Form 6-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 6-K

 

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 OF

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE MONTH OF MARCH 2015

Commission File Number: 333-04906

 

 

SK Telecom Co., Ltd.

(Translation of registrant’s name into English)

 

 

Euljiro 65(Euljiro2-ga), Jung-gu

Seoul 100-999, Korea

(Address of principal executive office)

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F  x             Form 40-F  ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ¨

 

 

 


Table of Contents

Results of the Annual General Meeting of Shareholders

 

1. Approval of the Financial Statements(1)(2)   

The 31st Fiscal Year (Fiscal Year ended December 31, 2014)

 

(in millions of Won, except for basic earnings per share)

 

  

  

Consolidated

   - Total Assets      27,941,233       - Operating Revenue      17,163,798   
     

 

 

       

 

 

 
- Total Liabilities   12,692,963    - Operating Income   1,825,105   
     

 

 

       

 

 

 
- Share Capital   44,639    - Profit for the Year   1,799,320   
     

 

 

       

 

 

 
- Total Equity   15,248,270    - Basic Earnings per Share   25,154   
     

 

 

       

 

 

 

Separate

- Total Assets   22,712,462    - Operating Revenue   13,012,644   
     

 

 

       

 

 

 
- Total Liabilities   9,170,241    - Operating Income   1,737,160   
     

 

 

       

 

 

 
- Share Capital   44,639    - Profit for the Year   1,028,541   
     

 

 

       

 

 

 
- Total Equity   13,542,221    - Basic Earnings per Share   14,262   
     

 

 

       

 

 

 

(1)    Prepared in accordance with International Financial Reporting Standards as adopted in Korea

(2)    Opinion of independent auditors: Appropriate

       

       

 

2. Approval of Dividends

 

(in Won, except for percentages and stock dividend)

 

  

  

a. Cash Dividends

   Dividend per Share    Common Stock    Year-end Dividend      8,400   
         Interim/Quarterly Dividends      1,000   
      Preferred Stock    Year-end Dividend      —     
         Interim/Quarterly Dividend      —     
           

 

 

 
Total Cash Dividend   666,801,558,400   
           

 

 

 

Market Dividend Rate (%) (including interim dividend)

Common Stock   3.51   
Preferred Stock   —     

b. Stock Dividends

Stock Dividend Rate (%) Common Stock   —     
Preferred Stock   —     
           

 

 

 
Total Stock Dividend (Shares) Common Stock   —     
           

 

 

 
Preferred Stock   —     
           

 

 

 


Table of Contents
3. Status of Directors (as of the date of appointment)
a. Approval of the Appointment of Directors

- One (1) Executive Director

 

- One (1) Member of the Audit Committee

 

(Who is an Independent Non-Executive Director)

     

 

b. Number of Independent Non-Executive Directors Following Appointment

Total Number of Directors

6
     

 

Total Number of Independent Non-Executive Directors

4
     

 

Percentage of Independent Non-Executive Directors (%)

66.7

c. Number of Auditors Following Appointment

Full-time Auditors

—  

Part-time Auditors

—  

d. Number of Members of Audit Committee Following Appointment

Number of Members of Audit Committee who are Independent Non-Executive Directors

3

Number of Members of Audit Committee who are not Independent Non-Executive Directors

—  
4. Other Resolutions

Agenda No. 1. Approval of Financial Statements for the 31st Fiscal Year

 

(Fiscal Year ended December 31, 2014)

 

: Approved as originally submitted.

 

Agenda No. 2. Amendment to the Articles of Incorporation

 

: Approved as originally submitted.

 

Agenda No. 3. Approval of the Appointment of an Executive Director

 

(Jang, Dong-Hyun)

 

: Approved as originally submitted.

 

Agenda No. 4. Approval of the Appointment of a Member of the Audit Committee

 

(Lee, Jae-Hoon)

 

: Approved as originally submitted.

 

Agenda No. 5. Approval of Ceiling Amount of the Remuneration for Directors

 

: Approved as originally submitted.

5. Date of General Meeting of Shareholders

March 20, 2015

6. Other Matters To Be Considered Before Investing

* Related Disclosure: The Company’s report on Form 6-K furnished on February 25, 2015.


Table of Contents
1. Approval of Financial Statements

SK TELECOM CO., LTD. AND SUBSIDIARIES

Consolidated Financial Statements

December 31, 2014 and 2013

(With Independent Auditors’ Report Thereon)


Table of Contents

Contents

 

     Page  

Independent Auditors’ Report

     1   

Consolidated Statements of Financial Position

     3   

Consolidated Statements of Income

     5   

Consolidated Statements of Comprehensive Income

     6   

Consolidated Statements of Changes in Equity

     7   

Consolidated Statements of Cash Flows

     8   

Notes to the Consolidated Financial Statements

     10   


Table of Contents

Independent Auditors’ Report

Based on a report originally issued in Korean

To The Board of Directors and Shareholders

SK Telecom Co., Ltd.:

We have audited the accompanying consolidated financial statements of SK Telecom Co., Ltd. and its subsidiaries (the “Group”), which comprise the consolidated statements of financial position as at December 31, 2014 and 2013, the consolidated statements of income, comprehensive income, changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Korean International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Korean Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements 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 entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at December 31, 2014 and 2013 and of its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with Korean International Financial Reporting Standards.

 

1


Table of Contents

Other Matter

The accompanying consolidated statement of financial position of the Group as of December 31, 2013, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for the year then ended, were audited by us in accordance with the previous auditing standards generally accepted in the Republic of Korea. We did not audit the financial statements of SK Broadband Co., Ltd., a domestic subsidiary, and an associate whose financial statements represent 21.2% of the Group’s consolidated total assets as of December 31, 2013 and 11.7% of the Group’s consolidated operating revenue and 33.6% of the Group’s profit before income tax for the year then ended. Other auditors audited those financial statements and our report, insofar as it relates to the amounts included for these entities, was based solely on the report of other auditors.

The procedures and practices utilized in the Republic of Korea to audit such consolidated financial statements may differ from those generally accepted and applied in other countries.

KPMG Samjong Accounting Corp.

Seoul, Korea

February 23, 2015

 

This report is effective as of February 23, 2015, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that the above audit report has not been updated to reflect the impact of such subsequent events or circumstances, if any.

 

2


Table of Contents
(In millions of won)    Note      December 31,
2014
     December 31,
2013
 

Assets

        

Current Assets:

        

Cash and cash equivalents

     31,35,36         834,429         1,398,639   

Short-term financial instruments

     6,31,35,36,37,38         313,068         311,474   

Short-term investment securities

     9,35,36         280,161         106,068   

Accounts receivable - trade, net

     7,31,35,36,37         2,392,150         2,257,316   

Short-term loans, net

     7, 35,36,37         74,512         79,395   

Accounts receivable - other, net

     7, 35,36,37         690,527         643,603   

Prepaid expenses

        134,404         108,909   

Derivative financial assets

     23, 35,36         —           10   

Inventories, net

     8,38         267,667         177,120   

Assets classified as held for sale

     10         10,510         3,667   

Advanced payments and other

     7,9, 35,36,37         85,720         37,214   
     

 

 

    

 

 

 

Total Current Assets

  5,083,148      5,123,415   
     

 

 

    

 

 

 

Non-Current Assets:

Long-term financial instruments

  6, 35,36,38      631      8,142   

Long-term investment securities

  9, 35,36      956,280      968,527   

Investments in associates and joint ventures

  13      6,298,088      5,325,297   

Property and equipment, net

  14,37,38      10,567,701      10,196,607   

Investment property, net

  15      14,997      15,811   

Goodwill

  16      1,917,595      1,733,261   

Intangible assets, net

  17      2,483,994      2,750,782   

Long-term loans, net

  7, 35,36,37      55,728      57,442   

Long-term accounts receivable - other

  7,35,36      3,596      —     

Long-term prepaid expenses

  38      51,961      32,008   

Guarantee deposits

  6,7, 35,36,37      285,144      249,600   

Long-term derivative financial assets

  23,35,36      70,035      41,712   

Deferred tax assets

  2,32      25,083      26,322   

Other non-current assets

  7, 35,36      127,252      47,589   
     

 

 

    

 

 

 

Total Non-Current Assets

  22,858,085      21,453,100   
     

 

 

    

 

 

 

Total Assets

  27,941,233      26,576,515   
     

 

 

    

 

 

 

See accompanying notes to the consolidated financial statements.

