsidiaries

     —         203  

Disposal of investment properties

     3,512       418  

Disposal of premises and equipment

     5,545       7,428  

Disposal of intangible assets

     9,199       1,188  

Disposal of assets held for distribution (sale)

     80,347       24,808  
  

 

 

   

 

 

 
     30,642,437       33,604,069  
  

 

 

   

 

 

 

Cash out-flows from investing activities:

    

Net cash in-flows of business combination

     134,967       —    

Acquisition of financial assets at FVTPL (K-IFRS 1109)

     12,322,160       —    

Acquisition of financial assets at FVTOCI

     13,275,429       —    

Acquisition of AFS financial assets

     —         19,674,346  

Acquisition of securities at amortized cost

     15,622,847       —    

Acquisition of HTM financial assets

     —         11,521,065  

Acquisition of investments in joint ventures and associates

     48,272       143,161  

Acquisition of investment properties

     15,195       9,872  

Acquisition of premises and equipment

     118,668       162,245  

Acquisition of intangible assets

     176,067       195,929  

Cash out-flow related to derivatives designated for hedging

     —         13,742  
  

 

 

   

 

 

 
     41,713,605       31,720,360  
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (11,071,168     1,883,709  
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Cash in-flows from financing activities:

    

Increase in borrowings

     9,606,126       9,057,999  

Issuance of debentures

     21,505,849       18,438,221  

Issuance of hybrid securities

     398,707       559,565  

Capital increase of subsidiaries

     —         35,841  
  

 

 

   

 

 

 
     31,510,682       28,091,626  
  

 

 

   

 

 

 

Cash out-flows from financing activities:

    

Repayment of borrowings

     8,349,005       12,692,883  

Repayment of debentures

     20,903,518       13,620,520  

Payment of dividends to common stocks

     336,636       336,636  

Dividends paid on hybrid securities

     147,625       177,730  

Redemption of hybrid securities

     255,000       1,323,400  

Dividends paid on non-controlling interests

     2,128       1,554  
  

 

 

   

 

 

 
     29,993,912       28,152,723  
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     1,516,770       (61,097
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (429,606     (156,393

Cash and cash equivalents, beginning of the period

     6,908,286       7,591,324  

Effects of exchange rate changes on cash and cash equivalents

     233,943       (526,645
  

 

 

   

 

 

 

Cash and cash equivalents, end of the period (Note 6)

     6,712,623       6,908,286  
  

 

 

   

 

 

 

 

(*)

The consolidated statements of cash flows for the year ended December 31, 2018 was prepared in accordance with K-IFRS 1109; however, the comparative consolidated statements of cash flows for the year ended December 31, 2017 was not retrospectively restated to apply K-IFRS 1109.

See accompanying notes


WOORI BANK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

1.

GENERAL

 

(1)

Summary of the parent company

Woori Bank (hereinafter referred to the “Bank”), which is a controlling entity in accordance with Korean International Financial Reporting standards (“K-IFRS”) 1110 – Consolidated Financial Statements, was established in 1899 and is engaged in the commercial banking business under the Banking Act, trust business and foreign exchange business under the Financial Investment Services and Capital Market Act (hereinafter referred to as the “Capital Market Act”)..

Previously, Woori Finance Holdings Co., Ltd. (established on March 27, 2001 in accordance with Financial Holding Companies Act), the former holding company of Woori Financial Group, held a 100% ownership of the Bank. Effective November 1, 2014, Woori Finance Holdings Co., Ltd. completed its merger (the “Merger”) with and into the Bank. Accordingly, the shares of the Bank, 597 million shares, prior to the merger, was reduced to nil in accordance with capital reduction procedure, and then, in accordance with the merger ratio, the Bank newly issued 676 million shares. As a result, the paid-in capital of the Bank as of December 31, 2018 is capital stock amounting to 3,381,392 million Korean Won. Meanwhile, during the year ended December 31, 2016, the Korea Deposit Insurance Corporation (“KDIC”), the majority shareholder of the Bank, sold its 187 million shares in the Bank in accordance with the contract of “Disposal of Woori Bank’s shares to Oligopolistic Shareholders”. In addition to the sale, during the year ended December 31, 2017, KDIC sold additional 33 million shares. As a result, KDIC holds 125 million shares (18.43% ownership interest) of the Bank as of December 31, 2018 and 2017, and is the majority shareholder of the Bank.

On June 24, 2002, Woori Finance Holdings Co., Ltd. listed its common stock on the Korea Exchange through public offering. In addition, on September 29, 2003, Woori Finance Holdings Co., Ltd. registered with the Securities and Exchange Commission in the United States of America and, on the same day, listed its American Depositary Shares on the New York Stock Exchange.

As Woori Finance Holdings Co., Ltd. was merged into the Bank, the Bank, which is the existing company, succeeded such rights and obligations as a listed company on the Korea Exchange and the New York Stock Exchange.

As a result of such merger, the Bank incorporated Woori Card Co., Ltd., Woori Investment Bank Co., Ltd., Woori FIS Co., Ltd., Woori Private Equity Asset Management Co., Ltd. and Woori Finance Research Institute Co., Ltd. as its subsidiaries.

The headquarters of the Bank is located at 51, Sogong-ro, Jung-gu, Seoul, Korea. The Bank has 877 branches and offices in Korea, and 23 branches and offices overseas as of December 31, 2018.


(2)

The consolidated financial statements for Woori Bank and its subsidiaries (the “Group”) include the following subsidiaries:

 

        Percentage of ownership
(%)
    Location   Financial
statements
as of
(2018)

Subsidiaries

 

Main business

  December 31,
2018
    December 31,
2017
 

Woori Bank:

         

Woori FIS Co., Ltd.

  System software development & maintenance     100.0       100.0     Korea   December 31

Woori Private Equity Asset Management Co., Ltd.

  Finance     100.0       100.0     Korea   December 31

Woori Finance Research Institute Co., Ltd.

  Other service business     100.0       100.0     Korea   December 31

Woori Card Co., Ltd.

  Finance     100.0       100.0     Korea   December 31

Woori Investment Bank Co., Ltd.

  Other credit finance business     59.8       59.8     Korea   December 31

Woori Credit Information Co., Ltd.

  Credit information     100.0       100.0     Korea   December 31

Woori America Bank

  Finance     100.0       100.0     U.S.A.   December 31

Woori Global Markets Asia Limited

      100.0       100.0     Hong Kong   December 31

Woori Bank China Limited

      100.0       100.0     China   December 31

AO Woori Bank

      100.0       100.0     Russia   December 31

PT Bank Woori Saudara Indonesia 1906 Tbk

      79.9       79.9     Indonesia   December 31

Banco Woori Bank do Brasil S.A.

      100.0       100.0     Brazil   December 31

Korea BTL Infrastructure Fund

      99.9       99.9     Korea   December 31

Woori Fund Service Co., Ltd.

      100.0       100.0     Korea   December 31

Woori Finance Cambodia PLC.

      100.0       100.0     Cambodia   December 31

Woori Finance Myanmar Co., Ltd.

      100.0       100.0     Myanmar   December 31

Wealth Development Bank

      51.0       51.0     Philippines   December 31

Woori Bank Vietnam Limited

      100.0       100.0     Vietnam   December 31

WB Finance Co., Ltd.(*5)

      100.0       —       Cambodia   December 31

Woori Bank Europe(*5)

      100.0       —       Germany   December 31

Kumho Trust First Co., Ltd. (*1)

  Asset securitization     0.0       0.0     Korea   December 31

Asiana Saigon Inc. (*1)

      0.0       0.0     Korea   December 31

Consus Eighth Co., LLC (*4)

      —         0.0     Korea   —  

KAMCO Value Recreation First Securitization Specialty Co., Ltd. (*1)

      15.0       15.0     Korea   December 31

Hermes STX Co., Ltd. (*1)

      0.0       0.0     Korea   December 31

BWL First Co., LLC (*1)

      0.0       0.0     Korea   December 31

Deogi Dream Fourth Co., Ltd. (*1)

      0.0       0.0     Korea   December 31

Jeonju Iwon Ltd. (*1)

      0.0       0.0     Korea   December 31

Wonju I one Inc. (*1)

      0.0       0.0     Korea   December 31

Heitz Third Co., Ltd. (*1)

      0.0       0.0     Korea   December 31

Woorihansoop 1st Co., Ltd. (*1)

      0.0       0.0     Korea   December 31

Electric Cable First Co., Ltd. (*1)

      0.0       0.0     Korea   December 31

Woori International First Co., Ltd. (*1)

      0.0       0.0     Korea   December 31

Woori HJ First Co., Ltd. (*4)

      —         0.0     Korea   —  

Woori WEBST 1st Co., Ltd. (*1)

      0.0       0.0     Korea   December 31

Wibihansoop 1st Co., Ltd. (*1)

      0.0       0.0     Korea   December 31

HNLD 1st Inc. (*4)

      —         0.0     Korea   —  

Uri QS 1st Co., Ltd. (*1)

      0.0       0.0     Korea   December 31

Uri Display 1st Co., Ltd.(*1)

      0.0       0.0     Korea   December 31

Tiger Eyes 2nd Co., Ltd.(*1)

      0.0       0.0     Korea   December 31

Woori Serveone 1st Co., Ltd. (*1)

      0.0       0.0     Korea   December 31

Uri Display 2nd Co.,Ltd. (*1)

      0.0       —       Korea   December 31

Woori the Colony Unjung Securitization Specialty Co., Ltd. (*1)

      0.0       —       Korea   December 31

Woori Dream 1st Co., Ltd. (*1)

      0.0       —       Korea   December 31

Woori Dream 2nd Co., Ltd. (*1)

      0.0       —       Korea   December 31

Woori H 1st Co., Ltd.(*1)

      0.0       —       Korea   December 31

Woori HS 1st Co., Ltd. (*1)

      0.0       —       Korea   December 31

Woori HS 2nd Co., Ltd.(*1)

      0.0       —       Korea   December 31

Woori Sinnonhyeon 1st Inc. (*1)

      0.0       —       Korea   December 31

Woori K 1st Co.,Ltd. (*1)

      0.0       —       Korea   December 31

Uri S 1st Co.,Ltd. (*1)

      0.0       —       Korea   December 31

Smart Casting Inc. (*1)

      0.0       —       Korea   December 31

 

- 2 -


        Percentage of ownership
(%)
    Location   Financial
statements
as of
(2018)

Subsidiaries

 

Main business

  December 31,
2018
    December 31,
2017
 

G5 Pro Short-term Bond Investment Fund 13 (*2)

  Securities investment and others     100.0       100.0     Korea   December 31

Heungkuk Global Private Placement Investment Trust No. 1 (*2)

      98.5       —       Korea   December 31

HeungkukWoori Tech Company Private Placement Investment Trust No. 1 (*2)

      98.0       98.0     Korea   December 31

AI Partners Water Supply Private Placement Investment Trust No.2 (*2)

      97.3       —       England   December 31

Consus Sakhalin Real Estate Investment Trust 1st(*2)

      75.0       75.0     Korea   December 31

Principle Guaranteed Trust (*3)

  Trust     0.0       0.0     Korea   December 31

Principle and Interest Guaranteed Trust (*3)

      0.0       0.0     Korea   December 31

Woori Investment Bank:

         

Dongwoo First Securitization Specialty Co., Ltd. (*1)

  Asset securitization     5.0       5.0     Korea   December 31

Seari First Securitization Specialty Co., Ltd. (*1)

      5.0       5.0     Korea   December 31

Seari Second Securitization Specialty Co., Ltd. (*1)

      5.0       —       Korea   December 31

Namjong 1st Securitization Specialty Co., Ltd. (*1)

      5.0       5.0     Korea   December 31

Bukgeum First Securitization Specialty Co., Ltd. (*1)

      5.0       5.0     Korea   December 31

Bukgeum Second Securitization Specialty Co., Ltd. (*1)

      5.0       —       Korea   December 31

Woori Card Co., Ltd.:

         

TUTU Finance-WCI Myanmar Co., Ltd.

  Finance     100.0       100.0     Myanmar   December 31

Woori Card one of 2017-1 Securitization Specialty Co., Ltd. (*1)

  Asset securitization     0.5       0.5     Korea   December 31

Woori Card one of 2017-2 Securitization Specialty Co., Ltd. (*1)

      0.5       0.5     Korea   December 31

Woori Card one of 2018-1 Securitization Specialty Co., Ltd. (*1)

      0.5       —       Korea   December 31

 

(*1)

The entity is a structured entity for the purpose of asset securitization and is in scope for consolidation. Although the Group is not a majority shareholder, the Group 1) has the power over the investee, 2) is exposed to or has rights to variable returns from its involvement with the investee, and 3) has the ability to use its power to affect its returns.

(*2)

The entity is a structured entity for the purpose of investment in securities and is in scope for consolidation. Although the Group is not a majority shareholder, the Group 1) has the power over the investee, 2) is exposed to or has rights to variable returns from its involvement with the investee, and 3) has the ability to use its power to affect its returns.

(*3)

The entity is a ‘money trust’ under the Financial Investment Services and Capital Markets Act and is in scope for consolidation. Although the Group is not a majority shareholder, the Group 1) has the power over the investee, 2) is exposed to or has rights to variable returns from its involvement with the investee, and 3) has the ability to use its power to affect its returns.

(*4)

The entity was removed from the list of subsidiaries as the control over the entity was lost during the current period.

(*5)

The entity was included in the list of subsidiaries as the Bank acquired more than 50% of the ownership interest.

 

- 3 -


(3)

The Group has not consolidated the following entities as of December 31, 2018 and 2017 despite having more than 50% ownership interest:

 

     As of December 31, 2018  

Subsidiaries

   Location      Main
Business
     Percentage of
ownership (%)
 

Golden Bridge NHN Online Private Equity Investment (*)

     Korea        Securities Investment        60.0  

Mirae Asset Seobu Underground Expressway Professional Investment (*)

     Korea        Securities Investment        65.8  

Mirae Asset Maps Clean Water Private Equity Investment Trust 7th (*)

     Korea        Securities Investment        59.7  

Kiwoom Yonsei Private Equity Investment Trust(*)

     Korea        Securities Investment        88.9  

Hana Walmart Real Estate Investment Trust 41-1 (*)

     Korea        Securities Investment        89.6  

IGIS Europe Private Placement Real Estate Fund No. 163-2 (*)

     Korea        Securities Investment        97.9  

IGIS Global Private Placement Real Estate Fund No. 148-1 (*)

     Korea        Securities Investment        75.0  

IGIS Global Private Placement Real Estate Fund No. 148-2 (*)

     Korea        Securities Investment        75.0  

KB Nongso Sewage Treatment Equipment Private Special Asset (*)

     Korea        Securities Investment        50.0  

Mirae Asset Seoul Ring Expressway Private Special Asset Fund No. 1 (*)

     Korea        Securities Investment        66.2  

Hangkang Sewage Treatment Plant Fund (*)

     Korea        Securities Investment        55.6  

Consus KyungJu Green Private Placement Real Estate Fund No. 1 (*)

     Korea        Securities Investment        52.4  

 

     As of December 31, 2017  

Subsidiaries

   Location      Main
Business
     Percentage of
ownership (%)
 

Golden Bridge NHN Online Private Equity Investment (*)

     Korea        Securities Investment        60.0  

Mirae Asset Maps Clean Water Private Equity Investment Trust 7th (*)

     Korea        Securities Investment        59.7  

Kiwoom Yonsei Private Equity Investment Trust (*)

     Korea        Securities Investment        88.9  

Hana Walmart Real Estate Investment Trust 41-1 (*)

     Korea        Securities Investment        90.1  

IGIS Global Private Placement Real Estate Fund No. 148-1 (*)

     Korea        Securities Investment        75.0  

IGIS Global Private Placement Real Estate Fund No. 148-2 (*)

     Korea        Securities Investment        75.0  

 

(*)

Since the investee is a private equity investment fund, the Group does not have the power over the fund’s activities even though it holds more than 50% of ownership interest.

 

(4)

The summarized financial information of the major subsidiaries are as follows. The financial information of each subsidiary was prepared on the basis of consolidated financial statements. (Unit: Korean Won in millions):

 

     As of and for the year ended December 31, 2018  
     Assets      Liabilities      Operating
revenue
     Net income
(loss)
attributable
to owners
    Comprehensive
income (loss)
attributable to
owners
 

Woori FIS Co., Ltd.

     96,260        63,412        271,651        2,840       269  

Woori Private Equity Asset Management Co., Ltd.

     38,820        1,439        1,713        (2,794     (2,843

Woori Finance Research Institute Co., Ltd.

     3,891        560        4,708        7       (109

Woori Card Co., Ltd.

     9,987,057        8,305,093        1,371,301        114,767       106,517  

Woori Investment Bank Co., Ltd.

     2,682,660        2,367,418        205,446        25,552       25,533  

Woori Credit Information Co., Ltd.

     34,921        6,386        36,883        1,657       1,411  

Woori America Bank

     2,182,454        1,878,117        90,975        20,510       32,335  

Woori Global Markets Asia Limited

     517,627        396,216        18,748        5,144       9,647  

Woori Bank China Limited

     5,470,927        4,953,813        366,973        21,879       19,194  

AO Woori Bank

     305,521        256,260        19,433        5,163       (3,234

PT Bank Woori Saudara Indonesia 1906 Tbk

     2,355,975        1,853,768        192,719        40,385       27,109  

Banco Woori Bank do Brasil S.A.