 

3


Table of Contents
(In millions of won)    Note      December 31,
2014
    December 31,
2013
 

Liabilities and Equity

       

Current Liabilities:

       

Short-term borrowings

     18,31,35,36         366,600        260,000   

Current installments of long-term debt, net

     18,31,35,36         590,714        1,042,276   

Current installments of finance lease liabilities

     21,31,35,36         3,804        19,351   

Current installments of long-term payables – other

     19,35,36         189,389        206,800   

Accounts payable - trade

     35,36,37         275,495        214,716   

Accounts payable - other

     35,36,37         1,381,850        1,864,024   

Withholdings

     35,36,37         1,053,063        728,936   

Accrued expenses

     35,36         952,418        988,193   

Income tax payable

     32         99,236        112,316   

Unearned revenue

        327,003        441,731   

Derivative financial liabilities

     23, 35,36         —          21,171   

Provisions

     20         51,075        66,775   

Advance receipts

     34,35         129,255        102,931   

Liabilities classified as held for sale

     10         408        —     
     

 

 

   

 

 

 

Total Current Liabilities

  5,420,310      6,069,220   
     

 

 

   

 

 

 

Non-Current Liabilities:

Debentures, excluding current installments, net

  18,31, 35,36      5,649,158      4,905,579   

Long-term borrowings, excluding current installments

  18,31, 35,36      149,720      104,808   

Long-term payables - other

  19, 35,36      684,567      838,585   

Long-term unearned revenue

  19,659      50,894   

Finance lease liabilities

  21,31, 35,36      26      3,867   

Defined benefit liabilities

  22      91,587      74,201   

Long-term derivative financial liabilities

  23, 35,36      130,889      103,168   

Long-term provisions

  20      36,013      28,106   

Deferred tax liabilities

  32      444,211      168,825   

Other non-current liabilities

  35,36      66,823      62,705   
     

 

 

   

 

 

 

Total Non-Current Liabilities

  7,272,653      6,340,738   
     

 

 

   

 

 

 

Total Liabilities

  12,692,963      12,409,958   
     

 

 

   

 

 

 

Equity

Share capital

  1,24      44,639      44,639   

Capital surplus and other capital adjustments

  24,25,26      277,998      317,508   

Retained earnings

  27      14,188,591      13,102,495   

Reserves

  28      (4,489   (12,270
     

 

 

   

 

 

 

Equity attributable to owners of the Parent Company

  14,506,739      13,452,372   

Non-controlling interests

  741,531      714,185   
     

 

 

   

 

 

 

Total Equity

  15,248,270      14,166,557   
     

 

 

   

 

 

 

Total Liabilities and Equity

  27,941,233      26,576,515   
     

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

4


Table of Contents
(In millions of won except for per share data)    Note      2014     2013  

Continuing operations

       

Operating revenue:

     5,37        

Revenue

        17,163,798        16,602,054   
     

 

 

   

 

 

 

Operating expense:

  37   

Labor cost

  22      1,659,777      1,561,358   

Commissions paid

  5,692,680      5,498,695   

Depreciation and amortization

  5      2,714,730      2,661,623   

Network interconnection

  997,319      1,043,733   

Leased line

  399,014      448,833   

Advertising

  415,857      394,066   

Rent

  460,309      443,639   

Cost of products that have been resold

  1,680,110      1,300,375   

Other operating expenses

  29      1,318,897      1,238,623   
     

 

 

   

 

 

 
  15,338,693      14,590,945   
     

 

 

   

 

 

 

Operating income

  5      1,825,105      2,011,109   

Finance income

  5,31      126,337      113,392   

Finance costs

  5,31      (386,673   (571,203

Gain related to investments in subsidiaries, associates and joint ventures, net

  1,5,13      906,338      706,509   

Other non-operating income

  30      56,279      74,467   

Other non-operating expenses

  30      (273,558   (507,173
     

 

 

   

 

 

 

Profit before income tax

  5      2,253,828      1,827,101   

Income tax expense from continuing operations

  32      454,508      400,797   
     

 

 

   

 

 

 

Profit from continuing operations

  1,799,320      1,426,304   

Discontinued operations

Profit from discontinued operations, net of income taxes

  39      —        183,245   
     

 

 

   

 

 

 

Profit for the year

  5      1,799,320      1,609,549   
     

 

 

   

 

 

 

Attributable to :

Owners of the Parent Company

  1,801,178      1,638,964   

Non-controlling interests

  (1,858   (29,415

Earnings per share

  33   

Basic earnings per share (in won)

  25,154      23,211   
     

 

 

   

 

 

 

Diluted earnings per share (in won)

  25,154      23,211   
     

 

 

   

 

 

 

Earnings per share - Continuing operations

  33   

Basic earnings per share (in won)

  25,154      20,708   
     

 

 

   

 

 

 

Diluted earnings per share (in won)

  25,154      20,708   
     

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

5


Table of Contents
(In millions of won)    Note      2014     2013  

Profit for the year

        1,799,320        1,609,549   

Other comprehensive income (loss)

       

Items that will never be reclassified to profit or loss:

       

Remeasurement of defined benefit liabilities

     22         (32,942     5,946   

Items that are or may be reclassified subsequently to profit or loss:

       

Net change in unrealized fair value of available-for-sale financial assets

     28,31         27,267        2,009   

Net change in other comprehensive income of investments in associates and joint ventures

     13,28         8,187        3,034   

Net change in unrealized fair value of derivatives

     23,28,31         (45,942     11,222   

Foreign currency translation differences for foreign operations

     28         14,944        (3,714
     

 

 

   

 

 

 

Other comprehensive income (loss) for the year

  (28,486   18,497   
     

 

 

   

 

 

 

Total comprehensive income

  1,770,834      1,628,046   
     

 

 

   

 

 

 

Total comprehensive income attributable to:

Owners of the Parent Company

  1,777,519      1,655,570   

Non-controlling interests

  (6,685   (27,524

See accompanying notes to the consolidated financial statements.

 

6


Table of Contents
(In millions of won)    Controlling interest              
     Share capital      Capital
surplus
(deficit) and
other capital
adjustments
    Retained
earnings
    Reserves     Sub-total     Non-
controlling
interests
    Total equity  

Balance, January 1, 2013

     44,639         (288,883     12,124,657        (25,636     11,854,777        1,000,005        12,854,782   

Cash dividends

     —           —          (655,946     —          (655,946     (2,242     (658,188

Total comprehensive income

               

Profit (loss) for the year

     —           —          1,638,964        —          1,638,964        (29,415     1,609,549   

Other comprehensive income

     —           —          3,240        13,366        16,606        1,891        18,497   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  —        —        1,642,204      13,366      1,655,570      (27,524   1,628,046   

Issuance of hybrid bond

  —        398,518      —        —        398,518      —        398,518   

Interest on hybrid bond

  —        —        (8,420   —        (8,420   —        (8,420

Treasury stock

  —        271,536      —        —        271,536      —        271,536   

Business combination under common control

  —        (61,854   —        —        (61,854   —        (61,854

Changes in ownership in subsidiaries

  —        (1,809   —        —        (1,809   (256,054   (257,863
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2013

  44,639      317,508      13,102,495      (12,270   13,452,372      714,185      14,166,557   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 1, 2014

  44,639      317,508      13,102,495      (12,270   13,452,372      714,185      14,166,557   

Cash dividends

  —        —        (666,802   —        (666,802   (170   (666,972

Total comprehensive income

Profit (loss) for the year

  —        —        1,801,178      —        1,801,178      (1,858   1,799,320   

Other comprehensive income (loss)

  —        —        (31,440   7,781      (23,659   (4,827   (28,486
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  —        —        1,769,738      7,781      1,777,519      (6,685   1,770,834   

Interest on hybrid bond

  —        —        (16,840   —        (16,840   —        (16,840

Changes in consolidation scope

  —        —        —        —        —        23,667      23,667   

Business combination under common control

  —        (28,641   —        —        (28,641   —        (28,641

Changes in ownership in subsidiaries

  —        (10,869   —        —        (10,869   10,534      (335
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2014

  44,639      277,998      14,188,591      (4,489   14,506,739      741,531      15,248,270   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

7


Table of Contents
(In millions of won)    Note      2014     2013  

Cash flows from operating activities:

       

Cash generated from operating activities

       

Profit for the year

        1,799,320        1,609,549   

Adjustments for income and expenses

     40         2,978,995        3,275,376   

Changes in assets and liabilities related to operating activities

     40         (707,333     (969,870
     

 

 

   

 

 

 

Sub-total

  4,070,982      3,915,055   

Interest received

  56,706      64,078   

Dividends received

  13,048      10,197   

Interest paid

  (280,847   (300,104

Income tax paid

  (182,504   (130,656
     

 

 

   

 

 

 

Net cash provided by operating activities

  3,677,385      3,558,570   
     

 

 

   

 

 

 

Cash flows from investing activities:

Cash inflows from investing activities:

Decrease in short-term financial instruments, net

  5,627      186,425   

Collection of short-term loans

  207,439      290,856   

Decrease in long-term financial instruments

  2,535      16   

Proceeds from disposal of long-term investment securities

  65,287      287,777   

Proceeds from disposal of investments in associates and joint ventures

  7,333      43,249   

Proceeds from disposal of property and equipment

  25,143      12,579   

Proceeds from disposal of intangible assets

  10,917      2,256   

Proceeds from disposal of assets held for sale

  3,667      190,393   

Collection of long-term loans

  4,454      13,104   

Decrease in deposits

  8,891      8,509   

Proceeds from disposal of other non-current assets

  94      683   

Proceeds from disposal of subsidiaries

  —        215,939   
     

 

 

   

 

 

 

Sub-total

  341,387      1,251,786   

Cash outflows for investing activities:

Increase in short-term investment securities, net

  (174,209   (45,032

Increase in short-term loans

  (202,501   (279,926

Increase in long-term loans

  (4,341   (4,050

Increase in long-term financial instruments

  (2,522   (7,510

Acquisition of long-term investment securities

  (41,305   (22,141

Acquisition of investments in associates and joint ventures

  (60,020   (97,366

Acquisition of property and equipment

  (3,008,026   (2,879,126

Acquisition of intangible assets

  (130,667   (243,163

Cash held by disposal group classified as held for sale

  (552   —     

Increase in deposits

  (6,903   (83,314

Increase in other non-current assets

  (18,233   (1,830

Acquisition of business, net of cash acquired

  (375,273   (94,805
     

 

 

   

 

 

 

Sub-total

  (4,024,552   (3,758,263
     

 

 

   

 

 

 

Net cash used in investing activities

  (3,683,165   (2,506,477
     

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

8


Table of Contents
(In millions of won)    Note    2014     2013  

Cash flows from financing activities:

       

Cash inflows from financing activities:

       

Increase in short-term borrowings, net

        102,868        —     

Issuance of debentures

        1,255,468        1,328,694   

Proceeds from long-term borrowings

        62,552        105,055   

Issuance of hybrid bond

        —          398,518   

Cash inflows from settlement of derivatives

        200        19,970   
     

 

 

   

 

 

 

Sub-total

  1,421,088      1,852,237   

Cash outflows for financing activities:

Decrease in short-term borrowings, net

  —        (340,245

Repayment of long-term account payables-other

  (207,791   (161,575

Repayment of debentures

  (1,039,938   (771,976

Repayment of long-term borrowings

  (23,284   (467,217

Cash outflows from settlement of derivatives

  (6,444   —     

Payment of finance lease liabilities

  (19,388   (20,342

Payment of dividends

  (666,802   (655,946

Payment of interest on hybrid bond

  (16,840   —     

Decrease in cash from consolidated capital transaction

  —        (8,093
     

 

 

   

 

 

 

Sub-total

  (1,980,487   (2,425,394
     

 

 

   

 

 

 

Net cash used in financing activities

  (559,399   (573,157
     

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

  (565,179   478,936   

Cash and cash equivalents at beginning of the year

  1,398,639      920,125   

Effects of exchange rate changes on cash and cash equivalents

  969      (422
     

 

 

   

 

 

 

Cash and cash equivalents at end of the year

  834,429      1,398,639   
     

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

9


Table of Contents
1. Reporting Entity

 

  (1) General

SK Telecom Co., Ltd. (“the Parent Company”) was incorporated in March 1984 under the laws of the Republic of Korea (“Korea”) to engage in providing cellular telephone communication services in Korea. The Parent Company mainly provides wireless telecommunications in Korea. The Parent Company’s common shares and depositary receipts (DRs) are listed on the Stock Market of Korea Exchange, the New York Stock Exchange and the London Stock Exchange. As of December 31, 2014, the Parent Company’s total issued shares are held by the following:

 

     Number of
shares
     Percentage of
total shares
issued (%)
 

SK Holdings Co., Ltd.

     20,363,452         25.22   

National Pension Service

     5,722,692         7.09   

Institutional investors and other minority stockholders

     44,850,192         55.54   

Treasury stock

     9,809,375         12.15   
  

 

 

    

 

 

 

Total number of shares

  80,745,711      100.00   
  

 

 

    

 

 

 

These consolidated financial statements comprise the Parent Company and its subsidiaries (together referred to as the “Group” and individually as “Group entities”). SK Holdings Co, Ltd. is the ultimate controlling entity of the Parent Company.

 

  (2) List of subsidiaries

The list of subsidiaries as of December 31, 2014 and 2013 is as follows:

 

            Ownership (%)  

Subsidiary

 

Location

 

Primary business

  Dec. 31,
2014
    Dec. 31,
2013
 

SK Telink Co., Ltd.

  Korea   Telecommunication and MVNO service     83.5        83.5   

M&Service Co., Ltd.

  Korea   Data base and internet website service     100.0        100.0   

SK Communications Co., Ltd.

  Korea   Internet website services     64.6        64.6   

Stonebridge Cinema Fund

  Korea   Investment association     56.0        56.0   

Commerce Planet Co., Ltd.

  Korea   Online shopping mall operation agency     100.0        100.0   

SK Broadband Co., Ltd.

  Korea   Telecommunication services     50.6        50.6   

K-net Culture and Contents Venture Fund

  Korea   Investment association     59.0        59.0   

Fitech Focus Limited Partnership II

  Korea   Investment association     66.7        66.7   

Open Innovation Fund

  Korea   Investment association     98.9        98.9   

PS&Marketing Corporation

  Korea   Communications device retail business     100.0        100.0   

Service Ace Co., Ltd.

  Korea   Customer center management service     100.0        100.0   

Service Top Co., Ltd.

  Korea   Customer center management service     100.0        100.0   

Network O&S Co., Ltd.

  Korea   Base station maintenance service     100.0        100.0   

BNCP Co., Ltd.

  Korea   Internet website services     100.0        100.0   

Iconcube Holdings, Inc.(*1)

  Korea   Investment association     100.0        —     

Iconecube, Inc.(*1)

  Korea   Internet website services     100.0        —     

SK Planet Co., Ltd.

  Korea   Telecommunication service     100.0        100.0   

Neosnetworks Co., Ltd.(*1,2)

  Korea   Guarding of facilities     66.7        —     

IRIVER LIMITED(*1,3)

  Korea   Manufacturing digital audio players and other portable media devices.     49.0        —     

Iriver CS Co., Ltd.(*1)

  Korea   After-sales service and logistics agency     100.0        —     

iriver Enterprise Ltd.(*1)

  Hong Kong   Management of Chinese subsidiary     100.0        —     

 

10


Table of Contents
1. Reporting Entity, Continued

 

  (2) List of subsidiaries, Continued

 

            Ownership (%)  

Subsidiary

 

Location

 

Primary business

  Dec. 31,
2014
    Dec. 31,
2013
 

iriver America Inc.(*1)

  USA   Marketing and sales in North America     100.0        —     

iriver Inc.(*1)

  USA   Marketing and sales in North America     100.0        —     

iriver China Co., Ltd.(*1)

  China   Sales and manufacturing MP3,4 in China     100.0        —     

Dongguan iriver Electronics Co., Ltd.(*1)

  China   Sales and manufacturing e-book in China     100.0        —     

SK Telecom China Holdings Co., Ltd.

  China   Investment association     100.0        100.0   

Shenzhen E-eye High Tech Co., Ltd.

  China   Manufacturing     65.5        65.5   

SK Global Healthcare Business Group., Ltd.

  Hong Kong   Investment association     100.0        100.0   

SK Planet Japan

  Japan   Digital contents sourcing service     100.0        100.0   

SKT Vietnam PTE. Ltd.

  Singapore   Telecommunication service     73.3        73.3   

SK Planet Global PTE. Ltd.

  Singapore   Digital contents sourcing service     100.0        100.0   

SKP GLOBAL HOLDINGS PTE. LTD.

  Singapore   Investment association     100.0        100.0   

SKT Americas, Inc.

  USA   Information gathering and consulting     100.0        100.0   

SKP America LLC.