     179,130        149,146        13,971        1,262       (2,326

Korea BTL Infrastructure Fund

     777,437        299        29,760        26,057       26,057  

Woori Fund Service Co., Ltd.

     14,448        1,440        10,052        1,597       1,597  

Woori Finance Cambodia PLC.

     93,239        71,133        11,038        2,826       3,676  

Woori Finance Myanmar Co., Ltd.

     19,340        6,886        4,496        640       (1,256

Wealth Development Bank

     218,134        184,344        13,668        80       (451

Woori Bank Vietnam Limited

     954,580        720,554        48,716        10,710       13,618  

WB Finance Co., Ltd.

     268,794        225,655        24,310        2,421       2,329  

 

- 4 -


     As of and for the year ended December 31, 2018  
     Assets      Liabilities      Operating
revenue
     Net income
(loss)
attributable to
owners
    Comprehensive
income (loss)
attributable to
owners
 

Woori Bank Europe

     58,399        311        5        (5,959     (5,974

Money trust under the FISCM Act

     1,582,765        1,552,594        54,860        259       259  

Structured entity for the securitization of financial assets

     1,369,745        1,786,869        53,578        4,990       (5,681

Structured entity for the investments in securities

     63,676        142        1,826        (1,299     (3,009

 

     As of and for the year ended December 31, 2017  
     Assets      Liabilities      Operating
revenue
     Net income
(loss)
attributable to
owners
    Comprehensive
income (loss)
attributable to
owners
 

Woori FIS Co., Ltd.

     103,932        71,386        252,460        1,940       (2,963

Woori Private Equity Asset Management Co., Ltd.

     42,894        2,670        7,257        (4,114     (4,074

Woori Finance Research Institute Co., Ltd.

     3,790        350        4,733        83       64  

Woori Card Co., Ltd.

     8,605,993        6,973,705        1,771,157        101,214       107,321  

Woori Investment Bank Co., Ltd.

     1,880,157        1,588,610        183,376        20,023       20,210  

Woori Credit Information Co., Ltd.

     33,298        6,175        31,580        861       752  

Woori America Bank

     1,954,301        1,679,248        81,337        11,869       (16,833

Woori Global Markets Asia Limited

     290,226        178,343        11,345        1,922       (12,544

Woori Bank China Limited

     4,960,637        4,458,683        388,913        13,809       (15,252

AO Woori Bank

     201,704        149,101        15,656        4,748       1,217  

PT Bank Woori Saudara Indonesia 1906 Tbk

     2,230,617        1,745,171        192,485        38,488       (18,689

Banco Woori Bank do Brasil S.A.

     213,889        181,544        20,455        1,843       (2,840

Korea BTL Infrastructure Fund

     786,480        301        30,240        26,390       26,390  

Woori Fund Service Co., Ltd.

     12,653        1,242        9,021        1,398       1,398  

Woori Finance Cambodia PLC.

     51,304        32,873        5,895        983       (473

Woori Finance Myanmar Co., Ltd.

     18,236        5,307        2,506        791       15  

Wealth Development Bank

     191,049        156,808        13,632        1,323       (1,093

Woori Bank Vietnam Limited

     775,758        632,160        29,698        2,436       (15,347

Money trust under the FISCM Act

     1,560,672        1,530,760        44,344        582       582  

Structured entity for the securitization of financial assets

     867,583        1,275,719        22,730        1,179       (2,800

Structured entity for the investments in securities

     34,939        76        377        (475     (38,592

 

(5)

The financial support that the Group provides to consolidated structured entities is as follows:

 

  -

Structured entity for asset securitization

The structured entity is established for the purpose of securitization of project financing loans, corporate bonds, and other financial assets. The Group is involved with the structured entity through providing with credit facility over asset-backed commercial papers issued by the entity, originating loans directly to the structured entity, or purchasing 100% of the subordinated debts issued by the structured entity.

 

  -

Structured entity for the investments in securities

The structured entity is established for the purpose of investments in securities. The Group acquires beneficiary certificates through its contribution of fund to the structured entity, and it is exposed to the risk that it may not be able to recover its fund depending on the result of investment performance of asset managers of the structured entity.

 

  -

Money trust under the Financial Investment Services and Capital Markets Act

The Group provides with financial guarantee of principal and interest or solely principal to some of its trust products. Due to the financial guarantees, the Group may be obliged when the principal and interest or principal of the trust product sold is short of the guaranteed amount depending on the result of investment performance of the trust product.

 

- 5 -


(6)

The Group has entered into various agreements with structured entities such as asset securitization, structured finance, investment fund, and monetary trust. The characteristics and the nature of risks related to unconsolidated structured entities over which the Group does not have control in accordance with K-IFRS 1110 are as follows:

The ownership interests on unconsolidated structured entities that the Group hold are classified into asset securitization vehicles, structured finance and investment fund, based on the nature and the purpose of the structured entities.

Unconsolidated structured entities classified as ‘asset securitization vehicles’ are entities that issue asset-backed securities, pay the principal and interest or distributes dividends on asset-backed securities through borrowings or profits from the management, operation and sale of securitized assets. The Group transfers related risks from the purchase commitments of asset-backed securities or issuance of asset-backed securities through credit grants, and the structured entities recognize related interest or fee revenue. There are entities that provide additional fund and conditional debt acquisition commitment before the Group’s financial support, but the Group is still exposed to losses arising from the purchase of financial assets issued by the structured entities when it fails to renew the securities.

Unconsolidated structured entities classified as ‘structured financing’ include real estate project financing investment vehicle, social overhead capital companies, and special purpose vehicles for ship (aircraft) financing. Each entity is incorporated as a separate company with a limited purpose in order to efficiently pursue business goals. ‘Structured financing’ is a financing method for large-scale risky business, with investments made based on feasibility of the specific business or project, instead of credit of business owner or physical collaterals. The investors receive profits from the operation of the business. The Group recognizes interest revenue, valuation gain or loss on ownership interest, or dividend income. With regard to uncertainties involving structured financing, there are entities that provide financial support such as additional fund, guarantees and prioritized credit grants prior to the Group’s intervention, but the Group is exposed to possible losses due to loss of principal from reduction in investment value or irrecoverable loans arising from failure to collect scheduled cash flows and cessation of projects.

Unconsolidated structured entities classified as ‘investment funds’ include investment trusts and private equity funds. An investment trust orders the investment and operation of funds to the trust manager in accordance with trust contract with profits distributed to the investors. Private equity funds finances money required to acquire equity securities to enable direction of management and/or improvement of ownership structure, with profit distributed to the investors. The Group recognizes pro rata amount of valuation gain or loss on investment and dividend income as an investor, and may be exposed to losses due to reduction in investment value.

 

- 6 -


Total assets of the unconsolidated structured entities, the carrying value of the related items recorded, the maximum exposure to risks, and the loss recognized in conjunction with the unconsolidated structured entities as of December 31, 2018 and 2017 are as follows (Unit: Korean Won in millions):

 

     December 31, 2018  
     Asset
securitization
vehicle
     Structured
finance
     Investment
Funds
 

Total asset of the unconsolidated structured entities

     6,796,235        58,161,494        11,138,822  

Assets recognized in the consolidated financial statements related to the unconsolidated structured entities

     2,571,835        2,831,842        1,530,767  

Financial assets at FVTPL

     285,156        70,219        1,197,844  

Financial assets at FVTOCI

     281,919        48,961        —    

Financial assets at amortized cost

     2,003,921        2,511,055        71,150  

Investments in joint ventures and associates

     —          197,393        261,773  

Derivative assets

     839        4,214        —    

Liabilities recognized in the consolidated financial statements related to the unconsolidated structured entities

     1,260        905        —    

Derivative liabilities

     116        248        —    

Other liabilities (including provisions)

     1,144        657        —    

The maximum exposure to risks

     3,252,329        3,408,271        1,587,325  

Investments

     2,571,835        2,831,842        1,530,767  

Credit facilities

     680,494        576,429        56,558  

Loss recognized on unconsolidated structured entities

     5,764        11,609        13,868  

 

     December 31, 2017  
     Asset
securitization
vehicle
     Structured
finance
     Investment
Funds
 

Total asset of the unconsolidated structured entities

     7,295,601        40,172,830        13,641,135  

Assets recognized in the consolidated financial statements related to the unconsolidated structured entities

     3,215,159        2,314,043        1,138,523  

Financial assets held for trading

     —          233,428        10,160  

AFS financial assets

     902,390        106,819        904,774  

HTM financial assets

     2,269,451        —          —    

Loans and receivables

     43,180        1,969,760        —    

Investments in joint ventures and associates

     —          —          223,589  

Derivative assets

     138        4,036        —    

Liabilities recognized in the consolidated financial statements related to the unconsolidated structured entities

     1,433        1,506        —    

Derivative liabilities

     575        968        —    

Other liabilities (including provisions)

     858        538        —    

The maximum exposure to risks

     4,032,531        2,918,448        1,138,523  

Investments

     3,215,159        2,314,043        1,138,523  

Credit facilities

     817,372        604,405        —    

Loss recognized on unconsolidated structured entities

     837        3,939        5,993  

 

- 7 -


  (7)

As of December 31, 2018 and 2017, the share of non-controlling interests on the net income and equity of subsidiaries in which non-controlling interests are significant are as follows: (Unit: Korean Won in millions):

 

  1)

Accumulated non-controlling interests at the end of the reporting period

 

     December 31, 2018      December 31, 2017  

Woori Investment Bank

     130,088        191,111  

PT Bank Woori Saudara Indonesia 1906 Tbk

     68,250        64,877  

Wealth Development Bank

     16,557        16,778  

 

  2)

Net income or loss attributable to non-controlling interests

 

     For the year ended
December 31, 2018
     For the year ended
December 31, 2017
 

Woori Investment Bank

     10,262        8,370  

PT Bank Woori Saudara Indonesia 1906 Tbk

     8,126        8,882  

Wealth Development Bank

     39        648  

 

  3)

Dividends to non-controlling interests

 

     For the year ended
December 31, 2018
     For the year ended
December 31, 2017
 

PT Bank Woori Saudara Indonesia 1906 Tbk

     2,082        1,513  

 

2.

BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES

 

(1)

Basis of presentation

The Woori Bank and its subsidiaries (the “Group”)’s consolidated financial statements are prepared in accordance with Korean Financial Reporting Standards (“K-IFRS”)

The significant accounting policies applied in the preparation of consolidated financial statements as of and for the year ended December 31, 2018 are stated below, and the accounting policies applied are identical to ones used in the preparation of previous period’s consolidated financial statements, except for the effects of adopting new standards or interpretations as explained below.

The consolidated financial statements are prepared at the end of each reporting period in historical cost basis, except for certain non-current assets and financial assets that are either revalued or measured in fair value. Historical cost is generally measured at the fair value of consideration given to acquire assets.

The consolidated financial statements of the Group was approved by the Board of Directors on March 6, 2019, and is planned for an approval in the annual shareholders’ meeting on March 27, 2019.

1) The standards and interpretations that are newly adopted by the Group during the current period, and the changes in accounting policies thereof are as follows:

 

  -

Adoption of K-IFRS 1109 – Financial instruments (enacted)

The Group initially applied K-IFRS 1109 and related amendments made to other standards during the current period, with January 1, 2018 as the date of initial application. K-IFRS 1109 introduces new rules on: 1) classification and measurement of financial assets and financial liabilities, 2) impairment of financial assets, and 3) hedge accounting. Additionally, the Group adopted consequential amendments to K-IFRS 1107 Financial Instruments: Disclosures that were applied to the disclosures for 2018.

The Group decided not to restate the prior period figures when applying the Standard for the first time, and as such the comparative consolidated financial statements are not restated.

 

- 8 -


The main contents of the new accounting standard and the effect on the consolidated financial statements of the Group are as follows.

a) Classification and measurement of financial assets

All financial assets included in the scope of K-IFRS 1109 are subsequently measured at amortized cost or fair value based on the Group’s business model for the management of financial assets and the nature of the contractual cash flows of the financial assets.

Debt instruments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortized cost at the end of subsequent accounting periods (Financial assets at amortized cost).

Debt instruments that are held within a business model whose objective is achieved both by collecting contractual cash flows and selling financial assets, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at fair value through other comprehensive income (Financial assets at fair value through other comprehensive income (“FVTOCI”)).

All other debt instruments and equity instruments are measured at their fair value at the end of subsequent accounting periods, and any change in the fair value is recognized as profit or loss (Financial assets at fair value through profit or loss (“FVTPL”)).

Notwithstanding the foregoing, the Group may make the following irrevocable choice or designation at the time of initial recognition of a financial asset.

The Group may make an irrevocable election to present in other comprehensive income subsequent changes in the fair value of an investment in an equity instrument within the scope of this standard that is neither held for trading nor is a contingent consideration recognized by an acquirer in a business combination to which K-IFRS 1103 applies.

At initial recognition, financial assets at amortized cost or FVTOCI may be irrevocably designated as financial assets at fair value through profit or loss mandatorily measured at fair value if doing so eliminates or significantly reduces a measurement or recognition inconsistency.

As of the date of initial application of K-IFRS 1109, there are no debt instruments classified either as financial assets at amortized cost or FVTOCI that are designated as financial assets at fair value through profit or loss.

When debt instruments measured at FVTOCI are derecognized, the cumulative gain or loss recognized in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment. On the other hand, for equity instruments designated as financial assets at fair value through other comprehensive income, cumulative gains or losses previously recognized in other comprehensive income are subsequently reclassified to retained earnings. Debt instruments measured subsequently at amortized cost or at FVTOCI are subject to impairment.

 

- 9 -


The classification and measurement of financial assets and financial liabilities in accordance with K-IFRS 1109 and K-IFRS 1039 as of January 1, 2018 are as follows (Unit: Korean Won in millions):

 

   

Classification in
accordance with

K-IFRS 1039

 

Classification in
accordance with

K-IFRS 1109

  Amount in
accordance
with
K-IFRS 1039
    Reclassification     Remeasurement (*1)     Amount in
accordance with
K-IFRS 1109
 

Deposit

 

Loans and receivables

 

Loan and other financial assets at amortized cost

    8,870,835       —         —         8,870,835  

Deposit

 

Financial assets at FVTPL

 

Financial assets at FVTPL

    25,972       —         —         25,972  

Debt securities

 

Financial assets at FVTPL

 

Financial assets at FVTPL(*1)

    2,654,027       —         —         2,654,027  

Equity securities

 

Financial assets at FVTPL

 

Financial assets at FVTPL(*1)

    47,304       —         —         47,304  

Derivatives assets

 

Financial assets at FVTPL

 

Financial assets at FVTPL(*1)

    3,115,775       (2,137     —         3,113,638  

Equity securities

 

AFS financial assets

 

Financial assets at FVTPL(*1)

    1,273,498       1,219       —         1,274,717  

Equity securities

 

AFS financial assets

 

Financial assets at FVTOCI

    850,207       —         —         850,207  

Debt securities

 

AFS financial assets

 

Financial assets at FVTPL

    46,855       —         —         46,855  

Debt securities

 

AFS financial assets

 

Financial assets at FVTOCI

    12,874,209       —         —         12,874,209  

Debt securities

 

AFS financial assets

 

Securities at amortized cost

    308,181       —         14,119       322,300  

Debt securities

 

HTM financial assets

 

Securities at amortized cost

    16,749,296       —         —         16,749,296  

Loans

 

Loans and receivables

 

Financial assets at FVTPL (*1)

    279,032       918       50       280,000  

Loans

 

Loans and receivables

 

Loan and other financial assets at amortized cost

    253,014,491       —         —         253,014,491  

Derivatives assets (Designated for hedging)

 

Derivatives assets (Designated for hedging)

 

Derivatives assets (Designated for hedging)

    59,272       —         —         59,272  

Other financial assets

 

Loans and receivables

 

Loan and other financial assets at amortized cost

    6,772,088       —         —         6,772,088  
     

 

 

   

 

 

   

 

 

   

 

 

 

Total financial assets

    306,941,042       —         14,169       306,955,211  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

- 10 -


    

Classification in
accordance with

K-IFRS 1039

  

Classification in
accordance with

K-IFRS 1109

   Amount in
accordance
with
K-IFRS 1039
     Reclassification      Remeasurement (*2)      Amount in
accordance with
K-IFRS 1109
 

Deposit due to customers

  

Financial liabilities at FVTPL

  

Financial liabilities at FVTPL

     25,964        —          —          25,964  

Deposit due to customers

  

Financial liabilities at amortized cost

  

Financial liabilities at amortized cost

     234,695,084        —          —          234,695,084  

Borrowings

  

Financial liabilities at amortized cost

  

Financial liabilities at amortized cost

     14,784,706        —          —          14,784,706  

Debentures

  

Financial liabilities at FVTPL

  

Financial liabilities at FVTPL

     91,739        —          —          91,739  

Debentures

  

Financial liabilities at amortized cost

  

Financial liabilities at amortized cost

     27,869,651        —          —          27,869,651  

Equity-linked securities

  

Financial liabilities at FVTPL

  

Financial liabilities at FVTPL

     160,057        —          —          160,057  

Derivatives liabilities

  

Financial liabilities at FVTPL

  

Financial liabilities at FVTPL

     3,150,149        —          —          3,150,149  

Derivatives liabilities (Designated for hedging)

  

Derivatives liabilities (Designated for hedging)

  

Derivatives liabilities (Designated for hedging)

     67,754        —          —          67,754  

Other financial liabilities

  

Financial liabilities at amortized cost

  

Financial liabilities at amortized cost

     13,892,461        —          —          13,892,461  

Provision for financial guarantee

  

Provision

  

Financial liabilities at amortized cost

     71,697        —          —          71,697  
        

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

     294,809,262        —          —          294,809,262  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(*1)

Under K-IFRS 1039, the embedded derivatives out of hybrid financial instruments are accounted for as derivative assets or liabilities if the criteria for separation of the embedded derivatives are met; and the host contract in those instruments are recorded as available-for-sale financial assets or loans and receivables respectively. However, since K-IFRS 1109 requires financial instruments to be accounted for based on the terms of the entire financial instrument, the hybrid financial assets are revalued and classified as financial assets at fair value through profit or loss.

(*2)

The remeasurement effect due to expected credit losses is not included (The remeasurement effect of expected credit losses is as follows: b) Impairment of financial assets).

At the date of the initial application of K-IFRS 1109, there were no financial assets or liabilities measured at FVTPL that were reclassified to FVTOCI or amortized cost category.

The financial assets at FVTPL or FVTOCI that are reclassified to the amortized cost measurement category as of the date of initial application of K-IFRS 1109, and the related valuation gain or loss and fair value of the financial assets as of December 31, 2018 had it not been reclassified, are as follows (Unit: Korean Won in millions):

 

Account subject

   Category before the adoption of
K-IFRS 1109
   Amount of valuation gain/loss
had it not been reclassified
     Fair value

Debt securities(*)

   AFS financial assets      2      257,665

 

(*)

Those financial assets that are removed from the books as of December 31, 2018 are not presented in the table above.

 

- 11 -


b) Impairment of financial assets

The impairment model under K-IFRS 1109 reflects expected credit losses, as opposed to incurred credit losses under K-IFRS 1039. Under the impairment approach in K-IFRS 1109, it is no longer necessary for a credit event to have occurred before credit losses are recognized. Instead, the Group accounts for expected credit losses and changes in those expected credit losses. The amount of expected credit losses should be updated at each reporting date to reflect changes in credit risk since initial recognition.

The Group is required to recognize the expected credit losses for financial instruments measured at amortized cost or FVTOCI (debt instrument), and unused loan commitments and financial guarantee contracts that are subject to the impairment provisions of K-IFRS 1109. In particular, K-IFRS 1109 requires the Group to measure the loss allowance for a financial instrument at an amount equal to the lifetime expected credit losses (ECL) if the credit risk on that financial instrument has increased significantly since initial recognition, or if the financial instrument is a purchased or originated credit-impaired financial asset. If the credit risk of a financial instruments does not increase significantly after initial recognition (excluding “purchased or originated credit-impaired loans” - for financial assets already impaired at initial recognition), the Group measures the loss allowance on the financial instruments at the amount equivalent to the expected 12-month credit loss.

Management assessed the impairment of the Group’s financial assets, lending arrangements and financial guarantees at the date of initial application by using reasonable and supportive measures that can be used without undue cost or effort in determining the credit risk of the financial instruments at initial recognition in accordance with K-IFRS 1109 and in comparing above credit risk with the credit risk at the date of initial application. As of January 1, 2018, the results of the assessment are as follows (Unit: Korean Won in millions):

 

    

Classification

in accordance

with K-IFRS

1039

  

Classification in
accordance with

K-IFRS 1109

   Loss allowance
in accordance
with K-IFRS
1039(A)
     Loss allowance
in accordance
with K-IFRS
1109 (B)
     Increases
(B-A)
 

Deposit

  

Loans and receivables

  

Loans and other financial assets at amortized cost

     2,458        3,092        634  

Debt securities

              

AFS securities

  

AFS financial assets

  

Financial assets at FVTOCI

     —          4,236        4,236  

HTM securities

  

HTM financial assets

  

Securities at amortized cost

     —          5,078        5,078  

Loans and other financial assets

  

Loans and receivables

  

Loans and other financial assets at amortized cost

     1,827,785        2,076,873        249,088  

Payment guarantee

           183,247        192,924        9,677  

Loan commitment

           66,115        104,985        38,870  
        

 

 

    

 

 

    

 

 

 

Total

     2,079,605        2,387,188        307,583  
  

 

 

    

 

 

    

 

 

 

c) Classification and measurement of financial liabilities

One of the major changes related to the classification and measurement of financial liabilities as a result of the adoption of K-IFRS 1109 is the accounting for change in the fair value of financial liabilities designated at fair value through profit or loss due to the changes in issuer’s own credit risk. The Group recognizes the effect of changes in the credit risk of financial liabilities designated as at FVTOCI in other comprehensive income, except for cases where it creates or enlarges accounting mismatch of the profit or loss. Changes in fair value due to credit risk of financial liabilities are not subsequently reclassified to profit or loss, but are reclassified as retained earnings when financial liabilities are derecognized.

 

- 12 -


In accordance with K-IFRS 1039, the entire of changes in fair value of financial liabilities designated as at FVTPL are recognized in profit or loss. As of January 1, 2018, the Group designated 251,796 million Korean Won of FVTPL out of 294,813,795 million of financial liabilities to be measured at FVTPL, and recognized 133 million Korean Won as accumulated other comprehensive loss in relation to the changes in own credit risk of financial liabilities.

d) Hedge accounting

The new hedge accounting model maintains three types of hedge accounting. However, it introduced more flexibility in the types of transactions that are eligible for hedge accounting and expanded the types of hedging instruments and non-financial hedge items that qualify for hedge accounting. The standard related to the evaluation of hedge accounting has been amended as a whole, where it is now replaced by the principle of “economic relationship” between the hedged item and the hedging instrument. Retrospective assessment of the hedging effectiveness is no longer required. Additional disclosure requirements have been introduced in relation to the Group’s risk management activities.

In accordance with the transitional provisions of K-IFRS 1109 on hedge accounting, the Group adopted the hedge accounting provisions of K-IFRS 1109 prospectively from January 1, 2018. As of the date of initial application, the Group concluded that the hedging relationship in accordance with K-IFRS 1039 is appropriate for hedge accounting under K-IFRS 1109, thus the hedging relationship is considered to exist continually. Since the major conditions for hedging instruments and the hedged items are consistent, all hedging relationships are consistent within the effectiveness assessment requirements of K-IFRS 1109. The Group has not designated a hedging relationship in accordance with K-IFRS 1109 in which the hedge relationship would not have met the requirements for hedge accounting under K-IFRS 1039.

e) Effect on equity as a result of adoption of K-IFRS 1109

The effect on equity due to the adoption of K-IFRS 1109 as of January 1, 2018 is as follows (Unit: Korean Won in millions):

 

  -

Impact on accumulated other comprehensive loss due to financial assets at FVTOCI, etc.

 

     Amount  

Balance as of December 31, 2017 (prior to K-IFRS 1109)

     (89,724

Adjustments

     (392,176

Reclassification of available-for-sale financial assets to financial assets at FVTPL

     (152,124

Recognition of expected credit losses of debt securities at FVTOCI

     4,293  

Reclassification of available-for-sale financial assets(equity securities) to financial assets at FVTOCI

     (397,508

Effect on changes in credit risk of financial liabilities at fair value through profit or loss designated as upon initial recognition

     (133

Others

     3,500  

Income tax effect

     149,796  
  

 

 

 

Balance as of January 1, 2018 (based on K-IFRS 1109)

     (481,900
  

 

 

 

 

- 13 -


  -

Retained earnings impact

 

     Amount  

Balance as of December 31, 2017 (prior to K-IFRS 1109)

     15,620,006  

Adjustments

     177,091  

Reclassification of available-for-sale financial assets to financial assets at FVTPL

     152,124  

Recognition of expected credit losses of debt instruments at FVTOCI

     (4,293

Reclassification of available-for-sale financial assets(equity securities) to financial assets at FVTOCI

     397,508  

Effect on revaluation of financial assets at amortized cost from loan and receivables or AFS financial assets

     282  

Recognition of expected credit losses of financial assets at amortized cost which were previously loan and receivables

     (240,683

Effect on provision for guarantees and unused loan commitments on liabilities

     (48,548

Effect on changes in credit risk of financial liabilities at fair value through profit or loss designated as upon initial recognition

     133  

Others

     (4,950

Income tax effect

     (74,482
  

 

 

 

Balance as of January 1, 2018 (based on K-IFRS 1109)

     15,797,097  
  

 

 

 

 

  -

Adoption of K-IFRS 1115 – Revenue from contracts with customers (enacted)

The Group adopted the requirements using the modified retrospective method, with the effect of initial application recognized on the date of initial application and without restatement of the comparative periods. Also, this standard is retroactively applied to contracts which are not completed as of the date of initial application, but practical expedient is used so that contract modifications made before the date of initial application are not retroactively restated.

Accordingly, the Group has not retroactively restated the comparative consolidated financial statements presented herein.

The effects of the adoption of K-IFRS 1115 by Woori Card Co. Ltd., a subsidiary of Woori Bank, are as follows. Woori Card Co. Ltd. has modified its accounting policies related to the customer loyalty program, whereby rewards and points provided to the users of the card are deducted from revenue due to the fact that these are regarded as consideration provided to the customer. As a result of the aforementioned accounting policy modification, Fees and Commission Received on Credit Card and Fees and Commission Paid for Credit Card are both reduced by 525,978 million Won. On the other hand, accounting change modifications resulting from the adoption of K-IFRS 1115 did not have any significant effect on the Consolidated Statement of Financial Position, the capital and the Consolidated Statement of Cash Flows.

 

  -

Amendments to K-IFRS 1102 – Classification and Measurement of Share-based Payment Transactions

The amendments clarify that: 1) When measuring the fair value of share-based payment, the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payment should be consistent with the measurement of equity-settled share-based payment; 2) When an entity has an obligation to pay the employee’s withholding tax to the tax authority for the employee’s equity-settled share-based payment, the transaction shall be classified in its entirety as an equity-settled share-based payment transaction if it would have been so classified in the absence of the net settlement feature; and 3) When a cash-settled share-based payment changes to an equity-settled share-based payment because of modifications of the terms and conditions, the original liability recognized is derecognized and the equity-settled share-based payment is recognized at the modification date fair value. Any difference between the carrying amount of the liability at the modification date and the amount recognized in equity at the same date would be recognized in profit and loss immediately.

 

  -

Amendments to K-IFRS 1040 – Investment Property

The amendments clarify that a transfer to, or from, investment property necessitates an assessment of whether a property meets the definition of investment property, supported by observable evidence that a change in use has occurred. The amendments further clarify that the situations listed in K-IFRS 1040 are not exhaustive and that a change in use is possible for properties under construction (i.e. a change in use is not limited to completed properties).

 

- 14 -


  -

Amendments to K-IFRS 2122 – Foreign Currency Transactions and Advance Consideration

The interpretation addresses how to determine the ‘date of transaction’ for the purpose of determining the exchange rate to use on initial recognition of an asset, expense or income (or part of them) as a result of the derecognition of a non-monetary asset or non-monetary liability (e.g., a non-refundable deposit or deferred revenue) which were previously recognized due to the fact that consideration was paid or received in advance in a foreign currency. The interpretation specifies that the date of transaction is the date on which the entity initially recognizes the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. If there are multiple payments or receipts in advance, the interpretation requires an entity to determine the date of transaction for each payment or receipt of advance consideration.

 

  -

Annual Improvements to K-IFRS 2014-2016 Cycle

The amendments include partial amendments to K-IFRS 1101 ‘First-time Adoption of K-IFRS’ and K-IFRS 1028 ‘Investments in Associates and Joint Ventures.’ Amendments to K-IFRS 1028 provide that an investment company such as a venture capital investment vehicle may selectively designate each of its investment in associates and/or joint ventures to be measured at fair value through profit or loss mandatorily measured at fair value, and that such designation must be made at the time of each investment’s initial recognition. In addition, when non-investment companies apply equity method to investment in associates and/or joint ventures that are investment companies, these companies may apply the same fair value measurement used by the said associates to value their own subsidiaries. This accounting treatment may be selectively applied to each associate.

The amendments, except for K-IFRS 1109 and K-IFRS 1115, do not have significant impact on the consolidated financial statements of the Group.

 

2)

The Group has not applied the following K-IFRS that have been issued but are not yet effective:

 

  -

K-IFRS 1116 – Leases(enacted)

K-IFRS 1116 introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessors and lessees. K-IFRS 1116 will supersede the current lease guidance including K-IFRS 1017 Leases and the related interpretations, and will be applied to periods beginning on or after January 1, 2019.

The Group plans to apply modified retrospective approach as of January 1, 2019 in accordance with K-IFRS 1116. Therefore, the cumulative effect of applying K-IFRS 1116 will be adjusted in the retained earnings (or, where appropriate, other components of equity) at the date of initial application, and the comparative financial statements will not be restated.

K-IFRS 1116 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer. Distinctions of operating leases and finance leases are removed for lessee accounting, and is replaced by model where a right-of-use asset and corresponding liability have to be recognized for all leases by lessees except for short-term leases and leases of low value assets.

The right-of-use asset is initially measured at cost and subsequently measured at cost (subject to certain exceptions) less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications, amongst others. Furthermore, the classification of cash flows will also be affected as operating lease payments under K-IFRS 1017 are presented as operating cash flows; whereas under the K-IFRS 1116 model, the lease payments will be split into a principal and an interest portion which will be presented as financing and operating cash flows respectively.

In contrast to lessee accounting, K-IFRS 1116 substantially carries forward the lessor accounting requirements in K-IFRS 1017, and continues to require a lessor to classify a lease either as an operating lease or a finance lease. Also, K-IFRS 1116 requires expanded disclosures.

 

- 15 -


According to the preliminary assessment of the Group, the lease agreements entered into by the Group as of December 31, 2018 are expected to meet the definition of lease under the Standard, and accordingly, if the Group adopts the Standard, it applies to all leases except short-term leases and leases of low value assets, and the Group will recognize the right-of-use assets and related liabilities accordingly. As a result of an analysis of the impact on consolidated financial statements, the Group expects right-of-use asset and lease liability to both increase by 338,914 million Won as of December 31, 2018.

The following enacted/amended standards are not expected to affect the Group:

 

  -

K-IFRS 2123 – Uncertainty over Income Tax Treatments (enacted)

 

  -

Amendments to K-IFRS 1109

 

  -

Amendments to K-IFRS 1028

 

  -

Amendments to K-IFRS 1019

 

  -

Amendments to K-IFRS 1115

 

  -

Annual Improvements to K-IFRS 2015-2017 Cycle

These annual improvements contain partial amendments to K-IFRS 1012 ‘Income taxes’, K-IFRS 1023 ‘Borrowing costs’, K-IFRS 1103 ‘Business combinations’ and K-IFRS 1111 ‘Joint arrangements’.

 

(2)

Basis of consolidated financial statement presentation

The consolidated financial statements incorporate the financial statements of the Bank and the entities (including structured entities) controlled by the Bank (and its subsidiaries, which is the “Group”). Control is achieved where the Group 1) has the power over the investee, 2) is exposed, or has rights, to variable returns from its involvement with the investee, and 3) has the ability to use its power to affect its returns. The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

When the Group has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Group considers all relevant facts and circumstances in assessing whether or not the Group’s voting rights in an investee are sufficient to give it power, including:

 

   

The relative size of the Group’s holding of voting rights and dispersion of holdings of the other vote holders;

 

   

Potential voting rights held by the Group, other vote holders or other parties;

 

   

Rights arising from other contractual arrangements;

 

   

Any additional facts and circumstances that indicate that the Group has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings.

Income and expenses of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the date the Group gains control until the date when the Group ceases to control the subsidiary. Profit or loss and each component of other comprehensive income are attributed to the owner of the Group and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owner of the Group and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies.

All intra-group transactions and, related assets and liabilities, income and expenses are eliminated in full on consolidation.

Changes in the Group’s ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to the owner of the parent company.

 

- 16 -


When the Group loses control of a subsidiary, a gain or loss on disposal is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-controlling interests. When assets of the subsidiary are carried at revalued amounts or fair values and the related cumulative gain or loss has been recognized in other comprehensive income and accumulated in equity, the amounts previously recognized in other comprehensive income and accumulated in equity are accounted for as if the Group had directly disposed of the relevant assets (i.e. reclassified to profit or loss or transferred directly to retained earnings). The fair value of any investment retained in the former subsidiary at the date when control is lost is recognized as the fair value on initial recognition for subsequent accounting under K-IFRS 1109 Financial Instruments or, when applicable, the cost on initial recognition of an investment in an associate or a joint venture.

 

(3)

Business combinations

Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured as the sum of the acquisition-date fair values of the assets transferred by the Group in exchange for control of the acquiree, liabilities assumed by the Group for the former owners of the acquiree and the equity interests issued by the Group. Acquisition-related costs are generally recognized in profit or loss as incurred.