  USA   Digital contents sourcing service     100.0        100.0   

YTK Investment Ltd.

  Cayman   Investment association     100.0        100.0   

Atlas Investment

  Cayman   Investment association     100.0        100.0   

Technology Innovation Partners, LP.

  USA   Investment association     100.0        100.0   

SK Telecom China Fund I L.P.

  Cayman   Investment association     100.0        100.0   

shopkick Management Company, Inc.(*1)

  USA   Investment association     95.2        —     

shopkick, Inc.(*1)

  USA   Mileage-based online transaction app development     100.0        —     

 

(*1) Changes in subsidiaries are explained in note 1-(4).
(*2) Due to the shareholders’ agreement which grants put option to the non-controlling shareholders, this entity is consolidated as a wholly owned subsidiary in the consolidated financial statements (See Note 11).
(*3) Although the Group has less than 50% of the voting rights of IRIVER LIMITED, it is considered to have de facto control since the Group holds significantly more voting rights than any other vote holder or organized group of vote holders, and the other shareholdings are widely dispersed (See Note 11).

In accordance with the Group’s accounting policy relating to the scope of consolidation, small-sized subsidiaries including IM Shopping Inc. were excluded from the list of subsidiaries as the effects on the Group’s consolidated financial statements are not material considering both individual and overall quantitative and qualitative effects.

 

11


Table of Contents
1. Reporting Entity, Continued

 

  (3) Condensed financial information of subsidiaries

Condensed financial information of subsidiaries as of and for the year ended December 31, 2014 is as follows:

 

(In millions of won)                                  

Subsidiary

   Total
assets
     Total
liabilities
     Total
equity
    Revenue      Profit
(loss)
 

SK Telink Co., Ltd.

     324,028         184,074         139,954        465,463         13,073   

M&Service Co., Ltd.

     79,476         37,505         41,971        133,789         7,458   

SK Communications Co., Ltd.

     176,168         41,987         134,181        93,910         (18,386

Stonebridge Cinema Fund

     11,137         320         10,817        —           383   

Commerce Planet Co., Ltd.

     26,078         27,259         (1,193     64,509         933   

SK Broadband Co., Ltd.

     3,109,991         1,988,379         1,121,612        2,654,381         4,307   

K-net Culture and Contents Venture Fund

     21,094         4         21,090        —           4,920   

Fitech Focus Limited Partnership II

     19,301         —           19,301        —           (2,055

Open Innovation Fund

     21,765         —           21,765        —           (6,266

PS&Marketing Corporation

     544,292         336,221         208,071        1,627,217         2,817   

Service Ace Co., Ltd.

     66,336         37,770         28,566        207,427         3,570   

Service Top Co., Ltd.

     57,032         36,723         20,309        188,835         3,503   

Network O&S Co., Ltd.

     71,348         45,770         25,578        211,916         3,823   

BNCP Co., Ltd.

     6,785         5,887         898        12,869         (1,505

Iconcube Holdings, Inc.(*1)

     1,415         515         900        630         (2,284

SK Planet Co., Ltd.

     2,579,286         746,832         1,832,454        1,512,492         1,593   

Neosnetworks Co., Ltd.

     31,633         13,251         18,382        33,302         (1,989

IRIVER LIMITED(*2)

     61,945         14,392         47,553        53,192         2,345   

SK Telecom China Holdings Co., Ltd.

     37,877         2,335         35,542        12,420         1,058   

Shenzhen E-eye High Tech Co., Ltd.

     15,566         408         15,158        3,637         (1,143

SK Global Healthcare Business Group., Ltd.

     25,874         —           25,874        —           (689

SK Planet Japan

     5,222         1,638         3,584        93         (4,561

SKT Vietnam PTE. Ltd.

     4,242         1,286         2,956        —           (73

SK Planet Global PTE. Ltd.

     4,215         64         4,151        87         (2,543

SKP GLOBAL HOLDINGS PTE. LTD.

     29,529         11         29,518        —           (9,716

SKT Americas, Inc.

     42,159         554         41,605        9,100         (5

SKP America LLC.

     297,981         67         297,914        —           (2,370

YTK Investment Ltd.

     27,944         —           27,944        —           (15,259

Atlas Investment(*3)

     66,825         94         66,731        —           (6,626

shopkick Management Company, Inc.

     230,925         —           230,925        —           —     

shopkick, Inc.

     28,216         13,698         14,518        —           —     

 

(*1) The condensed financial information of Iconcube Holdings, Inc. includes financial information of Icon-Cube Co., Ltd., a subsidiary of Iconcube Holdings, Inc.
(*2) The condensed financial information of IRIVER LIMITED includes financial information of iriver CS Co. Ltd., iriver Enterprise Ltd., iriver America Inc., iriver Inc., iriver China Co., Ltd., and Dongguan iriver Electronics Co., Ltd., subsidiaries of IRIVER LIMITED.
(*3) The financial information of Atlas Investment includes financial information of Technology Innovation Partners, L.P. and SK Telecom China Fund I L.P., subsidiaries of Atlas Investment.

 

12


Table of Contents
1. Reporting Entity, Continued

 

  (3) Condensed financial information of subsidiaries, Continued

 

Condensed financial information of subsidiaries as of and for the year ended December 31, 2013 is as follows:

 

(In millions of won)  

Subsidiary

   Total
assets
     Total
liabilities
     Total
equity
    Revenue      Profit
(loss)
 

SK Telink Co., Ltd.

     252,475         125,807         126,668        433,276         16,024   

M&Service Co., Ltd.

     68,587         32,626         35,961        130,178         4,176   

SK Communications Co., Ltd.

     205,792         53,755         152,037        128,272         (41,893

Stonebridge Cinema Fund

     11,974         377         11,597        1         1,320   

Commerce Planet Co., Ltd.

     26,237         27,333         (1,096     56,565         587   

SK Broadband Co., Ltd.

     3,044,349         1,916,721         1,127,628        2,539,366         12,306   

K-net Culture and Contents Venture Fund

     16,181         12         16,169        —           (16,595

Fitech Focus Limited Partnership II

     21,446         —           21,446        —           (1,179

Open Innovation Fund

     27,996         —           27,996        —           (15,408

PS&Marketing Corporation

     277,300         141,356         135,944        1,095,647         1,369   

Service Ace Co., Ltd.

     56,276         30,667         25,609        187,961         2,995   

Service Top Co., Ltd.

     48,369         30,634         17,735        159,364         3,484   

Network O&S Co., Ltd.

     56,677         32,353         24,324        198,664         2,060   

BNCP Co., Ltd.

     12,108         6,433         5,675        14,819         (9,019

SK Planet Co., Ltd.

     2,528,054         766,841         1,761,213        1,378,211         201,556   

SK Telecom China Holdings Co., Ltd.

     36,261         2,052         34,209        17,025         613   

Shenzhen E-eye High Tech Co., Ltd.

     17,894         1,841         16,053        7,703         (789

SK Global Healthcare Business Group., Ltd.

     27,625         —           27,625        —           831   

SK Planet Japan

     1,793         280         1,513        394         (1,635

SKT Vietnam PTE. Ltd.

     11,773         8,862         2,911        —           (28,086

SK Planet Global PTE. Ltd.

     697         149         548        331         (1,420

SKP GLOBAL HOLDINGS PTE. LTD.

     20,713         9         20,704        —           1,542   

SKT Americas, Inc.

     33,876         1,315         32,561        9,207         (6,544

SKP America LLC.

     22,399         12         22,387        —           —     

YTK Investment Ltd.

     42,118         —           42,118        —           (21,764

Atlas Investment(*)

     40,218         101         40,117        —           (8,248

 

(*) The financial information of Atlas Investment includes financial information of Technology Innovation Partners, L.P. and SK Telecom China Fund I L.P., subsidiaries of Atlas Investment.

 

13


Table of Contents
1. Reporting Entity, Continued

 

  (4) Changes in subsidiaries

The list of subsidiaries that were newly included in consolidation during the year ended December 31, 2014 is as follows:

 

Subsidiary

  

Reason

Neosnetworks Co., Ltd.    The Parent Company acquired ownership interests during the year ended December 31, 2014.(See Note 11)
IRIVER LIMITED   

Iriver CS Co., Ltd.

iriver Enterprise Ltd.

iriver America Inc.

iriver Inc.

iriver China Co., Ltd.

  
Dongguan iriver Electronics Co., Ltd.   

Iconcube Holdings, Inc.

Iconcube, Inc.