At the acquisition date, the acquiree’s identifiable assets, liabilities and contingent liabilities that meet the condition for recognition under K-IFRS 1103 are recognized at their fair value, except that:

 

   

deferred tax assets or liabilities and assets or liabilities related to employee benefit arrangements are recognized and measured in accordance with K-IFRS 1012 Income Taxes and K-IFRS 1019 Employee Benefits, respectively;

 

   

liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of the Group entered into to replace share-based payment arrangements of the acquiree are measured in accordance with K-IFRS 1102 Share-based Payment at the acquisition date; and

 

   

non-current assets (or disposal groups) that are classified as held for sale in accordance with K-IFRS 1105 Non-current Assets Held for Sale and Discontinued Operations are measured at the lower of their previous carrying amounts and fair value less costs to sell.

Any excess of the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the Group’s previously held equity interest (if any) in the acquiree over the net of identifiable assets and liabilities assumed of the acquiree at the acquisition date is recognized as goodwill which is included in intangible assets.

If, after reassessment, the Group’s interest in the fair value of the acquiree’s identifiable net assets exceeds the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously held equity interest in the acquiree (if any), the excess is recognized immediately in net income as a bargain purchase gain.

Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests’ proportionate share of the recognized amounts of the acquiree’s identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis. Other types of non-controlling interests are measured at fair value

When the consideration transferred by the Group in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date.

 

- 17 -


The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration other than the above is remeasured at subsequent reporting dates as appropriate, with the corresponding gain or loss being recognized in profit or loss.

When a business combination is achieved in stages, the Group’s previously held equity interest in the acquiree is remeasured at fair value at the acquisition date (i.e., the date when the Group obtains control) and the resulting gain or loss, if any, is recognized in net income (or other comprehensive income, if applicable). Amounts arising from changes in value of interests in the acquiree prior to the acquisition date that have previously been recognized in other comprehensive income are recognized, identical to the treatment assuming interests are sold directly.

In case where i) a common entity ultimately controls over all participating entities, or businesses, in a business combination transaction, prior to and after the transaction continuously, and ii) the control is not temporary, the transaction meets the definition of “business combination under common control” and it is deemed that the transaction only results in the changes in legal substance, and not economic substance, from the perspective of the ultimate controlling party. Thus, in such transactions, the acquirer recognizes the assets and liabilities of the acquiree in its financial statements at the book values as recognized in the ultimate controlling party’s consolidated financial statements, and the difference between the book value of consideration transferred to and the book value of net assets transferred in is recognized as equity.

 

(4)

Investments in joint ventures and associates

An associate is an entity over which the Group has significant influence, and that is not a subsidiary or a joint venture. Significant influence is the power to participate in making decision on the financial and operating policy of the investee but is not control or joint control over those policies.

A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to net assets relating to the arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

The net income of current period and the assets and liabilities of the joint ventures and associates are incorporated in these consolidated financial statements using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for in accordance with K-IFRS 1105 Non-current Assets Held for Sale and Discontinued Operations. Under the equity method, an investment in the joint ventures and associates is initially recognized in the consolidated statements of financial position at cost and adjusted thereafter to recognize the Group’s share of the net assets of the joint ventures and associates and any impairment. When the Group’s share of losses of the joint ventures and associates exceeds the Group’s interest in the associate, the Group discontinues recognizing its share of further losses. Additional losses are recognized only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the joint ventures and associates.

Any excess of the cost of acquisition over the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the joint ventures and associates recognized at the date of acquisition is recognized as goodwill, which is included within the carrying amount of the investment. Any excess of the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition is recognized immediately in net income.

Upon a loss of significant influence over the joint ventures and associates, the Group discontinues the use of the equity method and measures at fair value of any investment that the Group retains in the former joint ventures and associates from the date when the Group loses significant influence. The fair value of the investment is regarded as its fair value on initial recognition as a financial asset in accordance with K-IFRS 1039 Financial Instruments; Recognition and Measurement. The Group recognized differences between the carrying amount and fair value in net income and it is included in determination of the gain or loss on disposal of joint ventures and associates. The Group accounts for all amounts recognized in other comprehensive income in relation to that joint ventures and associates on the same basis as would be required if the joint ventures and associates had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognized in other comprehensive income by an associate would be reclassified to net income on the disposal of the related assets or liabilities, the Group reclassifies the gain or loss from equity to net income as a reclassification adjustment.

 

- 18 -


When the Group’s ownership of interest in an associate or a joint venture decreases but the Group continues to maintain significant influence over an associate or a joint venture, the Group reclassifies to profit or loss the proportion of the gain or loss that had previously been recognized in other comprehensive income relating to that decrease in ownership interest if the gain or loss would be reclassified to profit or loss on the disposal of the related assets or liabilities. Meanwhile, if interest on associate or joint venture meets the definition of non-current asset held for sale, it is accounted for in accordance with K-IFRS 1105.

The requirements of K-IFRS 1028 - Investments in Associates and Joint Ventures to determine whether there has been a loss event are applied to identify whether it is necessary to recognize any impairment loss with respect to the Group’s investment in the joint ventures and associates. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with K-IFRS 1036 - Impairment of Assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount. Any impairment loss recognized is not allocated to any asset (including goodwill), which forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized in accordance with K-IFRS 1036 to the extent that the recoverable amount of the investment subsequently increases.

The Group continues to use the equity method when an investment in an associate becomes an investment in a joint venture or an investment in a joint venture becomes an investment in an associate. There is no remeasurement to fair value upon such changes in ownership interests.

When a subsidiary transacts with an associate or a joint venture of the Group, profits and losses resulting from the transactions with the associate or joint venture are recognized in the Group’s consolidated financial statements only to the extent of interests in the associate or joint venture that are not related to the Group.

 

(5)

Investment in Joint operation

A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

When the Group operates as a joint operator, it recognizes in relation to its interest in a joint operation:

 

  -

its assets, including its share of any assets held jointly;

 

  -

its liabilities, including its share of any liabilities incurred jointly;

 

  -

its revenue from the sale of its share of the output arising from the joint operation;

 

  -

its share of the revenue from the sale of the output by the joint operation; and

 

  -

its expenses, including its share of any expenses incurred jointly.

The Group accounts for the assets, liabilities, revenues and expenses relating to its interest in a joint operation in accordance with the K-IFRSs applicable to the particular assets, liabilities, revenues and expenses.

When the Group enters into a transaction with a joint operation in which it is a joint operator, such as a sale or contribution of assets, it is conducting the transaction with the other parties to the joint operation and, as such, the Group recognizes gains and losses resulting from such a transaction only to the extent of the other parties’ interests in the joint operation.

When the Group enters into a transaction with a joint operation in which it is a joint operator, such as a purchase of assets, it does not recognize proportional share of profit or loss until the asset is sold to a third party.

 

- 19 -


(6)

Revenue recognition

K-IFRS 1018 allowed recognition of fees and commission income, a revenue from contracts with customers, in accordance with the accrual principle. However, K-IFRS 1115, applicable from the current period, requires the recognition of revenues based on transaction price allocated to the performance obligation when or as the Group performs that obligation to the customer. Since revenues other than those from contracts with customers, such as interest revenue and loan origination fee (cost), are measured through effective interest rate method, the revenue recognition principles are identical with those applied in the previous periods.

1) Revenues from contracts with customers

The Group recognizes revenue when the Group satisfies a performance obligation by transferring a promised good or service to a customer. When a performance obligation is satisfied, the Group shall recognizes as a revenue the amount of the transaction price that is allocated to that performance obligation. The transaction price is the amount of consideration to which the Group expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.

The Group is recognizing revenue by major sources as shown below:

 

Fees and commission received for brokerage

The fees and commission received for agency are the amount of consideration or fee expected to be entitled to receive in return for providing goods or services to the other parties with the Group acting as an agency, such as in the case of sales of bancassurance and beneficiary certificates. The majority of these fees and commission received for brokerage are from the business activities relevant to Consumer banking segment.

 

Fees and commission received related to credit

The fees and commission received related to credit mainly include the lending fees received from the loan activity and the fees received in the L/C transactions. Except for the fees and commission accounted for in calculating the effective interest rate, it is generally recognized when the performance obligation has been performed. The majority of these fees and commission received related to credit are from the business activities relevant to Consumer banking and Corporate banking segment.

 

Fees and commission received for electronic finance

The fees and commission received for electronic finance include fees received in return for providing various kinds of electronic financial services through firm-banking and CMS. These fees are recognized as revenue immediately upon the completion of services. The majority of these fees and commission received for electronic finance are from the business activities relevant to Consumer banking and Corporate banking segment.

 

Fees and commission received on foreign exchange handling

The fees and commission received on foreign exchange handling consist of various fees incurred when transferring foreign currency. The point of processing the customer’s request is the time when performance obligation is satisfied, and revenue is immediately recognized when fees and commission are received after requests are processed. The business activities relevant to these fees and commission received on foreign exchange handling are substantially attributable to Corporate banking segment.

 

Fees and commission received on foreign exchange

The fees and commission received on foreign exchange consist of fees related to the issuance of various certificates, such as exchange, import and export performance certificates, purchase certificates, etc. The point of processing the customer’s request is the time when performance obligation is satisfied, and revenue is immediately recognized when fees and commission are received after requests are processed. The business activities relevant to these fees and commission received on foreign exchange are substantially attributable to Corporate banking segment.

 

Fees and commission received for guarantee

The fees and commission received for guarantee include the fees received for the various warranties. The activities related to the warranty consist mainly of performance obligations satisfied over time and fees and commission are recognized over the guarantee period. The business activities relevant to these fees and commission received for guarantee are substantially attributable to Corporate banking segment.

 

- 20 -


Fees and commission received on credit card

The fees and commission received on credit card consist mainly of merchant account fees and annual fees. The Group recognizes merchant account fees by multiplying agreed commission rate to the amount paid by using the credit card. The annual fees are performance obligation satisfied over time and are recognized over agreed periods after the annual fees are paid in advance. The business activities relevant to these fees and commission received on credit card are substantially attributable to Credit cards segment.

 

Fees and commission received on securities business

The fees and commission received on securities business consist mainly of fees and commission for the sale of beneficiary certificates, and these fees are recognized when the beneficiary certificates are sold to customers. The business activities relevant to these fees and commission received on securities business are substantially attributable to Consumer banking segment.

 

Fees and commission from trust management

The fees and commission from trust management consist of fees and commission received in return for the operation and management services for entrusted assets. These operation and management services are performance obligations satisfied over time, and revenue is recognized over the service period. Among the fees and commission from trust management, variable considerations such as profit commission that are affected by the value of entrusted assets and base return of the future periods are recognized as revenue when limitations to the estimates are lifted. The majority of these fees and commission received for brokerage are from the business activities relevant to Consumer banking segment.

 

Fees and commission received on credit Information

The fees and commission received on credit Information are composed of the fees and commission received by performing credit investigation and proxy collection services. Credit investigation fees and commission are the amount received in return for verifying the information requested by the customer and are recognized as revenue at the time the verification is completed. Proxy collection service fees are recognized by multiplying the applicable rate to the collected amount at the time when collection services are completed. The majority of these fees and commission received for brokerage are from the business activities relevant to Consumer banking segment.

 

LOGO

Other fees

Other fees are usually fees related to remittances, but include fees related to various other services provided to customers by the Group. These fees are recognized when transactions occur at the customers’ request and services are provided, at the same time when commission are received. These other fees occur across all operating segments and no single operating segment represents majority of other fees.

2) Revenues from sources other than contracts with customers

Interest income

Interest income on financial assets measured at FVTOCI and financial assets at amortized costs is measured using the effective interest method.

The effective interest method is a method of calculating the amortized cost of a debt instrument and of allocating the interest income over the expected life of the asset. The effective interest rate is the rate that exactly discounts estimated future cash flows to the instrument’s initial unamortized cost over the expected period, or shorter if appropriate. Future cash flows include commissions and cost of reward points(limited to the primary component of effective interest rate) and other premiums or discounts that are paid or received between the contractual parties when calculating the effective interest rate, but does not include expected credit losses. All contractual terms of a financial instrument are considered when estimating future cash flows.

For purchased or originated credit-impaired financial assets, interest revenue is recognized by applying the credit-adjusted effective interest rate to the amortized cost of the financial asset from initial recognition. Even if the financial asset is no longer impaired in the subsequent periods due to credit improvement, the basis of interest revenue calculation is not changed from amortized cost to unamortized cost of the financial assets.

 

- 21 -


Loan origination fees and costs

The commission fees earned on loans, which is part of the effective interest of loans, is accounted for as deferred origination fees. Incremental costs related to the origination of loans are accounted for as deferred origination fees and is being added or deducted to/from interest income on loans using effective interest rate method.

 

(7)

Accounting for foreign currencies

The Group’s consolidated financial statements are presented in Korean Won, which is the functional currency of the Group. At the end of each reporting period, monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at its prevailing exchange rates at the date. The effective portion of the changes in fair value of a derivative that qualifies as a cash flow hedge and the foreign exchange differences on monetary items that form part of net investment in foreign operations are recognized in equity.

Assets and liabilities of the foreign operations subject to consolidation are translated into Korean Won at foreign exchange rates at the end of the reporting period. Except for situations in which it is required to use exchange rates at the date of transaction due to significant changes in exchange rates during the period, items that belong to profit or loss shall be measured by average exchange rate, with foreign exchange differences recognized as other comprehensive income and added to equity (allocated to non-controlling interests, if appropriate). When foreign operations are disposed, the controlling interest’s share of accumulated foreign exchange differences related to such foreign operations will be reclassified to profit or loss, while non-controlling interest’s corresponding share will not be reclassified.

Adjustments to fair value of identifiable assets and liabilities, and goodwill arising from the acquisition of foreign operations will be treated as assets and liabilities of the corresponding foreign operation, and is translated using foreign exchange rates at the end of the period. The foreign exchange differences are recognized in equity.

 

(8)

Cash and cash equivalents

The Group is classifying cash on hand, demand deposits, interest-earning deposits with original maturities of up to three months on acquisition date, and highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value as cash and cash equivalents.

 

(9)

Financial assets and financial liabilities

The Group’s accounting policies in accordance with the newly adopted K-IFRS 1109 are as follows:

 

  1)

Financial assets

A regular way purchase or sale of financial assets is recognized or derecognized on the trade or settlement date. A regular way purchase or sale is a purchase or sale of a financial asset under a contract whose term requires delivery of the asset within the time frame established generally by regulation or convention in the marketplace concerned.

On initial recognition, financial assets are classified into financial assets at FVTPL, financial assets at FVTOCI, and financial assets at amortized cost.

 

  a)

Business model

The Group evaluates the way business is being managed, and the purpose of the business model for managing a financial asset best reflects the way information is provided to the management at its portfolio level. Such information considers the following:

 

  -

The accounting policies and purpose specified for the portfolio, the actual operation of such policies. This includes strategy of the management focusing on the receipt of contractual interest revenue, maintaining a certain level of interest income, matching the duration of financial assets and the duration of corresponding liabilities to obtain the asset, and outflow or realization of expected cash flows from disposal of assets

 

  -

The way the performance of a financial asset held under the business model is evaluated, and the way such evaluation is being reported to the management

 

- 22 -


  -

The risk affecting the performance of the business model (and financial assets held under the business model), and the way such risk is being managed

 

  -

The compensation plan for the management (e.g. whether the management is being compensated based on the fair value of assets or based on contractual cash flows received)

 

  -

Frequency, amount, timing and reason for sale of financial assets in the past, and forecast of future sale activities.

 

  b)

Contractual cash flows

The principal is defined to be the fair value of a financial assets at initial recognition. Interest is not only composed of consideration for the time value of money, consideration for the credit risk related to remaining principal at a certain period of time, and consideration for other cost (e.g. liquidity risk and cost of operation) and fundamental risk associated with lending, but also profit.

When evaluating whether contractual cash flows are solely payments of principal and interests, the Group considers the contractual terms of the financial instrument. When a financial asset contains contractual conditions that modify the timing and amount of contractual cash flows, it is required to determine whether contractual cash flows that arise during the remaining life of the financial instrument due to such contractual condition are solely payments of principal and interest. The Group considers the following elements when evaluating the above:

 

  -

Conditions that lead to modification of timing or amount of cash flows

 

  -

Contractual terms that adjust contractual nominal interest, including floating rate features

 

  -

Early payment features and maturity extension features

 

  -

Contractual terms that limit the Group’s claim on cash flows arising from certain assets (e.g. non-recourse feature)

 

 

Financial assets at FVTPL

The Group is classifying those financial assets that are not classified as either financial assets at amortized cost or financial assets at FVTOCI, and those designated to be measured at FVTPL, as financial assets at FVTPL. Financial assets at FVTPL are measured at fair value, and related profit or loss is recognized in net income. Transaction costs related to acquisition at initial recognition is recognized in net income immediately upon its occurrence.

It is possible to designate a financial asset as financial asset at FVTPL if at initial recognition: (a) it is possible to remove or significantly reduce recognition or measurement mismatch that may otherwise have occurred if not for its designation as financial asset at FVTPL; (b) the financial asset forms part of the Group’s financial instrument group (A group composed of a combination of financial asset or liability), is measured at fair value and is being evaluated for its performance, and such information is provided internally; and (c) the financial asset is part of a contract that contains one or more of embedded derivatives, and is a hybrid contract in which designation as financial asset at FVTPL is allowed under K-IFRS 1109 ‘Financial Instruments’. However, the designation is irrevocable.

 

 

Financial assets at FVTOCI

When financial assets are held under a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and when contractual cash flows from such financial assets are solely payments of principal and interest, the financial assets are classified as financial assets at FVTOCI. Also, for investments in equity instruments that are not held for short-term trade, an irrevocable election is available at initial recognition to present subsequent changes in fair value as other comprehensive income.

At initial recognition, financial assets at FVTOCI is measured at its fair value plus any direct transaction cost, and is subsequently measured in fair value. However, for equity instruments that do not have a quotation in an active market and in which fair value cannot be measured reliably, they are measured at cost. The changes in fair value except for profit or loss items such as impairment losses (reversals), interest revenue calculated by using effective interest method, and foreign exchange gain or loss, and related income tax effects are recognized as other comprehensive income until the asset’s disposal. Upon derecognition, the accumulated other comprehensive income is reclassified from equity to net income for FVTOCI (debt instrument), and reclassified within the equity for FVTOCI (equity instruments).

 

- 23 -


 

Financial assets at amortized cost

When financial assets are held under a business model whose objective is to hold financial assets in order to collect contractual cash flows, and when contractual cash flows from such financial assets are solely payments of principal and interest, the financial assets are classified as financial assets at amortized cost. At initial recognition, financial assets at amortized cost are recognized at fair value plus any direct transaction cost. Financial assets at amortized cost is presented at amortized cost using effective interest method, less any loss allowance.

 

  2)

Financial liabilities

At initial recognition, financial liabilities are classified into either financial liabilities at FVTPL or financial liabilities at amortized cost.

Financial liabilities are usually classified as financial liabilities at FVTPL when they are acquired with a purpose to repurchase them within a short period of time, when they are part of a certain financial instrument portfolio that is actually and recently being managed with a purpose of short-term profit and joint management by the Group at initial recognition, and when they are derivatives that do not qualify as hedging instruments. Financial liabilities at FVTPL are measured at fair value plus direct transaction cost at initial recognition, and are subsequently measured at fair value. Profit or loss arising from financial liabilities at FVTPL is recognized in net income when occurred.

It is possible to designate a financial liability as financial liability at FVTPL if at initial recognition: (a) it is possible to remove or significantly reduce recognition or measurement mismatch that may otherwise have occurred if not for its designation as financial liability at FVTPL; (b) the financial asset forms part of the Group’s financial instrument group (A group composed of a combination of financial asset or liability) according to the Group’s documented risk management or investment strategy, is measured at fair value and is being evaluated for its performance, and such information is provided internally; and (c) the financial liability is part of a contract that contains one or more of embedded derivatives, and is a hybrid contract in which designation as financial liability at FVTPL is allowed under K-IFRS 1109 ‘Financial Instruments’.

Financial liabilities designated as at FVTPL are initially recognized at fair value, with any direct transaction cost recognized in profit or loss, and are subsequently measured at fair value. Any profit or loss from financial liabilities at FVTPL are recognized in profit or loss.

Financial liabilities not classified as financial liabilities at FVTPL are measured at amortized cost. The Group is classifying liabilities such as deposits due to customers, borrowings and debentures as financial liabilities at amortized cost.

 

  3)

Reclassification

Financial assets are not reclassified after initial recognition unless the Group modifies the business model used to manage financial assets. When the Group modifies the business model used to manage financial assets, all affected financial assets are reclassified on the first day of the first reporting period after the modification.

 

  4)

Derecognition

Financial assets are derecognized when contractual rights to cash flows from the financial assets are expired, or when substantially all of risk and reward for holding financial assets is transferred to another entity as a result of a sale of financial assets. If the Group does not have and does not transfer substantially all of the risk and reward of holding financial assets with control of the transferred financial assets retained, the Group recognizes financial assets to the extent of its continuing involvement. If the Group holds substantially all the risk and reward of holding a financial asset, it continues to recognize that asset and proceeds are accounted for as collateralized borrowings.

When a financial asset is fully derecognized, the difference between the book value and the sum of proceeds and accumulated other comprehensive income is recognized as profit or loss in case of FVTOCI (debt instruments), and as retained earnings for FVTOCI (equity instruments).

 

- 24 -


In case when a financial asset is not fully derecognized, the Group allocates the book value into amounts retained in the books and removed from the books, based on the relative fair value of each portion at the date of sale, and based on the degree of continuing involvement. For the derecognized portion of the financial assets, the difference between its book value and the sum of proceeds and the portion of accumulated other comprehensive income attributable to that portion will be recognized in profit or loss in case of debt instruments and recognized in retained earnings in case of equity instruments. The accumulated other comprehensive income is distributed to the portion of book value retained in the books, and to the portion of book value removed from the books.

The Group derecognizes financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or have expired. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in profit or loss.

When the Group exchanges with the existing lender one debt instrument into another one with the substantially different terms, such exchange is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. Similarly, the Group accounts for substantial modification of terms of an existing liability or part of it as an extinguishment of the original financial liability and the recognition of a new liability. It is assumed that the terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective rate is at least 10 percent different from the discounted present value of the remaining cash flows of the original financial liability

 

  5)

Fair value of financial instruments

Financial assets at FVTPL and financial assets at FVTOCI are measured and presented in consolidated financial statements at their fair values, and all derivatives are also subject to fair value measurement.

Fair value is defined as the price that would be received to exchange an asset or paid to transfer a liability in a recent transaction between independent parties that are reasonable and willing. Fair value is the transaction price of identical financial assets or financial liabilities generated in an active market. An active market is a market where trade volume is sufficient and objective price information is available due to the fact that bid and ask price differences are small.

When trade volume of a financial instrument is low, when transaction prices within the market show large differences among them, or when it cannot be concluded that a financial instrument is being traded within an active market due to disclosures being extremely shallow, fair value is measured using valuation techniques based on alternative market information or using internal valuation techniques based on general and observable information obtained from objective sources. Market information includes maturity and characteristics, duration, similar yield curve, and variability measurement of financial instruments of similar nature. Fair value amount contains unique assumptions on each entity (the Group concluded that it is using assumptions applied in valuing financial instruments in the market, or risk-adjusted assumptions in case marketability does not exist).

The market approach and income approach, which are valuation techniques used to estimate the fair value of financial instruments, both require significant judgment. Market approach measures fair value using either a recent transaction price that includes the financial instrument, or observable information on comparable firm or assets. Income approach measures fair value through discounting future cash flows with a discount rate reflecting market expectations, and revenue, operating income, depreciation, capital expenditures, income tax, working capital and estimated residual value of financial investments are being considered when deriving future cash flows. Valuation techniques such as the above include estimates based on the financial instruments’ complexity and usefulness of observable information in the market.

The valuation techniques used in the evaluation of financial instruments are explained below.

a) Financial assets at FVTPL and Financial assets at FVTOCI

The fair value of equity securities included in financial assets at FVTPL and financial assets at FVTOCI category is recognized in the statement of financial position at its available market price. Debt securities traded in the over-the-counter market are generally recognized at an amount computed by an independent appraiser. Especially, when the Group uses the fair value determined by independent appraisers, the Group usually obtains three values from three different appraisers for each financial instrument, and selects the minimum amount without making additional adjustments. For equity securities without marketability, the Group uses the amount determined by the independent appraiser. The Group verifies the prices obtained from appraisers in various ways, including the evaluation of independent appraisers’ competency, indirect verification through comparison between appraisers’ price and other available market information, and reperformance done by employees who have knowledge of valuation models and assumptions that appraisers used.

 

- 25 -


b) Derivatives

The Group’s transactions involving derivatives such as futures and exchange traded options are measured at market value. For exchange traded derivatives classified as level 2 in the fair value hierarchy, the fair value is estimated using internal valuation techniques. If there are no publicly available market prices because they are traded over-the-counter, fair value is measured through internal valuation techniques. When using internal valuation techniques to derive fair value, the types of derivatives, base interest rate or characteristics of prices, or stock market indices are considered. When variables used in the internal valuation techniques are not observable information in the market, such variables may contain significant estimates.

c) Adjustment of valuation amount

The Group is exposed to credit risk when counterparty to a derivative contract does not perform its contractual obligation, and the exposure amount is equal to the amount of derivative asset recognized in the statement of financial position. When the Group earns income through valuation of derivatives, such income is recognized as derivative asset in the statement of financial position. Some of the derivatives are traded in the market, but most of the derivatives are measured at estimated fair value derived from internal valuation models that use observable information in the market. As such, in order to estimate the fair value there should be an adjustment made to incorporate counterparty’s credit risk, and credit risk adjustment is being considered when valuing derivative assets such as over-the counter derivatives. The amount of financial liabilities is also adjusted by the Group’s own credit risk when valuing them.

The amount of adjustment is derived from counterparty’s probability of default and loss given default. This adjustment considers contractual matters that are designed to reduce the Group’s exposure to each counterparty’s credit risk. When derivatives are under master netting arrangement, the exposure used in the computation of credit risk adjustment is a net amount after adding/deducting cash collateral received (or paid) from loss (or gain) position derivatives with the same counterparty.

 

  6)

Expected credit losses on financial assets

The Group recognizes loss allowance on expected credit losses for the following assets:

 

  -

Financial assets at amortized cost

 

  -

Debt instruments measured at FVTOCI

 

  -

Contract assets as defined by K-IFRS 1115

Expected credit losses are weighted-average value of a range of possible results, considering the time value of money, and are measured by incorporating information on current conditions and forecasts of future economic conditions that are available without undue cost or effort.

The methods to measure expected credit losses are classified into following three categories in accordance with K-IFRS:

 

  -

General approach: Financial assets that does not belong to below two models and unused loan commitments

 

  -

Simplified approach: When financial assets are either trade receivables, contract assets or lease receivables

 

  -

Credit impairment model: Purchased or originated credit-impaired financial assets

The measurement of loss allowance under general approach is differentiated depending on whether the credit risk has increased significantly after initial recognition. That is, loss allowance is measured based on 12-month expected credit loss when the credit risk has not increased significantly after initial recognition, while loss allowance is measured at lifetime expected credit loss when credit risk has increased significantly. Lifetime is the expected remaining life of the financial instrument up to the maturity date of the contract.

The measurement of loss allowance under simplified approach is always based on lifetime expected credit loss, and loss allowance under credit impairment model is measured as the cumulative change in lifetime expected credit loss since initial recognition.

 

- 26 -


a) Measurement of expected credit losses on financial asset at amortized cost

The expected credit losses on financial assets at amortized cost is measured by the difference between the contractual cash flows during the period and the present value of expected cash flows. Expected cash inflows are computed for individually significant financial assets in order to calculate expected credit losses.

When financial assets that are not individually significant, they are included in a group of financial assets with similar credit risk characteristics and expected credit losses of the group are calculated collectively.

Expected credit losses are deducted through loss allowance account, and when the financial asset is determined to be uncollectible, the loss allowance is written off from the books along with the related financial asset. When loan receivable previously written off is subsequently collected, the related loss allowance is increased and changes in loss allowance are recognized in profit or loss.

b) Measurement of expected credit losses on financial asset at FVTOCI

The measurement method of expected credit loss is identical to financial asset at amortized cost, but changes in the loss allowance is recognized in other comprehensive income. When financial assets at FVTOCI is disposed or repaid, the related loss allowance is reclassified from other comprehensive income to net income.

The comparative financial statements for the year 2017 are prepared in accordance with K-IFRS 1039.

 

  1)

Financial assets

A regular way purchase or sale of financial assets is recognized or derecognized on the trade or settlement date. A regular way purchase or sale is a purchase or sale of a financial asset under a contract whose term requires delivery of the asset within the time frame established generally by regulation or convention in the marketplace concerned.

On initial recognition, financial assets are classified into financial assets at fair value through profit or loss (“FVTPL”), AFS financial assets, held-to-maturity (“HTM”) and loans and receivables.

 

 

Financial assets at FVTPL

The Group classifies financial assets as financial assets measured at FVTPL when they are either held for trading or designated to be measured at FVTPL. Financial assets acquired with the purpose of selling in the near term are classified as financial assets held for trading, and are measured at fair value with related valuation gain or loss recognized in net income. Any transaction cost related to the acquisition of financial assets at initial recognition is recognized in net income upon its occurrence.

A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if: (a) such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or (b) the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or (c) it forms part of a contract containing one or more embedded derivatives, and K-IFRS 1039 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.

Financial assets designated by the Group on initial recognition as at FVTPL are recognized at fair value, with transaction costs recognized in net income, and are subsequently measured at fair value. Gains and losses on financial assets that are designated as at FVTPL are recognized in net income as they arise.

 

- 27 -


 

AFS financial assets

Financial assets that are not classified as HTM, financial assets at FVTPL, or loans and receivables, are classified as AFS. Financial assets can be designated as AFS on initial recognition. AFS financial assets are initially recognized at fair value plus directly related transaction costs. They are subsequently measured at fair value. Unquoted equity investments whose fair value cannot be measured reliably are carried at cost and classified as AFS financial assets. Impairment losses in monetary and non-monetary AFS financial assets and dividends on non-monetary financial assets are recognized in net income. Interest revenue on monetary financial assets is calculated using the effective interest method. Other changes in the fair value of AFS financial assets and any related tax are reported in a separate component of shareholders’ equity until disposal, when the cumulative gain or loss is recognized in net income.

 

 

HTM financial assets

A financial asset may be classified as a HTM investment only if it has fixed or determinable payments, a fixed maturity, and the Group has the positive intention and ability to hold the financial asset to maturity. HTM investments are initially recognized at fair value plus directly related transaction costs. They are subsequently measured at amortized cost using the effective interest method less any impairment losses.

 

 

Loans and other receivables

Non-derivative financial assets with fixed or determinable repayments that are not quoted in an active market are classified as loans and receivables, except those that are classified as AFS or as held-for-trading, or designated as at FVTPL. Loans and receivables are initially recognized at fair value plus directly related transaction costs. They are subsequently measured at amortized cost using the effective interest method less any impairment losses. Interest income is recognized using the effective interest method, except for the short-term receivables to which the present value discount is not meaningful.

 

  2)

Financial liabilities

On initial recognition financial liabilities are classified financial liabilities at FVTPL (held for trading, and financial liabilities designated as at FVTPL) and financial liabilities measured at amortized cost.

A financial liability is classified as held-for-trading if it is incurred principally for repurchase in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking, or it is a derivative (not in a qualifying hedge relationship). Held-for-trading financial liabilities are recognized at fair value with transaction costs being recognized in net income. Subsequently, they are measured at fair value. Gains and losses are recognized in net income as they incur.

A financial liability other than a financial liability held for trading may be designated as at FVTPL upon initial recognition if: (a) such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or (b) the financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or (c) it forms part of a contract containing one or more embedded derivatives, and K-IFRS 1039 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.

Financial liabilities that the Group designates on initial recognition as being at FVTPL are recognized at fair value, with transaction costs being recognized in net income, and are subsequently measured at fair value. Gains and losses on financial liabilities that are designated as at FVTPL are recognized in net income as they incur.

All other financial liabilities, such as deposits due to customers, borrowings, and debentures, are measured at amortized cost using the effective interest method.

 

  3)

Reclassification

Held-for-trading and AFS financial assets that meet the definition of loans and receivables (non-derivative financial assets with fixed or determinable payments that are not quoted in an active market) may be reclassified to loans and receivables if the Group has the intention and ability to hold the financial asset for the foreseeable future or until maturity. The Group typically regards the foreseeable future as twelve months from the date of reclassification. Reclassifications are made at fair value. This fair value becomes the asset’s new cost or amortized cost as appropriate. Gains and losses recognized up to the date of reclassification are not reversed.

 

- 28 -


  4)

Derecognition

The Group derecognizes a financial asset when the contractual right to the cash flows from the asset is expired, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another company. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognizes its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognize the financial asset and also recognizes a collateralized borrowing for the proceeds received.

On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulated gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized in profit or loss.

On derecognition of a financial assets other than in its entirety the Group allocates the previous carrying amount of the financial asset between the part it continues to recognize under continuing involvement, and the part it no longer recognizes on the basis of the relative fair value of those parts on the date of the transfer. The difference between the carrying amount allocated to the part that is no longer recognized and the sum of the consideration received for the part that is no longer recognized and any cumulative gain or loss allocated to it that had been recognized in other comprehensive income is recognized in profit or loss. A cumulative gain or loss that had been recognized in other comprehensive income is allocated between the part that continues to be recognized and the part that is no longer recognized on the basis of the relative fair value of those parts.

The Group derecognizes the financial liability, when Group’s obligations are discharged, canceled or expired. The difference between paid cost and the carrying amount of financial liabilities is recorded in profit or loss.

 

  5)

Fair value of financial instruments

Financial instruments classified as held-for-trading or designated as at FVTPL and financial assets classified as AFS are recognized in the financial statements at fair value. All derivatives are measured at fair value.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in and orderly transaction between market participants at the measurement date. Fair values are determined from quoted prices in active markets for identical financial assets or financial liabilities where these are available. The Group characterizes active markets as those in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

Where a financial instrument is not in active market characterized by low transaction volumes, price quotations which vary substantially among market participants, or in which minimal information is released publicly, fair values are established using valuation techniques rely on alternative market data or internally developed models using significant inputs that are generally readily observable from objective sources. Market data includes prices of financial instruments with similar maturities and characteristics, duration, interest rate yield curves, and measures of volatility. The amount determined to be fair value may incorporate the management of the Group’s own assumptions (including assumptions that the Group believes market participants would use in valuing the financial instruments and assumptions relating to appropriate risk adjustments for nonperformance and lack of marketability).