   Established by spinoff from BNCP Co., Ltd. during the year ended December 31, 2014.
shopkick Management Company, Inc.    Established by SKP America LLC. during the year ended December 31, 2014.
shopkick, Inc.    Shopkick Management Company, Inc. acquired ownership interests during the year ended December 31, 2014. (See Note 11)

 

14


Table of Contents
1. Reporting Entity, Continued

 

  (5) The information of significant non-controlling interests of the Group as of and for the years ended December 31, 2014 and 2013 are as follows. There were no dividends paid during the years ended December 31, 2014 and 2013 by subsidiaries of which non-controlling interests are significant.

 

(In millions of won)    December 31, 2014  
     SK Communications
Co., Ltd.
     SK Broadband
Co., Ltd.
 

Ownership of non-controlling interests (%)

     35.4         49.4   

Current assets

     89,135         463,764   

Non-current assets

     87,033         2,646,227   

Current liabilities

     (41,252      (881,886

Non-current liabilities

     (735      (1,106,493

Net assets

     134,181         1,121,612   

Adjustment for fair value

     —           111,561   

Net assets of consolidated entities

     134,181         1,233,173   

Carrying amount of non-controlling interests

     47,577         609,638   

Revenue

     93,910         2,654,381   

Profit (loss) for the period

     (18,386      4,307   

Amortization of fair value adjustment

     —           (1,916

Profit (loss) of the consolidated entities

     (18,386      2,391   

Total comprehensive income (loss)

     530         (10,324

Profit (loss) attributable to non-controlling interests

     (6,519      1,182   

Net cash provided by (used in) operating activities

     (5,962      431,760   

Net cash used in investing activities

     (17,927      (599,016

Net cash provided by financing activities

     —           119,484   

Net decrease in cash and cash equivalents

     (23,889      (47,772

 

15


Table of Contents
1. Reporting Entity, Continued

 

  (5) The information of significant non-controlling interests of the Group as of and for the years ended December 31, 2014 and 2013 are as follows. There were no dividends paid during the years ended December 31, 2014 and 2013 by subsidiaries of which non-controlling interests are significant., Continued

 

(In millions of won)    December 31, 2013  
     SK Communications
Co., Ltd.
     SK Broadband
Co., Ltd.
 

Ownership of non-controlling interests (%)

     35.4         49.4   

Current assets

     108,100         533,597   

Non-current assets

     97,692         2,510,752   

Current liabilities

     (51,868      (938,385

Non-current liabilities

     (1,887      (978,336

Net assets

     152,037         1,127,628   

Adjustment for fair value

     —           113,478   

Net assets of consolidated entities

     152,037         1,241,106   

Carrying amount of non-controlling interests

     53,856         613,560   

Revenue

     128,272         2,539,366   

Profit (loss) for the period

     (41,893      12,306   

Amortization of fair value adjustment

     —           (30,977

Loss of the consolidated entities

     (41,893      (18,671

Total comprehensive loss

     (43,318      (13,059

Loss attributable to non-controlling interests

     (14,853      (9,231

Net cash provided by (used in) operating activities

     (22,867      440,036   

Net cash provided by (used in) investing activities

     41,788         (329,346

Net cash provided by (used in) financing activities

     19         (129,181

Net increase (decrease) in cash and cash equivalents

     18,940         (18,491

 

16


Table of Contents
2. Basis of Presentation

 

  (1) Statement of compliance

These consolidated financial statements were prepared in accordance with Korean International Financial Reporting Standards (“K-IFRS”), as prescribed in the Act on External Audits of Corporations in the Republic of Korea.

The consolidated financial statements were authorized for issuance by the Board of Directors on February 5, 2015, which will be submitted for approval at the shareholders’ meeting to be held on March 20, 2015.

 

  (2) Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis, except for the following material items in the consolidated statements of financial position:

 

    derivative financial instruments are measured at fair value

 

    financial instruments at fair value through profit or loss are measured at fair value

 

    available-for-sale financial assets are measured at fair value

 

    liabilities for defined benefit plans are recognized at the net of the total present value of defined benefit obligations less the fair value of plan assets

 

  (3) Functional and presentation currency

Financial statements of Group entities within the Group are presented in functional currency and the currency of the primary economic environment in which each entity operates. Consolidated financial statements of the Group are presented in Korean won, which is the Parent Company’s functional and presentation currency.

 

  (4) Use of estimates and judgments

The preparation of the consolidated financial statements in conformity with K-IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period prospectively.

 

  1) Critical judgments

Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements is included in the following notes:

 

    revenue : Note 4.(22))

 

    consolidation : Note 4.(2))

 

    classification of lease : Note 4.(14))

 

17


Table of Contents
2. Basis of Presentation, Continued

 

  (4) Use of estimates and judgments, Continued

 

  2) Assumptions and estimation uncertainties

Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year are included in the following notes: allowance for doubtful accounts, estimated useful lives of property and equipment and intangible assets, impairment of goodwill, recognition of provision, measurement of defined benefit obligations, recognition of deferred tax assets (liabilities), and commitments and contingencies.

 

  3) Fair value measurement

Group’s accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities. The Group has an established control framework with respect to the measurement of fair values. This includes a valuation team that has overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values, and reports directly to the finance executive.

The valuation team regularly reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or pricing services, is used to measure fair values, then the valuation team assesses the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of K-IFRS, including the level in the fair value hierarchy in which such valuations should be classified.

When measuring the fair value of an asset or a liability, the Group uses market observable data as far as possible. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows.

 

    Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

    Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

 

    Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

If the inputs used to measure the fair value of an asset or a liability fall into different levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The Group recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.

Information about assumptions used for fair value measurements are included in Note 36.

 

  (5) Common control transactions

SK Holdings Co., Ltd. (“the Ultimate Controlling Entity”) is the Ultimate Controlling Entity of the Parent Company because it controls the Parent Company. Accordingly, gains and losses from business acquisitions and dispositions involving entities that are under the control of the Ultimate Controlling Entity are accounted for as common control transactions within equity.

 

18


Table of Contents
3. Changes in Accounting Policies

Except for the changes below, the Group has consistently applied the accounting policies set out in Note 4 to all periods presented in these consolidated financial statements.

The Group has adopted the following amendments to standards with a date of initial application of January 1, 2014.

 

  (1) Offsetting Financial Assets and Financial Liabilities

The Group has adopted amendments to K-IFRS 1032, ‘Offsetting Financial Assets and Financial Liabilities’ since January 1, 2014. The amendments clarify the meaning of ‘currently has a legally enforceable right of set-off’. According to the amendments, the right to set off should not be contingent on a future event, and legally enforceable in the normal course of business, in the event of default, and in the event of insolvency or bankruptcy of the entity and all of the counterparties. The amendments also state that some gross settlement systems would be considered equivalent to net settlement if they eliminate or result in insignificant credit and liquidity risk and process receivables and payables in a single settlement process or cycle.

There is no material impact of the application of this amendment on the consolidated financial statements.

 

4. Significant Accounting Policies

The significant accounting policies applied by the Group in preparation of its consolidated financial statements in accordance with K-IFRSs are included below. The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements except for those as described in Note 3.

 

  (1) Operating segments

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. The Group’s operating segments have been determined to be each business unit, for which the Group generates separately identifiable financial information that is regularly reported to the chief operating decision maker for the purpose of resource allocation and assessment of segment performance. The Group has three reportable segments which consist of cellular services, fixed-line telecommunication services and others, as described in Note 5. Segment results that are reported to the chief operating decision maker include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. The chief operating decision maker does not receive any information about segment assets and liabilities.

 

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  (2) Basis of consolidation

 

  (i) Business combination

A business combination is accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control.

Consideration transferred is generally measured at fair value, identical to the measurement of identifiable net assets acquired at fair value. If goodwill incurs as a result of business combination, the Group performs impairment test on an annual basis and recognizes gain from bargain purchases through profit or loss. Acquisition-related costs are expensed in the periods in which the costs are incurred and the services are received excluding costs to issue debt or equity securities recognized based on K-IFRS No. 1032 and 1039.

Consideration transferred does not include the amount settled in relation to the pre-existing relationship and the amount settled in relation to the pre-existing relationship is generally recognized through profit or loss.

Contingent consideration is measured at fair value at the acquisition date. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. If contingent consideration is not classified as equity, the Group subsequently recognizes changes in fair value of contingent consideration and recognizes through profit or loss.