The valuation techniques used to estimate the fair value of the financial instruments include market approach and income approach, each of which involves a significant degree of judgment. Under the market approach, fair value is determined by reference to a recent transaction involving the financial instruments or by reference to observable valuation measures for comparable companies or assets. Under the income approach, fair value is determined by converting future amounts (e.g., cash flows or earnings) to a single present amount (discounted) using current market expectations about the future amounts. In determining value under this approach, the Group makes assumptions regarding, among other things, revenues, operating income, depreciation and amortization, capital expenditures, income taxes, working capital needs, and terminal value of the financial investments. These valuation techniques involve a degree of estimation, the extent of which depends on the instrument’s complexity and the availability of market-based data.

The following are descriptions of valuation methodologies used by the Group to measure various financial instruments at fair value.

 

- 29 -


a) Financial assets at FVTPL and AFS financial assets

The fair value of the securities included in financial assets at FVTPL and AFS financial assets are recognized in the consolidated statements of financial position based on quoted market prices, where available. For debt securities traded in the OTC market, the Group generally determines fair value based on prices obtained from independent pricing services. Specifically, with respect to independent pricing services, the Group obtains three prices per instrument from reputable independent pricing services in Korea, and generally uses the lowest of the prices obtained from such services without further adjustment. For non-marketable equity securities, the Group obtains prices from the independent pricing services. The Group validates prices received from such independent pricing services using a variety of means, including verification of the qualification of the independent pricing services, corroboration of the pricing by comparing the prices among the independent pricing services and by reference to other available market data, and review of the pricing model and assumptions used by the independent pricing services by the Group’s personnel who are familiar with market-related conditions.

b) Derivatives

Quoted market prices are used for the Group’s exchange-traded derivatives, such as certain interest rate futures and option contracts. All of the Group’s derivatives are traded in OTC markets where quoted market prices are not readily available are valued using internal valuation techniques. Valuation techniques and inputs to internally developed models depend on the type of derivative and nature of the underlying rate, price or index upon which the derivative’s value is based. If the model inputs for certain derivatives are not observable in a liquid market, significant judgments on the level of inputs used for valuation techniques are required.

c) Adjustment of valuation amount

By using derivatives, the Group is exposed to credit risk if counterparties to the derivative contracts do not perform as expected. If counterparty fails to perform, counterparty credit risk is equal to the amount reported as a derivative asset in the consolidated statements of financial position. The amounts reported as a derivative asset are derivative contracts in a gain position. Few of the Group’s derivatives are listed on an exchange. The majority of derivative positions is valued using internally developed models that use as their basis observable market inputs. Therefore, an adjustment is necessary to reflect the credit quality of each counterparty to arrive at fair value. Counterparty credit risk adjustments are applied to derivative assets, such as OTC derivative instruments, when the market inputs used in valuation models may not be indicative of the creditworthiness of the counterparty. Adjustments are also made when valuing financial liabilities to reflect the Group’s own credit standing.

The adjustment is based on probability of default of a counterparty and loss given default. The adjustment also takes into account contractual factors designed to reduce the Group’s credit exposure to each counterparty. To the extent derivative assets (liabilities) are subject to master netting arrangements, the exposure used to calculate the credit risk adjustment is net of derivatives in a loss (gain) position with the same counterparty and cash collateral received (paid).

 

  6)

Impairment of financial assets

The Group assesses at the end of each reporting date whether there is any objective evidence that a financial asset or group of financial assets classified as AFS, HTM or loans and receivables is impaired. A financial asset or portfolio of financial assets is impaired and an impairment loss incurred if there is objective evidence of impairment as result of one or more events that occurred after the initial recognition asset and that event (or events) has an impact on the estimated future cash flows of the financial asset.

a) Financial assets carried at amortized cost

If there is objective evidence that an impairment loss on a financial asset or group of financial assets classified as HTM investments or as loans and receivables have been incurred, the Group measures the amount of the loss as the difference between the carrying amount of the asset or group of assets and the present value of estimated future cash flows from the asset or group of assets discounted at the effective interest rate of the instrument at initial recognition. For collateralized loans and receivables, estimated future cash flows include cash flows that may result from foreclosure less the costs of obtaining and selling the collateral.

 

- 30 -


Impairment losses are assessed individually for financial assets that are individually significant and assessed either individually or collectively for assets that are not individually significant. In making collective assessment of impairment, financial assets are grouped into portfolios on the basis of similar risk characteristics. Future cash flows from these portfolios are estimated on the basis of the contractual cash flows and historical loss experience for assets with similar credit risk characteristics. Historical loss experience is adjusted, on the basis of observable data, to reflect current conditions not affecting the period of historical experience.

Impairment losses are recognized in net income and the carrying amount of the financial asset or group of financial assets reduced by establishing a provision for impairment losses. If, in a subsequent period, the amount of the impairment loss reduces and the reduction can be ascribed to an event after the impairment was recognized (i.e., improvement in the credit quality of a debtor), the previously recognized loss is reversed by adjusting the provision. Once an impairment loss has been recognized on a financial asset or group of financial assets, interest income is recognized on the carrying amount using the rate of interest at which estimated future cash flows were discounted in measuring impairment.

It is not the Group’s usual practice to write-off the asset at the time an impairment loss is recognized. Impaired loans and receivables are written off (i.e. the impairment provision is applied in writing down the loan’s carrying value in full) when the Group concludes that there is no longer any realistic prospect of recovery of part or the entire loan. Amounts recovered after a loan has been written off are reflected to the provision for the period in which they are received.

b) Financial assets carried at fair value

When a decline in the fair value of a financial asset classified as AFS has been recognized directly in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss is removed from other comprehensive income and recognized in net income. The loss is measured as the difference between the amortized cost of the financial asset and its current fair value. Impairment losses on AFS equity instruments are not reversed through net income, but those on AFS debt instruments are reversed, if there is a decrease in the cumulative impairment loss that is objectively related to a subsequent event.

 

(10)

Offsetting financial instruments

Financial assets and liabilities are presented as a net amount in the statements of financial position when the Group has an enforceable legal right and an intention to settle on a net basis or to realize an asset and settle the liability simultaneously.

 

(11)

Investment properties

The Group classifies a property held to earn rentals and/or for capital appreciation as an investment property. Investment properties are measured initially at cost, including transaction costs, less subsequent depreciation and impairment.

Subsequent costs are included in the carrying amount of the asset or recognized as a separate asset if it is probable that future economic benefits associated with the assets will flow into the Group and the cost of an asset can be measured reliably, and the book value of a portion of an asset that are replaced by a subsequent expenditure is removed from the books. Routine maintenance and repairs are expensed as incurred.

While land is not depreciated, all other investment properties are depreciated based on the depreciation method and useful lives of premises and equipment. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, and when it is deemed appropriate to change them, the effect of any change is accounted for as a change in accounting estimates.

An investment property is derecognized from the consolidated financial statements on disposal or when it is permanently withdrawn from use and no future economic benefits are expected even from its disposal. The gain or loss on the derecognition of an investment property is calculated as the difference between the net disposal proceeds and the carrying amount of the property, and is recognized in profit or loss in the period of the derecognition.

 

- 31 -


(12)

Premises and equipment

Premises and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. The cost of an item of premises and equipment is expenditures directly attributable to their purchase or construction, which includes any cost 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. It also includes the initial estimate of costs of dismantling and removing the item and restoring the site on which it is located.

Subsequent costs are recognized in the carrying amount of an asset or as a separate asset (if appropriate) if it is probable that future economic benefit associated with the assets will flow into the Group and the cost of an asset can be measured reliably. Routine maintenance and repairs are expensed as incurred.

While land is not depreciated, for all other premises and equipment, depreciation is charged to net income on a straight-line basis by applying the following estimated economic useful lives on the amount of cost or revalued amount less residual value.

 

    

Useful life

Buildings used for business purpose

   35 to 57 years

Structures in leased office

   4 to 5 years

Properties for business purpose

   4 to 5 years

Leased assets

  

Useful lives of the same kind or

similar other premises and equipment

The Group reassesses the depreciation method, the estimated useful lives and residual values of premises and equipment at the end of each reporting period. If changes in the estimates are deemed appropriate, the changes are accounted for as a change in an accounting estimate. When there is an indicator of impairment and the carrying amount of a premises and equipment item exceeds the estimated recoverable amount, the carrying amount of such asset is reduced to the recoverable amount.

 

(13)

Intangible assets and goodwill

The Group is recognizing intangible assets measured at the manufacturing cost or acquisition cost plus additional incidental expenses less accumulated amortization and accumulated impairment losses. The Group’s intangible asset are amortized over the following economic lives using the straight-line method. The estimated useful life and amortization method are reviewed at the end of each reporting period. If changes in the estimates are deemed appropriate, the changes are accounted for as a change in an accounting estimate.

 

    

Useful life

Industrial property rights

   10 years

Development costs

   5 years

Software and others

   4 to 5 years

In addition, when an indicator that intangible assets are impaired is noted, and the carrying amount of the asset exceeds the estimated recoverable amount of the asset, the carrying amount of the asset is reduced to its recoverable amount.

Goodwill acquired in a business combination is included in intangible assets. Goodwill is not amortized, but is subject to an impairment test at the cash-generating unit level every year, and whenever there is an indicator that goodwill is impaired.

Goodwill is allocated to each of the Group’s cash-generating unit (or groups of cash-generating units) that is expected to benefit from the synergies of the combination. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit on a pro rata basis based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognized directly in profit or loss. An impairment loss recognized for goodwill is not reversed in subsequent periods.

 

- 32 -


(14)

Impairment of non-monetary assets

Intangible assets with indefinite useful lives or intangible assets that are not yet available for use are tested for impairment annually, regardless of whether or not there is any indication of impairment. All other assets are tested for impairment by estimating the recoverable amount when there is an objective indication that the carrying amount may not be recoverable. Recoverable amount is the higher of value in use or net fair value, less costs to sell. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount and such impairment loss is recognized immediately in net income.

 

(15)

Leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

1) The Group as a lessor

The Group recognizes lease receivables at the present value of minimum lease payments of a finance lease and any unguaranteed residual value. After the commencement date of the lease, accounting is done to recognize interest income over each reporting period by computing periodic interest income on the Group’s net investment.

Rental income from operating leases is recognized on a straight-line basis over the lease term. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and expensed on a straight-line basis over the lease term. Operating lease assets are included within other asset category in other assets, and depreciated over their economic life.

2) The Group as a lessee

Assets held under finance leases are initially recognized as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the separate statements of financial position as a finance lease obligation. Lease payments are apportioned between finance expenses and reduction of the lease obligation to achieve a constant rate of interest on the remaining balance of the liability. Contingent rentals arising under finance leases are recognized as expenses in the periods in which they are incurred.

Operating lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognized as expenses in the period in which they are incurred.

 

(16)

Derivative instruments

Derivative instruments are classified as forwards, futures, options and swaps, depending on the types of transactions and are classified at the point of transaction as either trading or hedging based on its purpose.

Derivatives are initially recognized at fair value at the date of contract and are subsequently measured at fair value at the end of each reporting period. The resulting gain or loss is recognized in net income immediately unless the derivative is designated and effective as a hedging instrument. If derivatives have been designated as hedging instruments and if it is effective, the point of recognition of gain or loss depends on the characteristics of hedging relationship.

1) Embedded derivatives

Embedded derivatives are components of a hybrid financial instrument that includes a non-derivative host contract. It has an effect of modifying part of cash flows of the hybrid financial instrument similar to an independent derivative.

Embedded derivatives that are part of a hybrid contract of which the host contract is a financial asset within the scope of K-IFRS 1109 is not separated. The classification is done by considering the hybrid contract as a whole, and subsequent measurement is either at amortized cost or fair value.

 

- 33 -


If embedded derivatives are part of a hybrid contract of which the host contract is not a financial asset within the scope of K-IFRS 1109 (e.g. financial liability), then these are treated as separate derivatives if embedded derivatives meet the definition of a derivative, characteristics & risk of the embedded derivatives are not closely related to that of host contract, and if the host contract is not measured at FVTPL.

In the previous year, all embedded derivatives which were part of a hybrid contract were treated as separate derivatives if embedded derivatives meet the definition of a derivative, characteristics & risk of the embedded derivatives are not closely related to that of host contract, and if the host contract is not measured at FVTPL

2) Hedge accounting

The Group is applying K-IFRS 1109 in regards to hedge accounting. The Group is designating certain derivatives as hedging instrument against fair value changes in relation to the interest rate risk, foreign currency translation and interest rate risk, and foreign currency translation risk.

The Group is documenting the relationship between hedging instruments and hedged items at the commencement of hedging in accordance with their purpose and strategy. Also, the Group documents at the commencement and subsequent dates whether the hedging instrument effectively counters the changes in fair value of hedged items. A hedging instrument is effective only when it meets all the following criteria:

 

   

When there is an economic relationship between the hedged items and hedging instruments.

 

   

When the effect of credit risk is not stronger than the change in value due to the economic relationship between the hedged items and hedging instruments.

 

   

When the hedge ratio is equal to the proportion of hedged items to the hedging instruments.

When a hedging relationship no longer meets the hedging effectiveness requirements related to hedge ratio, but when the purpose of risk management on designated hedging relationship is still maintained, the hedge ratio of the hedging relationship is adjusted so that hedging relationship may meet the requirements again (Hedge ratio readjustment).

The Group has designated derivatives as hedging instrument except for the portion on foreign currency basis spread. The fair value change due to foreign currency basis spread is recognized in other comprehensive income and is accumulated in equity. If the hedged item is related to transactions, the accumulated other comprehensive income is reclassified to profit or loss when the hedged item affects the profit or loss. However, when non-monetary items are subsequently recognized due to hedged items, the accumulated equity is removed from the equity directly, and is included in the initial book value of the recognized non-monetary items. Such transfers does not affect other comprehensive income. But if part or all of accumulated equity is not expected to be recovered in the future periods, the amount not expected to be recovered is immediately reclassified to profit or loss. If the hedged item is time-related, then the foreign currency basis spread on the day the derivative is designated as a hedging instrument that is related to the hedged item is reclassified to profit or loss over the term of the hedge.

3) Fair value hedge

Gain or loss arising from valid hedging instrument is recognized in profit or loss. However, when the hedging instrument mitigates risks on equity instruments designated as financial assets at FVTOCI, related gain or loss is recognized in other comprehensive income.

The book value of hedged items that are not measured in fair value is adjusted by the changes in fair value arising from the hedged risk, with resulting gain or loss reflected in net income. In case of debt instruments measured at FVTOCI, book value is an amount that is already adjusted to fair value and thus gain or loss arising from the hedged risk is recognized in profit or loss instead of other comprehensive income without adjustments in book value. When the hedged item is equity instruments measured at FVTOCI, the gain or loss arising from hedged risk is retained at other comprehensive income in order to match the gain or loss with hedging instruments.

Hedge accounting ceases to apply only when hedging relationship (or part of it) does not meet the requirements of hedge accounting (even after hedging relationship readjustment, if applicable). This treatment holds in case of lapse, disposal, expiry and exercise of hedging instruments, and this cease of treatment applies prospectively. The fair value adjustments made to book value of hedged item due to hedged risk is amortized from the date of discontinuance of hedge accounting and is recognized in profit or loss.

 

- 34 -


4) Cash flow hedge

The Group recognizes the effective portion of changes in the fair value of derivatives and other valid hedging instruments that are designated and qualified as cash flow hedges in other comprehensive income, to the extent of cumulative fair value changes of the hedged item from the date of hedge accounting. The gain or loss relating to the ineffective portion is recognized immediately in net income.

Amounts previously recognized in other comprehensive income and accumulated in equity are reclassified to net income when the hedged item affects net income. However, when non-monetary assets or liabilities are subsequently recognized due to expected transactions involving hedged items, the valuation gain or loss accumulated in the equity as other comprehensive income is removed from the equity and included in the initial book value of the recognized non-monetary assets or liabilities. Such transfers does not affect other comprehensive income. Also if accumulated other comprehensive income is a loss and part or all of the losses are not expected to be recovered in the future periods, the said amount is immediately reclassified to profit or loss.

Hedge accounting ceases to apply only when hedging relationship (or part of it) does not meet the requirements of hedge accounting (even after hedging relationship readjustment, if applicable). This treatment holds in case of lapse, disposal, expiry and exercise of hedging instruments, and this cease of treatment applies prospectively. At the point of cessation of cash flow hedge, the valuation gain or loss recognized as accumulated other comprehensive income continues to be recognized as equity, and is reclassified to profit or loss when the expected transaction is ultimately recognized as profit or loss. However, when transactions are no longer expected to occur, the valuation gain or loss of hedging instrument recognized as accumulated other comprehensive income is immediately reclassified to profit or loss.

 

(17)

Assets (or disposal group) held for sale

The Group classifies a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. Non-current assets (and disposal groups) classified as held for sale are measured at the lower of their previous carrying amount and fair value less costs to sell.

(18) Provisions

Provisions are recognized if (a) it has present or contractual obligations as a result of the past event, (b) it is probable that an outflow of resources will be required to settle the obligation and (c) the amount of the obligation is reliably estimated. Provision is not recognized for the future operating losses.

The Group recognizes provision related to the unused membership points, payment guarantees, loan commitment and litigations. Where the Group is required to restore a leased property that is used as a branch to an agreed condition after the contractual term expires, the present value of expected amounts to be used to dispose, decommission or repair the facilities is recognized as an asset retirement obligation.

Where there are a number of similar obligations, the probability that an outflow will be required in settlement is determined by considering the obligations as a whole. Although the likelihood of outflow for any one item may be small, if it is probable that some outflow of resources will be needed to settle the obligations as a whole, a provision is recognized.

 

(19)

Capital and compound financial instruments

The Group classifies a financial instrument that it issues as a financial liability or an equity instrument in accordance with the substance of the contractual arrangement. A financial liability is a contractual obligation to deliver cash or another financial asset to another entity. An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. The compound financial instruments are financial instruments where it is neither a financial liability nor an equity instrument because it was designed to contain both equity and debt elements.

 

- 35 -


If the Group reacquires its own equity instruments, the consideration paid including the direct transaction costs (net of tax expense) are presented as a deduction from total equity until such instruments are retired or reissued. When these instruments are reissued, the consideration received (net of direct transaction costs) is included in the shareholder’s equity.

 

(20)

Financial guarantee contracts

A financial guarantee contract is a contract where the issuer must pay a certain amount of money in order to compensate losses suffered by the creditor when debtor defaults on a debt instrument in accordance with original or modified contractual terms.

A financial guarantee is initially measured at fair value and is subsequently measured at the higher of the amounts below unless it is designated to be measured at FVTPL or when it arises from disposal of an asset.

 

-

Loss allowance in accordance with K-IFRS 1109

 

-

Initial book value less accumulated profit measured in accordance with K-IFRS 1115

 

(21)

Employee benefits and pensions

The Group recognizes the undiscounted amount of short-term employee benefits expected to be paid in exchange for the services rendered by the employees. Also, the Group recognizes expenses and liabilities in the case of accumulating compensated absences when the employees render services that entitle their right to future compensated absences. Similarly, the Group recognizes expenses and liabilities for customary profit distribution or bonuses when the employees render services, even though the Group does not have legal obligation to do so because it can be construed as constructive obligation.

The Group is operating defined contribution plans and defined benefit plans. Contributions to defined contribution plans are recognized as an expense when employees have rendered services entitling them to receive the benefits. For defined benefit plans, the defined benefit liability is calculated through an actuarial assessment using the projected unit credit method every end of the reporting period, conducted by a professional actuaries. Remeasurement, comprising actuarial gains and losses, the return on plan assets (excluding interest), and the effect of the changes to the asset ceiling (if applicable) is reflected immediately in the separate statement of financial position with a charge or credit recognized in other comprehensive income in the period in which they occur.

Remeasurement recognized in the consolidated statement of comprehensive income is not reclassified to profit or loss in the subsequent periods. Past service cost is recognized in profit or loss in the period of a plan amendment. Net interest is calculated by applying the discount rate at the beginning of the period to the net defined benefit liability or asset. Defined benefit costs are composed of service cost (including current service cost and past service cost, as well as gains and losses on curtailments and settlements), net interest expense (income) and remeasurement.

The Group presents the service cost and net interest expense (income) components in profit or loss, and the remeasurement component in other comprehensive income. Curtailment gains and losses are accounted for as past service costs.

The retirement benefit obligation recognized in the consolidated statement of financial position represents the actual deficit or surplus in the Group’s defined benefit plans. Any surplus resulting from this calculation is recognized as an asset limited to the present value of any economic benefits available in the form of refunds from the plans or reductions in future contributions to the plans.

Liabilities for termination benefits are recognized at the earlier of either 1) the date when the Group is no longer able to cancel its proposal for termination benefits or 2) the date when the Group has recognized the cost of restructuring that accompanies the payment of termination benefits.

 

- 36 -


(22)

Income taxes

Income tax expense is composed of current tax and deferred tax. That is, income tax expense is composed of taxes payable or refundable during the period and deferred taxes calculated by applying asset-liability method to taxable and deductible temporary differences arising from operating loss and tax credit carryforwards. Temporary differences are the differences between the carrying values of assets and liabilities for financial reporting purposes and their tax bases. Deferred income tax benefit or expense is recognized for the change in deferred tax assets or liabilities. Deferred tax assets and liabilities are measured as of the reporting date using the enacted or substantively enacted tax rates expected to apply in the period in which the liability is settled or asset realized. Deferred tax assets, including the carryforwards of unused tax losses, are recognized to the extent it is probable that the deferred tax assets will be realized.

Deferred income tax assets and liabilities are offset if, and only if, the Group has a legally enforceable right to offset current tax assets against current tax liabilities, and the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority or when the entity intends to settle current tax liabilities and assets on a net basis with different taxable entities.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred liabilities are not recognized if the temporary difference arises from the initial recognition of goodwill. Deferred tax assets or liabilities are not recognized if they arise from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Current and deferred taxes are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity or when it arises from business combination.

 

(23)

Earnings per share (“EPS”)

Basic EPS is a calculation of net income per each common stock. It is calculated by dividing net income attributable to ordinary shareholders by the weighted-average number of common shares outstanding. Diluted EPS is calculated by adjusting the earnings and number of shares for the effects of all dilutive potential common shares.

 

3.

SIGNIFICANT ACCOUNTING ESTIMATES AND ASSUMPTIONS

The significant accounting estimates and assumptions are continuously being evaluated based on numerous factors including historical experiences and expectations of future events considered to be reasonably possible. Actual results can differ from those estimates based on such definitions. The accounting estimates and assumptions that contain significant risk of materially changing current book values of assets and liabilities in the next accounting periods are as follows:

 

(1)

Income taxes

The Group has recognized current and deferred taxes based on best estimates of expected future income tax effect arising from the Group’s operations until the end of the current reporting period. However, actual tax payment may not be identical to the related assets and/or liabilities already recognized, and these differences may affect current taxes and deferred tax assets/liabilities at the time when income tax effects are finalized. Deferred tax assets relating to tax losses carried forward and deductible temporary differences are recognized only to the extent that it is probable that future taxable profit will be available against which the tax losses carried forward and the deductible temporary differences can be utilized. In this case the Group’s evaluation considers various factors such as estimated future taxable profit based on forecasted operating results, which are based on historical financial performance. The Group is reviewing the book value of deferred tax assets every end of the reporting period and in the event that the possibility of earning future taxable income changes, the deferred tax assets are adjusted up to taxable income sufficient to use deductible temporary differences.

 

- 37 -


(2)

Valuation of financial instruments

Financial assets at FVTPL and FVTOCI are recognized in the consolidated financial statements at fair value. All derivatives are measured at fair value. Valuation techniques are required in order to determine fair values of financial instruments where observable market prices do not exist. Financial instruments that are not actively traded and have low price transparency will have less objective fair value and require broad judgment in liquidity, concentration, uncertainty in market factors and assumption in price determination and other risks.

As described in Note 2-(9)-5), ‘Fair value of financial assets and liabilities’, when valuation techniques are used to determine the fair value of a financial instrument, various general and internally developed techniques are used, and various types of assumptions and variables are incorporated during the process.

 

(3)

Impairment of financial instruments

K-IFRS 1109 requires entities to measure loss allowance equal to 12-month expected credit losses or lifetime expected credit losses after classifying financial assets into one of the three stages, which depends on the degree of increase in credit risk after their initial recognition.

 

    

Stage 1

  

Stage 2

  

Stage 3

  

Credit risk has not significantly increased
since initial recognition(*)

  

Credit risk has significantly

increased since initial

recognition

  

Credit has

been impaired

Allowance for expected credit losses

  

Expected 12-month credit losses:

Expected credit losses due to possible defaults on financial instruments within a 12-month period from the year-end.

  

Expected lifetime credit losses:

Expected credit losses from all possible defaults during the expected lifetime of the financial instruments.

 

(*)

Credit risk may be considered to not have been significantly increased when credit risk is low at year-end.

The Group has estimated the allowance for credit losses based on reasonable and supportable information that was available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.

Probability of default (PD) and Loss given default (LGD) for each category of financial asset is being calculated by considering factors such as debtor type, credit rating and portfolio. The estimates are regularly being reviewed in order to reduce discrepancies with actual losses.

Also, in measuring the expected credit losses, the Group is using reasonable and supportable macroeconomic indicators such as economic growth rates, interest rates, market index rates, etc., in order to forecast future economic conditions.

The Group is conducting the following procedures to estimate and apply future economic forecast information.

- Development of prediction models by analyzing the correlation between default rates of corporate and retail exposures per year and macroeconomic indicators

- Calculation of predicted default rate incorporating future economic forecasts by applying estimated macroeconomic indicators provided by verified institutions such as Bank of Korea and National Assembly Budget Office to the prediction model developed.

At the end of every reporting period, the Group evaluates whether credit risk reflected forward-looking information has significantly been increased since the date of initial recognition. When evaluating whether credit risk has significantly been increased, the changes in the probability of default over the financial instrument’s remaining life is used instead of changes in the amount of expected credit losses. The Group performs the above evaluation with distinctions made to corporate and retail exposures, and indicators of significant increase in credit risk are as follows:

 

- 38 -


Corporate Exposures

  

Retail Exposures

Asset quality level ‘Precautionary’ or lower

   Asset quality level ‘Precautionary’ or lower

More than 30 days past due

   More than 30 days past due

‘Warning’ level in early warning system

   Significant decrease in credit rating(*)

Debtor experiencing financial difficulties

(Capital impairment, Adverse opinion or Disclaimer of opinion by external auditors)

  

Significant decrease in credit rating(*)

  

 

(*)

Determining whether there has been a significant decrease in the credit rating of corporate and retail exposures applies only to credit ratings that are measured through 12-month expected credit loss. The Bank has applied the above indicators of significant decrease in credit rating since initial recognition as follows, and the estimation method is regularly being monitored.

 

    

Credit rating

  

Significant increased indicator of the credit rating

Corporate

   AAA ~ A+    More than 4 steps
   A- ~ BBB    More than 3 steps
   BBB- ~ BB+    More than 2 steps
   BB ~ BB-    More than 1 step

Retail

   1 ~ 3    More than 3 steps
   4 ~ 5    More than 2 steps
   6 ~ 10    More than 1 step

The Group sees no significant increase in credit risk after initial recognition for debt securities, etc. with a credit rating of A + or higher, which are deemed to have low credit risk at the end of the reporting period

 

The

Group concludes that credit is impaired when financial assets are under conditions stated below:

 

-

When principal of loan is overdue for 90 days or longer due to significant deterioration in credit

 

-

For loans overdue for less than 90 days, when it is determined that not even a portion of the loan will be recovered unless claim actions such as disposal of collaterals are taken

 

-

When other objective indicators of impairment has been noted for the financial asset.

The Group determines which loan is subject to write-off in accordance with internal guidelines, and writes off loan receivables when it is determined that the loans are practically irrecoverable. For example, loans are practically irrecoverable when application is made for rehabilitation under the Debtor Rehabilitation and Bankruptcy Act and loans are confirmed as irrecoverable by the court’s decision to waive debtor’s obligation, or when it is impossible to recover the loan amount through legal means such as auctioning of debtor’s assets or through any other means of recovery available. Notwithstanding the write-off, the Group may still exercise its right of collection after the asset has been written off in accordance with its collection policies.

 

(4)

Defined benefit plan

The Group operates a defined benefit pension plan. Defined benefit obligation is calculated at every end of the reporting period by performing actuarial valuation, and estimation of assumptions such as discount rate, expected wage growth rate and mortality rate is required to perform such actuarial valuation. The defined benefit plan, due to its long-term nature, contains significant uncertainties in its estimates.

 

- 39 -


4.

RISK MANAGEMENT

The Group’s operating activity is exposed to various financial risks. The Group is required to analyze and assess the level of complex risks, and determine the permissible level of risks and manage such risks. The Group’s risk management procedures have been established to improve the quality of assets for holding or investment purposes by making decisions as how to avoid or mitigate risks through the identification of the source of the potential risks and their impact.

The Group has established an approach to manage the acceptable level of risks and reduce the excessive risks in financial instruments in order to maximize the profit given risks present, for which the Group has implemented processes for risk identification, assessment, control, and monitoring and reporting.

The risk is managed by the risk management department in accordance with the Group’s risk management policy. The Risk Management Committee makes decisions on the risk strategies such as the allocation of risk capital and the establishment of acceptable level of risk.

 

(1)

Credit risk

Credit risk represents the possibility of financial losses incurred when the counterparty fails to fulfill its contractual obligations. The goal of credit risk management is to maintain the Group’s credit risk exposure to a permissible degree and to optimize its rate of return considering such credit risk.

 

  1)

Credit risk management

The Group considers the probability of failure in performing the obligation of its counterparties, credit exposure to the counterparty, the related default risk and the rate of default loss. The Group uses the credit rating model to assess the possibility of counterparty’s default risk; and when assessing the obligor’s credit grade, the Group utilizes credit grades derived using statistical methods.

In order to manage credit risk limit, the Group establishes the appropriate credit line per obligor, company or industry. It monitors obligor’s credit line, total exposures and loan portfolios when approving the loan.

The Group mitigates credit risk resulting from the obligor’s credit condition by using financial and physical collateral, guarantees, netting agreements and credit derivatives. The Group has adopted the entrapment method to mitigate its credit risk. Credit risk mitigation is reflected in qualifying financial collateral, trade receivables, guarantees, residential and commercial real estate and other collaterals. The Group regularly performs a revaluation of collateral reflecting such credit risk mitigation.

 

  2)

Maximum exposure to credit risk

The Group’s maximum exposure to credit risk refers to net book value of financial assets net of allowances, which shows the uncertainties of maximum changes of net value of financial assets attributable to a particular risk without considering collateral and other credit enhancements obtained. However, the maximum exposure is the fair value amount (recorded on the books) for derivatives, maximum contractual obligation for payment guarantees and unused loan commitment.

 

- 40 -


The maximum exposure to credit risk is as follows (Unit: Korean Won in millions):

 

          December 31, 2018      December 31, 2017  

Loans and other financial assets at amortized cost

   Korean treasury and government agencies      13,547,154        —    
   Banks      22,282,857        —    
   Corporates      96,619,393        —    
   Consumers      149,998,911        —    
     

 

 

    

 

 

 
   Sub-total      282,448,315        —    
     

 

 

    

 

 

 

Loans and receivables

   Korean treasury and government agencies      —          8,823,584  
   Banks      —          26,845,309  
   Corporates      —          90,570,551  
   Consumers      —          140,866,760  
     

 

 

    

 

 

 
   Sub-total      —          267,106,204  
     

 

 

    

 

 

 

Financial assets at FVTPL

(K-IFRS 1109)

   Deposit      26,935        —    
   Debt securities      1,824,155        —    
   Loans      385,450        —    
   Derivative assets      2,026,079        —    
     

 

 

    

 

 

 
   Sub-total      4,262,619        —    
     

 

 

    

 

 

 

Financial assets at FVTPL

(K-IFRS 1039)

   Deposit      —          25,972  
   Debt securities      —          2,644,333  
   Financial assets designated at FVTPL      —          9,694  
   Derivative assets      —          3,115,775  
     

 

 

    

 

 

 
   Sub-total      —          5,795,774  
     

 

 

    

 

 

 

Financial assets at FVTOCI

   Debt securities      17,112,249        —    

AFS financial assets

   Debt securities      —          13,229,244  

Securities at amortized cost

   Debt securities      22,932,559        —    

HTM financial assets

   Debt securities      —          16,749,296  

Derivative assets

   Derivative assets (Designated for hedging)      35,503        59,272  

Off-balance accounts

   Guarantees      12,666,417        12,859,715  
   Unused loan commitments      97,796,704        80,760,325  
     

 

 

    

 

 

 
   Sub-total      110,463,121        93,620,040  
     

 

 

    

 

 

 
   Total      437,254,366        396,559,830  
     

 

 

    

 

 

 

 

- 41 -


  a)

Credit risk exposure by geographical areas

The following tables analyze credit risk exposure by geographical areas (Unit: Korean Won in millions):

 

     December 31, 2018  
     Korea      China      USA      UK      Japan      Others (*)      Total  

Loans and other financial assets at amortized cost

     261,538,144        4,592,153        4,597,119        1,526,532        893,354        9,301,013        282,448,315  

Securities at amortized cost

     22,757,048        —          70,578        —          —          104,933        22,932,559  

Financial assets at FVTPL

     4,261,110        1,243        —          —          266        —          4,262,619  

Financial assets at FVTOCI

     15,697,518        261,085        103,755        24,960        2,247        1,022,684        17,112,249  

Derivative assets (Designated for hedging)

     35,503        —          —          —          —          —          35,503  

Off-balance accounts

     107,632,858        801,978        343,323        136,727        35,000        1,513,235        110,463,121  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     411,922,181        5,656,459        5,114,775        1,688,219        930,867        11,941,865        437,254,366  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2017  
     Korea      China      USA      UK      Japan      Others (*)      Total  

Loans and receivables

     250,678,479        4,104,912        2,823,247        1,094,988        381,890        8,022,688        267,106,204  

Financial assets at FVTPL

     5,551,870        2,937        —          148,955        —          92,012        5,795,774  

AFS debt securities

     12,407,602        52,259        151,131        —          —          618,252        13,229,244  

HTM securities

     16,606,692        —          63,732        —          —          78,872        16,749,296  

Derivative assets (Designated for hedging)

     16,590        —          —          42,682        —          —          59,272  

Off-balance accounts

     91,603,852        529,193        172,570        66,974        25,039        1,222,412        93,620,040  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     376,865,085        4,689,301        3,210,680        1,353,599        406,929        10,034,236        396,559,830  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(*)

Others consist of financial assets in Indonesia, Hong Kong, Singapore, and other countries.