Entire or certain portion of market-based measure of replacement award for share-based payment transactions of the acquiree or the replacement of an acquiree’s share-based payment transactions with share-based payment transactions of the acquirer is included in measurement of contingent considerations. Portion of a replacement award that is part of the consideration transferred for the acquiree and the portion that is remuneration for post-combination service is determined by comparing market-based measure of the awards of acquire and replacement awards that is attributable to pre-combination service.

 

  (ii) Non-controlling interests

The Group measure at the acquisition date components of non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the acquiree’s net assets.

Changes in a Controlling Company’s ownership interest in a subsidiary that do not result in the Controlling Company losing control of the subsidiary are accounted for as equity transactions.

 

  (iii) Subsidiaries

Subsidiaries are entities controlled by the Group. The Group controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Consolidation of an investee begins from the date the Group obtains control of the investee and cease when the Group loses control of the investee.

 

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4. Significant Accounting Policies, Continued

 

  (2) Basis of consolidation, Continued

 

  (iv) Loss of control

If the Group loses control of a subsidiary, the Group derecognizes the assets and liabilities of the former subsidiary from the consolidated statement of financial position and recognizes gain or loss associated with the loss of control attributable to the former controlling interest. Any investment retained in the former subsidiary is recognized at its fair value when control is lost.

 

  (v) Interest in investees accounted for using the equity method

Interest in investees accounted for using the equity method composed of interest in associates and joint ventures. An associate is an entity in which the Group has significant influence, but not control, over the entity’s financial and operating policies. A joint venture is a joint arrangement whereby the Group that has joint control of the arrangement have rights to the net assets of the arrangement.

The investment in an associate and a joint venture is initially recognized at cost including transaction costs and the carrying amount is increased or decreased to recognize the Group’s share of the profit or loss and changes in equity of the associate or the joint venture after the date of acquisition.

 

  (vi) Intra-group transactions

Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. The Group’s share of unrealized gain incurred from transactions with investees accounted for using the equity method are eliminated and unrealized loss are eliminated using the same basis if there are no evidence of asset impairments.

 

  (vii) Business combinations under common control

The assets and liabilities acquired from the combination of entities or business under common control are recognized at the carrying amounts in the ultimate controlling shareholder’s consolidated financial statements. The difference between consideration and carrying amount of net assets acquired is added to or subtracted from other capital adjustments.

 

  (3) Cash and cash equivalents

Cash and cash equivalents comprise cash balances and call deposits with maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments.

 

  (4) Inventories

Inventories are stated at the acquisition cost using the average method. During the period, a perpetual inventory system is used to value inventories, which is adjusted to the physical inventory counts performed at the period end. When the net realizable value of inventories is less than the acquisition cost, the carrying amount is reduced to the net realizable value and any difference is charged to current operations as operating expenses. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.

 

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4. Significant Accounting Policies, Continued

 

  (5) Non-derivative financial assets

The Group recognizes and measures non-derivative financial assets by the following four categories: financial assets at fair value through profit or loss, held-to-maturity investments, loans and receivables and available-for-sale financial assets. The Group recognizes financial assets in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of the instrument.

Upon initial recognition, non-derivative financial assets are measured at their fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the asset’s acquisition or issuance.

 

  (i) Financial assets at fair value through profit or loss

A financial asset is classified as financial assets are classified at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Upon initial recognition, transaction costs are recognized in profit or loss when incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss.

 

  (ii) Held-to-maturity investments

A non-derivative financial asset with a fixed or determinable payment and fixed maturity, for which the Group has the positive intention and ability to hold to maturity, are classified as held-to-maturity investments. Subsequent to initial recognition, held-to-maturity investments are measured at amortized cost using the effective interest rate method.

 

  (iii) Loans and receivables

Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method except for loans and receivables of which the effect of discounting is immaterial.

 

  (iv) Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified as financial assets at fair value through profit or loss, held-to-maturity investments or loans and receivables. Subsequent to initial recognition, they are measured at fair value, which changes in fair value, net of any tax effect, recorded in other comprehensive income in equity. Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at cost.

 

  (v) De-recognition of financial assets

The Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognized as a separate asset or liability. If the Group retains substantially all the risks and rewards of ownership of the transferred financial assets, the Group continues to recognize the transferred financial assets and recognizes financial liabilities for the consideration received.

 

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4. Significant Accounting Policies, Continued

 

  (5) Non-derivative financial assets, Continued

 

  (vi) Offsetting between financial assets and financial liabilities

Financial assets and financial liabilities are offset and the net amount is presented in the consolidated statement of financial position only when the Group currently has a legally enforceable right to offset the recognized amounts, and there is the intention to settle on a net basis or to realize the asset and settle the liability simultaneously.

 

  (6) Derivative financial instruments, including hedge accounting

Derivatives are initially recognized at fair value. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below.

 

  (i) Hedge accounting

The Group holds forward exchange contracts, interest rate swaps, currency swaps and other derivative contracts to manage interest rate risk and foreign exchange risk. The Group designated derivatives as hedging instruments to hedge the risk of changes in the fair value of assets, liabilities or firm commitments (a fair value hedge) and foreign currency risk of highly probable forecasted transactions or firm commitments (a cash flow hedge).

On initial designation of the hedge, the Group formally documents the relationship between the hedging instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship.

Fair value hedge

Changes in the fair value of a derivative hedging instrument designated as a fair value hedge are recognized in profit or loss. The gain or loss from remeasuring the hedging instrument at fair value for a derivative hedging instrument and the gain or loss on the hedged item attributable to the hedged risk are recognized in profit or loss in the same line item of the consolidated statement of income. The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, or if the hedge no longer meets the criteria for hedge accounting. Any adjustment arising from gain or loss on the hedged item attributable to the hedged risk is amortized to profit or loss from the date the hedge accounting is discontinued.

Cash flow hedge

When a derivative is designated to hedge the variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecasted transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognized in other comprehensive income, net of tax, and presented in the hedging reserve in equity. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss on the hedging instrument that has been recognized in other comprehensive income is reclassified to profit or loss in the periods during which the forecasted transaction occurs. If the forecasted transaction is no longer expected to occur, then the balance in other comprehensive income is recognized immediately in profit or loss.

 

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4. Significant Accounting Policies, Continued

 

  (6) Derivative financial instruments, including hedge accounting, Continued

 

  (ii) Separable embedded derivatives

Embedded derivatives are separated from the host contract and accounted for separately only if the following criteria have been met:

 

  (a) the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract;

 

  (b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and

 

  (c) the hybrid instrument is not measured at fair value with changes in fair value recognized in profit or loss.

Changes in the fair value of separable embedded derivatives are recognized immediately in profit or loss.

 

  (iii) Other derivative financial instruments

Changes in the fair value of other derivative financial instrument not designated as a hedging instrument are recognized immediately in profit or loss.

 

  (7) Impairment of financial assets

A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. However, losses expected as a result of future events, regardless of likelihood, are not recognized.

Objective evidence that a financial asset is impaired includes following loss events:

 

    significant financial difficulty of the issuer or obligor;

 

    a breach of contract, such as default or delinquency in interest or principal payments;

 

    the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider;

 

    it becoming probable that the borrower will enter bankruptcy or other financial reorganization;

 

    the disappearance of an active market for that financial asset because of financial difficulties; or

 

    observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group

In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment.

 

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4. Significant Accounting Policies, Continued

 

  (7) Impairment of financial assets, Continued

 

If financial assets have objective evidence that they are impaired, impairment losses should be measured and recognized.

 

  (i) Financial assets measured at amortized cost

An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of its estimated future cash flows discounted at the asset’s original effective interest rate. If it is not practicable to obtain the instrument’s estimated future cash flows, impairment losses would be measured by using prices from any observable current market transactions. The Group can recognize impairment losses directly or establish a provision to cover impairment losses. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the previously recognized impairment loss shall be reversed either directly or by adjusting an allowance account.

 

  (ii) Financial assets carried at cost

If there is objective evidence that an impairment loss has occurred on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, the amount of the impairment loss is measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment losses shall not be reversed.

 

  (iii) Available-for-sale financial assets

When a decline in the fair value of an available-for-sale financial asset has been recognized in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss that had been recognized in other comprehensive income shall be reclassified from equity to profit or loss as a reclassification adjustment even though the financial asset has not been derecognized. Impairment losses recognized in profit or loss for an investment in an equity instrument classified as available-for-sale shall not be reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss shall be reversed, with the amount of the reversal recognized in profit or loss.