 

  b)

Credit risk exposure by industries

The following tables analyze credit risk exposure by industries, which are service, manufacturing, finance and insurance, construction, individuals and others in accordance with the Korea Standard Industrial Classification Code (Unit: Korean Won in millions):

 

     December 31, 2018  
     Service      Manufacturing      Finance and
insurance
     Construction      Individuals      Others      Total  

Loans and other financial assets at amortized cost

     48,316,081        34,967,700        40,337,838        3,295,967        145,715,074        9,815,655        282,448,315  

Securities at amortized cost

     1,157,512        —          13,414,743        527,847        —          7,832,457        22,932,559  

Financial assets at FVTPL

     120,659        153,159        3,117,845        16,118        7,614        847,224        4,262,619  

Financial assets at FVTOCI

     382,409        109,749        13,017,646        224,665        5,535        3,372,245        17,112,249  

Derivative assets (Designated for hedging)

     —          —          35,503        —          —          —          35,503  

Off-balance accounts

     17,645,104        22,300,388        9,654,685        4,146,708        49,948,865        6,767,371        110,463,121  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     67,621,765        57,530,996        79,578,260        8,211,305        195,677,088        28,634,952        437,254,366  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2017  
     Service      Manufacturing      Finance and
insurance
     Construction      Individuals      Others      Total  

Loans and receivables

     47,192,641        34,502,509        38,260,051        3,574,746        133,094,287        10,481,970        267,106,204  

Financial assets at FVTPL

     100,766        83,239        4,640,068        15,073        1,040        955,588        5,795,774  

AFS debt securities

     707,737        37,719        7,331,774        153,534        —          4,998,480        13,229,244  

HTM securities

     1,348,754        —          10,962,149        296,214        —          4,142,179        16,749,296  

Derivative assets (Designated for hedging)

     —          —          59,272        —          —          —          59,272  

Off-balance accounts

     16,892,926        21,427,378        9,841,379        3,842,479        36,928,554        4,687,324        93,620,040  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     66,242,824        56,050,845        71,094,693        7,882,046        170,023,881        25,265,541        396,559,830  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 42 -


  3)

Credit risk exposure

 

a)

Financial assets

The maximum exposure to credit risk by asset quality, except for financial assets at FVTPL and derivative asset (Designated for hedging) is as follows (Unit: Korean Won in millions):

 

     December 31, 2018  
     Stage 1      Stage 2      Stage 3      Total      Loss
allowance
    Total, net  
     Above
appropriate
credit rating
(*1)
     Less than a
limited
credit rating
(*3)
     Above
appropriate
credit rating
(*2)
     Less than a
limited
credit rating
(*3)
 

Loans and other financial assets at amortized cost

     252,911,704        17,624,416        6,330,382        5,739,850        1,693,148        284,299,500        (1,851,185     282,448,315  

Korean treasury and government agencies

     13,549,305        1,009        1        —          —          13,550,315        (3,161     13,547,154  

Banks

     22,162,966        105,583        27,777        —          14,307        22,310,633        (27,776     22,282,857  

Corporates

     77,152,005        15,550,301        655,907        3,424,215        1,034,030        97,816,458        (1,197,065     96,619,393  

General business

     43,165,455        6,474,057        526,303        1,723,704        716,722        52,606,241        (816,783     51,789,458  

Small- and medium-sized enterprise

     29,510,917        8,527,542        107,998        1,547,761        277,825        39,972,043        (335,469     39,636,574  

Project financing and others

     4,475,633        548,702        21,606        152,750        39,483        5,238,174        (44,813     5,193,361  

Consumers

     140,047,428        1,967,523        5,646,697        2,315,635        644,811        150,622,094        (623,183     149,998,911  

Securities at amortized cost

     22,939,039        —          195        —          250        22,939,484        (6,925     22,932,559  

Financial assets at FVTOCI (*4)

     16,940,654        146,443        25,153        —          —          17,112,250        (6,177     17,112,250  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     292,791,397        17,770,859        6,355,730        5,739,850        1,693,398        324,351,234        (1,864,287     322,493,124  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

     December 31, 2018  
     Collateral value  
     Stage1      Stage2      Stage3      Total  

Loans and other financial assets at amortized cost

     163,329,105        8,836,440        698,593        172,864,138  

Korean treasury and government agencies

     11,600        —          —          11,600  

Banks

     361,024        3,334        —          364,358  

Corporates

     51,595,949        2,509,620        426,325        54,531,894  

General business

     19,907,948        1,167,993        241,651        21,317,592  

Small- and medium-sized enterprise

     29,780,716        1,291,222        184,674        31,256,612  

Project financing and others

     1,907,285        50,405        —          1,957,690  

Consumers

     111,360,532        6,323,486        272,268        117,956,286  

Securities at amortized cost

     —          —          —          —    

Financial assets at FVTOCI (*4)

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     163,329,105        8,836,440        698,593        172,864,138  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(*1)

Credit grade of corporates are AAA ~ BBB, and consumers are grades 1 ~ 6.

(*2)

Credit grade of corporates are A- ~ BBB, and consumers are grades 1 ~ 6.

(*3)

Credit grade of corporates are BBB- ~ C, and consumers are grades 7 ~ 10.

(*4)

Financial assets at FVTOCI has been disclosed as the amount before deducting loss allowance because loss allowance does not reduce the carrying amount.

 

- 43 -


  -

Loans and receivables

 

     December 31, 2017  
                 Corporates                
   Korean
treasury and
government
agencies
     Banks      General
business
     Small and
medium sized
enterprise
     Project
financing
and others
     Sub-total      Consumers      Total  

Neither overdue nor impaired

     8,825,767        26,861,286        50,463,112        34,107,547        5,547,950        90,118,609        139,886,407        265,692,069  

Overdue but not impaired

     8        —          65,616        63,067        —          128,683        878,406        1,007,097  

Impaired

     —          —          1,402,131        251,431        46,717        1,700,279        537,001        2,237,280  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     8,825,775        26,861,286        51,930,859        34,422,045        5,594,667        91,947,571        141,301,814        268,936,446  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loss allowance

     2,191        15,977        1,078,733        267,162        31,125        1,377,020        435,054        1,830,242  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total, net

     8,823,584        26,845,309        50,852,126        34,154,883        5,563,542        90,570,551        140,866,760        267,106,204  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  -

Debt securities

The Group manages debt securities based on the external credit rating. Credit soundness of debt securities on the basis of External Credit Assessment Institution (ECAI)’s rating is as follows (Unit: Korean Won in millions):

 

     December 31, 2017  
     Financial assets at
FVTPL (*)
     AFS debt
securities
     HTM securities      Total  

AAA

     1,685,099        9,897,689        15,806,327        27,389,115  

AA- ~ AA+

     722,923        2,386,567        888,547        3,998,037  

BBB- ~ A+

     236,311        876,482        52,188        1,164,981  

Below BBB-

     9,694        68,506        2,234        80,434  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,654,027        13,229,244        16,749,296        32,632,567  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (*)

Financial assets at FVTPL comprise debt securities held for trading and financial assets designated at FVTPL.

 

b)

Guarantees and loan commitments

The credit quality of the guarantees and loan commitments as of December 31, 2018 as follows (Unit: Korean Won in millions):

 

     December 31, 2018  

Financial assets

   Stage 1      Stage 2      Stage3      Total  
   Above
appropriate
credit rating
(*1)
     Less than a
limited
credit rating
(*3)
     Above
appropriate
credit rating
(*2)
     Less than a
limited
credit rating
(*3)
 

Off-balance accounts

                 

Guarantees

     11,212,772        1,063,551        7,147        261,599        121,348        12,666,417  

Loan commitments

     91,734,567        3,632,586        1,529,330        880,518        19,703        97,796,704  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     102,947,339        4,696,137        1,536,477        1,142,117        141,051        110,463,121  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (*1)

Credit grade of corporates are AAA ~ BBB, and consumers are grades 1 ~ 6.

  (*2)

Credit grade of corporates are A- ~ BBB, and consumers are grades 1 ~ 6.

  (*3)

Credit grade of corporate are BBB- ~ C, and consumers are grades 7 ~ 10.

 

- 44 -


4) Collateral and other credit enhancements

During the current quarter, there have been no significant changes in the value of collateral or other credit enhancements held by the Group and there have been no significant changes in collateral or other credit enhancements due to changes in the collateral policy of the Group. As of December 31, 2018, there are no financial assets that do not recognize the allowance for losses just because financial assets have collateral.

5) For the financial assets that record loss allowance as total expected credit loss, the amortized cost before the change in contractual cash flows is 23,132 million won, and the net loss due to the change is 239 million won.

6) As the Group manages receivables that have not lost the right of claim to the debtor for the grounds of incomplete statute limitation and uncollected receivables under the related laws as receivable charge-offs, the balance as of December 31, 2018 is 9,578,796 million won.

 

(2)

Market risk

Market risk is the possible risk of loss arising from trading activities and non-trading activities in the volatility of market factors such as interest rates, stock prices and foreign exchange rates. Market risk occurs as a result of changes in the interest rates and foreign exchange rates for financial instruments that are not yet settled, and all contracts are exposed to a certain level of volatility according to changes in the interest rates, credit spreads, foreign exchange rates and the price of equity securities.

 

  1)

Market risk management

For trading activities and non-trading activities, the Group avoids, bears, or mitigates risks by identifying the underlying source of the risks, measuring parameters and evaluating their appropriateness.

On a yearly basis, the Risk Management Committee establishes a Value at Risk (“VaR”, maximum losses) limit, loss limit and risk capital limit by subsidiaries for its management purposes. The limit by investment desk/dealer is independently managed to the extent of the limit given to subsidiaries and the limit by investment and loss cut is managed by the risk management personnel within the department.

The Group uses both a standard-based and an internal model-based approach to measure market risk. The standard-based approach is used to calculate individual market risk of owned capital while the internal model-based approach is used to calculate general capital market risk and it is used to measure internal risk management measure. For the trading activities, the Risk Management department measures the VaR limit by department, risk factor and loss limit on a daily basis and reports regularly to the Risk Management Committee.

 

  2)

Sensitivity analysis of market risk

The Group performs the sensitivity analyses both for trading and for non-trading activities.

For trading activities, the Group uses a VaR model that uses certain assumptions of possible fluctuations in market condition and, by conducting simulations of gains and losses, under which the model estimates the maximum losses that may occur. A VaR model predicts based on statistics of possible losses on the portfolio at a certain period currently or in the future. It indicates the maximum expected loss with at least 99% confidence level. In short, there exists a one percent possibility that the actual loss might exceed the predicted loss generated from the VaR calculation. The actual results are periodically monitored to examine the validity of the assumptions, variables, and factors that are used in VaR calculations. However, this approach cannot prevent the loss when the market fluctuation exceeds expectation.

For the non-trading activities, interest rate Earning at Risk (“EaR”) and interest rate VaR, which is based on the simulations of the Net Interest Income (“NII”) and Net Portfolio Value (“NPV”), are calculated for the Bank and the consolidated trusts, and the risks for all other subsidiaries are measured and managed by the interest rate EaR and the interest rate VaR calculations based on the Bank for International Settlements (“BIS”) Framework.

 

- 45 -


NII is a profit-based indicator for displaying the profit changes in short term due to the short-term interest changes. It will be estimated as subtracting interest expenses of liabilities from the interest income of assets. NPV is an indicator for displaying risks in economic view according to unfavorable changes related to interest rate. It will be estimated as subtracting the present value of liabilities from the present value of assets. EaR shows the maximum profit-loss amount, which indicates the maximum deduction amount caused by the unfavorable changes related to the interest rate of a certain period (i.e. 1 year). Interest rate VaR shows the potential maximum loss generated by the unfavorable changes during a certain period of time in the present or future.

 

  a)

Trading activities

The minimum, maximum and average VaR for the year ended December 31, 2018 and 2017, respectively, and the VaR as of December 31, 2018 and 2017, respectively, are as follows (Unit: Korean Won in millions):

 

     December 31,
2018
    For the year ended
December 31, 2018
    December 31,
2017
    For the year ended
December 31, 2017
 

Risk factor

  Average     Maximum     Minimum     Average     Maximum     Minimum  

Interest rate

     3,107       3,702       5,528       1,730       4,183       3,799       4,918       2,467  

Stock price

     2,353       2,669       5,081       1,138       909       2,863       4,419       909  

Foreign currencies

     4,972       4,678       6,136       3,439       4,750       5,051       6,636       4,061  

Commodity price

     —         3       24       —         —         31       188       —    

Diversification

     (4,445     (4,869     (8,155     (1,815     (4,472     (4,621     (6,798     (2,067
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total VaR(*)

     5,987       6,183       8,614       4,492       5,370       7,123       9,363       5,370  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (*)

VaR (Value at Risk): Maximum expected losses

 

  b)

Non-trading activities

The NII and NPV are calculated for the assets and liabilities owned by the Bank and consolidated trusts, respectively, by using the simulation method. The scenario responding to interest rate (“IR”) changes are as follows (Unit: Korean Won in millions):

 

     December 31, 2018      December 31, 2017  
     NII(*1)      NPV(*2)      NII(*1)      NPV(*2)  

Base case

     4,895,332        24,636,678        4,916,138        23,472,792  

Base case (Prepay)

     4,887,799        24,225,946        4,916,015        23,163,942  

IR 100bp up

     5,575,470        24,415,761        5,361,546        22,886,122  

IR 100bp down

     4,329,543        24,907,344        4,386,437        24,127,559  

IR 200bp up

     6,603,132        24,232,738        5,806,723        22,372,208  

IR 200bp down

     3,508,859        25,245,667        3,452,590        24,830,482  

IR 300bp up

     7,560,155        24,079,415        6,251,897        21,929,189  

IR 300bp down

     3,352,267        25,680,084        2,254,609        26,633,807  

 

  (*1)

NII: Net Interest Income

  (*2)

NPV: Net Portfolio Value

The interest EaR and VaR calculated based on the BIS Framework of subsidiaries other than the Bank and consolidated trusts are as follows (Unit: Korean Won in millions):

 

December 31, 2018

  

December 31, 2017

EaR (*1)

  

VaR (*2)

  

EaR (*1)

  

VaR (*2)

248,364

   141,484    255,679    130,821

 

  (*1)

EaR(Earning at Risk): Change of Maximum expected income and expense

  (*2)

VaR(Value at Risk): Maximum expected losses

 

- 46 -


The Group estimates and manages risks related to changes in interest rate due to the difference in the maturities of interest-bearing assets and liabilities and discrepancies in the terms of interest rates. Cash flows (both principal and interest), interest bearing assets and liabilities, presented by each re-pricing date, are as follows (Unit: Korean Won in millions):

 

     December 31, 2018  
     Within 3
months
     4 to 6
months
     7 to 9
months
     10 to 12
months
     1 to 5
years
     Over 5 years      Total  

Asset:

                    

Loans and other financial assets at amortized cost

     159,893,080        45,387,214        8,878,060        9,903,959        46,459,450        4,201,379        274,723,142  

Financial assets at FVTPL

     371,984        32,278        24,951        64,838        145,121        27,536        666,708  

Financial assets at FVTOCI

     2,579,442        1,775,435        1,486,953        2,223,494        9,289,742        185,320        17,540,386  

Securities at amortized cost

     2,449,416        2,251,180        1,735,698        1,946,948        15,177,608        402,671        23,963,521  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     165,293,922        49,446,107        12,125,662        14,139,239        71,071,921        4,816,906        316,893,757  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liability:

                    

Deposits due to customers

     100,232,916        44,207,416        29,419,951        35,427,657        40,130,055        72,276        249,490,271  

Borrowings

     9,971,680        1,924,390        670,404        518,167        2,723,156        626,364        16,434,161  

Debentures

     2,143,916        2,416,483        2,201,070        2,584,230        18,955,400        2,403,077        30,704,176  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     112,348,512        48,548,289        32,291,425        38,530,054        61,808,611        3,101,717        296,628,608  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2017  
     Within 3
months
     4 to 6
months
     7 to 9
months
     10 to 12
months
     1 to 5
years
     Over 5 years      Total  

Asset:

                    

Loans and receivables

     161,653,892        41,671,530        7,614,159        6,411,841        54,150,998        26,272,958        297,775,378  

AFS financial assets

     2,150,708        2,500,103        2,016,711        2,367,762        4,229,000        601,735        13,866,019  

HTM financial assets

     2,286,179        2,161,467        1,433,425        1,687,362        9,369,794        345,868        17,284,095  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     166,090,779        46,333,100        11,064,295        10,466,965        67,749,792        27,220,561        328,925,492  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liability:

                    

Deposits due to customers

     106,815,564        37,750,367        25,117,556        27,585,458        37,518,878        91,246        234,879,069  

Borrowings

     9,865,249        1,056,579        412,966        437,431        2,709,010        479,827        14,961,062  

Debentures

     1,955,902        2,452,240        1,018,563        1,752,847        19,770,538        2,869,766        29,819,856  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     118,636,715        41,259,186        26,549,085        29,775,736        59,998,426        3,440,839        279,659,987