 

  (8) Property, plant and equipment

Property, plant and equipment are initially measured at cost and after initial recognition, are carried at cost less accumulated depreciation and accumulated impairment losses. The cost of property, plant and equipment includes expenditures arising directly from the construction or acquisition of the asset, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management and the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

 

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4. Significant Accounting Policies, Continued

 

  (8) Property, plant and equipment, Continued

 

Subsequent to initial recognition, an item of property, plant and equipment is carried at its cost less any accumulated depreciation and any accumulated impairment losses.

Subsequent costs are recognized in the carrying amount of property, plant and equipment at cost or, if appropriate, as separate items if it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing are recognized in profit or loss as incurred.

Property, plant and equipment, except for land, are depreciated on a straight-line basis over estimated useful lives that appropriately reflect the pattern in which the asset’s future economic benefits are expected to be consumed. A component that is significant compared to the total cost of property, plant and equipment is depreciated over its separate useful life.

Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognized as other non-operating income (loss).

The estimated useful lives of the Group’s property, plant and equipment are as follows:

 

     Useful lives (years)

Buildings and structures

   15 ~ 40

Machinery

   3 ~ 15

Other property, plant and equipment (“Other PP&E”)

   4 ~ 10

Depreciation methods, useful lives and residual values are reviewed at the end of each reporting date and adjusted, if appropriate. The change is accounted for as a change in an accounting estimate.

 

  (9) Borrowing costs

The Group capitalizes borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Other borrowing costs are recognized in expense as incurred. A qualifying asset is an asset that requires a substantial period of time to get ready for its intended use or sale. Financial assets and inventories that are manufactured or otherwise produced over a short period of time are not qualifying assets. Assets that are ready for their intended use or sale when acquired are not qualifying assets.

To the extent that the Group borrows funds specifically for the purpose of obtaining a qualifying asset, the Group determines the amount of borrowing costs eligible for capitalization as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings. To the extent that the Group borrows funds generally and uses them for the purpose of obtaining a qualifying asset, the Group shall determine the amount of borrowing costs eligible for capitalization by applying a capitalization rate to the expenditures on that asset. The capitalization rate shall be the weighted average of the borrowing costs applicable to the borrowings of the Group that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs that the Group capitalizes during a period shall not exceed the amount of borrowing costs incurred during that period.

 

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  (10) Intangible assets

Intangible assets are measured initially at cost and, subsequently, are carried at cost less accumulated amortization and accumulated impairment losses.

Amortization of intangible assets except for goodwill is calculated on a straight-line basis over the estimated useful lives of intangible assets from the date that they are available for use. The residual value of intangible assets is zero. However, as there are no foreseeable limits to the periods over which club memberships are expected to be available for use, this intangible asset is determined as having indefinite useful lives and not amortized.

The estimated useful lives of the Group’s intangible assets are as follows:

 

     Useful lives (years)

Frequency use rights

   6.3 ~ 13.1

Land use rights

   5

Industrial rights

   5, 10

Development costs

   5

Facility usage rights

   10, 20

Customer relations

   3 ~ 7

Other

   3 ~ 20

Amortization periods and the amortization methods for intangible assets with finite useful lives are reviewed at the end of each reporting period. The useful lives of intangible assets that are not being amortized are reviewed at the end of each reporting period to determine whether events and circumstances continue to support indefinite useful life assessments for those assets. Changes are accounted for as changes in accounting estimates.

Expenditures on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, are recognized in profit or loss as incurred. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Group intends to and has sufficient resources to complete development and to use or sell the asset. Other development expenditures are recognized in profit or loss as incurred.

Subsequent expenditures are capitalized only when they increase the future economic benefits embodied in the specific asset to which it relates. All other expenditures, including expenditures on internally generated goodwill and brands, are recognized in profit or loss as incurred.

 

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  (11) Government grants

Government grants are not recognized unless there is reasonable assurance that the Group will comply with the grant’s conditions and that the grant will be received.

(i) Grants related to assets

Government grants whose primary condition is that the Group purchase, construct or otherwise acquire long-term assets are deducted in calculating the carrying amount of the asset. The grant is recognized in profit or loss over the life of a depreciable asset as a reduction to depreciation expense.

(ii) Grants related to income

Government grants which are intended to compensate the Group for expenses incurred are deducted from the related expenses.

 

  (12) Investment property

Property held for the purpose of earning rentals or benefiting from capital appreciation is classified as investment property. Investment property is initially measured at its cost. Transaction costs are included in the initial measurement. Subsequently, investment property is carried at depreciated cost less any accumulated impairment losses.

Subsequent costs are recognized in the carrying amount of investment property at cost or, if appropriate, as separate items if it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing are recognized in profit or loss as incurred.

Investment property except for land, are depreciated on a straight-line basis over 15~40 years as estimated useful lives.

Depreciation methods, useful lives and residual values are reviewed at the end of each reporting date and adjusted, if appropriate. The change is accounted for as a change in an accounting estimate.

 

  (13) Impairment of non-financial assets

The carrying amounts of the Group’s non-financial assets, other than assets arising from employee benefits, inventories, deferred tax assets and non-current assets held for sale, are reviewed at the end of the reporting period to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill and intangible assets that have indefinite useful lives or that are not yet available for use, irrespective of whether there is any indication of impairment, are tested for impairment annually by comparing their recoverable amount to their carrying amount.

 

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4. Significant Accounting Policies, Continued

 

  (13) Impairment of non-financial assets, Continued

 

The Group estimates the recoverable amount of an individual asset, if it is impossible to measure the individual recoverable amount of an asset, then the Group estimates the recoverable amount of cash-generating unit (“CGU”). A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. The value in use is estimated by applying a pre-tax discount rate that reflect current market assessments of the time value of money and the risks specific to the asset or CGU for which estimated future cash flows have not been adjusted, to the estimated future cash flows expected to be generated by the asset or CGU.

An impairment loss is recognized in profit or loss if the carrying amount of an asset or a CGU exceeds its recoverable amount.

Goodwill acquired in a business combination is allocated to each CGU that is expected to benefit from the synergies arising from the goodwill acquired. Any impairment identified at the CGU level will first reduce the carrying value of goodwill and then be used to reduce the carrying amount of the other assets in the CGU on a pro rata basis. Except for impairment losses in respect of goodwill which are never reversed, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

 

  (14) Leases

The Group classifies and accounts for leases as either a finance or operating lease, depending on the terms. Leases where the Group assumes substantially all of the risks and rewards of ownership are classified as finance leases. All other leases are classified as operating leases.

 

  (i) Finance leases

At the commencement of the lease term, the Group recognizes as finance assets and finance liabilities in its consolidated statements of financial position, the lower amount of the fair value of the leased property and the present value of the minimum lease payments, each determined at the inception of the lease. Any initial direct costs are added to the amount recognized as an asset.

Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent rents are charged as expenses in the periods in which they are incurred.

The depreciable amount of a leased asset is allocated to each accounting period during the period of expected use on a systematic basis consistent with the depreciation policy the lessee adopts for depreciable assets that are owned. If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the asset is fully depreciated over the shorter of the lease term and its useful life. The Group reviews to determine whether the leased asset may be impaired.

 

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4. Significant Accounting Policies, Continued

 

  (14) Leases, Continued

 

  (ii) Operating leases

Leases where the lessor retains a significant portion of the risks and rewards of ownership are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are recognized in profit or loss on a straight-line basis over the period of the lease.

 

  (iii) Determining whether an arrangement contains a lease

Determining whether an arrangement is, or contains, a lease shall be based on the substance of the arrangement and requires an assessment of whether fulfillment of the arrangement is dependent on the use of a specific asset or assets (the asset) and the arrangement conveys a right to use the asset.

At inception or reassessment of the arrangement, the Group separates payments and other consideration required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the Group concludes for a financial lease that it is impracticable to separate the payments reliably, the Group recognizes an asset and a liability at an amount equal to the fair value of the underlying asset that was identified as the subject of the lease. Subsequently, the liability shall be reduced as payments are made and an imputed finance charge on the liability recognized using the purchaser’s incremental borrowing rate of interest.

 

  (15) Non-current assets held for sale

Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. In order to be classified as held for sale, the asset (or disposal group) must be available for immediate sale in its present condition and its sale must be highly probable. The assets or disposal group that are classified as non-current assets held for sale are measured at the lower of their carrying amount and fair value less cost to sell. The Group recognizes an impairment loss for any initial or subsequent write-down of an asset (or disposal group) to fair value less costs to sell, and a gain for any subsequent increase in fair value less costs to sell, up to the cumulative impairment loss previously recognized in accordance with K-IFRS No. 1036, ‘Impairment of Assets’.

A non-current asset that is classified as held for sale or part of a disposal group classified as held for sale is not depreciated (or amortized).

 

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  (16) Non-derivative financial liabilities

The Group classifies non-derivative financial liabilities into financial liabilities at fair value through profit or loss or other financial liabilities in accordance with the substance of the contractual arrangement and the definitions of financial liabilities. The Group recognizes financial liabilities in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of the financial liability.

 

  (i) Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss include financial liabilities held for trading or designated as such upon initial recognition. Subsequent to initial recognition, financial liabilities at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. Upon initial recognition, transaction costs that are directly attributable to the acquisition are recognized in profit or loss as incurred.

 

  (ii) Other financial liabilities

Non-derivative financial liabilities other than financial liabilities at fair value through profit or loss are classified as other financial liabilities. At the date of initial recognition, other financial liabilities are measured at fair value minus transaction costs that are directly attributable to the acquisition. Subsequent to initial recognition, other financial liabilities are measured at amortized cost using the effective interest method.

The Group derecognizes a financial liability from the consolidated statement of financial position when it is extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expires).

 

  (17) Employee benefits

 

  (i) Short-term employee benefits

Short-term employee benefits are employee benefits that are due to be settled within 12 months after the end of the period in which the employees render the related service. When an employee has rendered service to the Group during an accounting period, the Group recognizes the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service.

 

  (ii) Other long-term employee benefits

Other long-term employee benefits include employee benefits that are settled beyond 12 months after the end of the period in which the employees render the related service, and are calculated at the present value of the amount of future benefit that employees have earned in return for their service in the current and prior periods. Any changes from remeasurements are recognized through profit or loss in the period in which they arise.

 

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  (17) Employee benefits, Continued

 

  (iii) Retirement benefits: defined contribution plans

When an employee has rendered service to the Group during a period, the Group recognizes the contribution payable to a defined contribution plan in exchange for that service as a liability (accrued expense), after deducting any contribution already paid. If the contribution already paid exceeds the contribution due for service before the end of the reporting period, the Group recognizes that excess as an asset (prepaid expense) to the extent that the prepayment will lead to a reduction in future payments or a cash refund.

 

  (iv) Retirement benefits: defined benefit plans

As of the end of reporting period, defined benefits liabilities relating to defined benefit plans are recognized as present value of defined benefit obligations net of fair value of plan assets.

The calculation is performed annually by an independent actuary using the projected unit credit method. When the fair value of plan assets exceeds the present value of the defined benefit obligations, the Group recognizes an asset, to the extent of the present value of any economic benefits available in the form of refunds from the plan or reduction in the future contributions to the plan.

Remeasurements of the net defined benefit liability comprise of actuarial gains and losses, the return on plan assets excluding amounts included in net interest on the net defined benefit liability, and any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability and recognized in other comprehensive income. The Group determines net interests on net defined benefit liability (asset) by multiplying discount rate determined at the beginning of the annual reporting period and considers changes in net defined benefit liability (asset) from contributions and benefit payments. Net interest costs and other costs relating to the defined benefit plan are recognized through profit or loss.

When the plan amendment or curtailment occurs, gains or losses on amendment or curtailment in benefits for the past service provided are recognized through profit or loss. The Group recognizes gain or loss on a settlement when the settlement of defined benefit plan occurs.

 

  (v) Termination benefits

The Group recognizes a liability and expense for termination benefits at the earlier of the period when the Group can no longer withdraw the offer of those benefits and the period when the Group recognizes costs for a restructuring. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value.

 

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  (18) Provisions

Provisions are recognized when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

The risks and uncertainties that inevitably surround many events and circumstances are taken into account in reaching the best estimate of a provision. Where the effect of the time value of money is material, provisions are determined at the present value of the expected future cash flows.

Where some or all of the expenditures required to settle a provision are expected to be reimbursed by another party, the reimbursement shall be recognized when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The reimbursement shall be treated as a separate asset.

Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimates. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed.

A provision shall be used only for expenditures for which the provision was originally recognized.

 

  (19) Foreign currencies

 

  (i) Foreign currency transactions

Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated to the functional currency using the reporting date’s exchange rate. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined.

Foreign currency differences arising on retranslation are recognized in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments, a financial liability designated as a hedge of the net investment in a foreign operation, or qualifying cash flow hedges, which are recognized in other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.

 

  (ii) Foreign operations

If the presentation currency of the Group is different from a foreign operation’s functional currency, the financial statements of the foreign operation are translated into the presentation currency using the following methods:

The assets and liabilities of foreign operations, whose functional currency is not the currency of a hyperinflationary economy, are translated to presentation currency at exchange rates at the reporting date. The income and expenses of foreign operations are translated to functional currency at exchange rates at the dates of the transactions. Foreign currency differences are recognized in other comprehensive income.

 

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4. Significant Accounting Policies, Continued

 

  (19) Foreign currencies, Continued

 

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation is treated as assets and liabilities of the foreign operation. Thus they are expressed in the functional currency of the foreign operation and translated at the closing rate.

When a foreign operation is disposed of, the relevant amount in the translation is transferred to profit or loss as part of the profit or loss on disposal. On the partial disposal of a subsidiary that includes a foreign operation, the relevant proportion of such cumulative amount is reattributed to non-controlling interest. In any other partial disposal of a foreign operation, the relevant proportion is reclassified to profit or loss.

 

  (20) Equity capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issuance of ordinary shares and share options are recognized as a deduction from equity, net of any tax effects.

When the Group repurchases its share capital, the amount of the consideration paid is recognized as a deduction from equity and classified as treasury shares. The profits or losses from the purchase, disposal, reissue, or retirement of treasury shares are not recognized as current profit or loss. If the Group acquires and retains treasury shares, the consideration paid or received is directly recognized in equity.

 

  (21) Hybrid bond

The Group recognizes a financial instrument issued by the Group as an equity instrument if it does not include contractual obligation to deliver financial assets including cash to the counter party.

 

  (22) Revenue

Revenue from the sale of goods, rendering of services or use of the Group assets is measured at the fair value of the consideration received or receivable. Returns, trade discounts and volume rebates are recognized as a reduction of revenue.

 

  (i) Services

Revenue from cellular services consists of revenue from basic charges, voice charges, data charges, data-roaming services and interconnection charges. Such revenues are recognized as services are performed. Revenues received for the activation of service are deferred and recognized over the average customer retention period.

Revenue from fixed-line services includes domestic short and long distance charges, international phone connection charges, and broadband internet services. Such revenues are recognized as the related services are performed.

Revenue from services rendered is recognized in profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to surveys of work performed.

 

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4. Significant Accounting Policies, Continued

 

  (22) Revenue, Continued

 

  (ii) Goods sold

Revenue is recognized when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably.

 

  (iii) Customer loyalty programmes

For customer loyalty programmes, the fair value of the consideration received or receivable in respect of the initial sale is allocated between the award credits and the other components of the sale. The amount allocated to the award credits is estimated by reference to the fair value of the services to be provided with respect to the redeemable award credits. The fair value of the services to be provided with respect to the redeemable portion of the award credits granted to the customers in accordance with customer loyalty programmes is estimated taking into account the expected redemption rate and timing of the expected redemption. Considerations allocated to the award credits are deferred and revenue is recognized when the award credits are recovered and the Group performs its obligation to provide the service. The amount of revenue recognized is based on the relative size of the total award credits that are expected to be redeemed and the redeemed award credits in exchange for services.

 

  (iv) Bundled arrangements

When the Group sells both handsets and wireless services to subscribers, the Group recognizes these transactions separately as sales for handset sales and wireless telecommunication services.

 

  (23) Finance income and finance costs

Finance income comprises interest income on funds invested (including available-for-sale financial assets), dividend income, gains on the disposal of available-for-sale financial assets, changes in the fair value of financial assets at fair value through profit or loss, and gains on hedging instruments that are recognized in profit or loss. Interest income is recognized as it accrues in profit or loss, using the effective interest rate method. Dividend income is recognized in profit or loss on the date that the Group’s right to receive payment is established.

Finance costs comprise interest expense on borrowings, unwinding of the discount on provisions, changes in the fair value of financial assets at fair value through profit or loss, and losses on hedging instruments that are recognized in profit or loss. Interest expense on borrowings and debentures are recognized in profit or loss using the effective interest rate method.

 

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4. Significant Accounting Policies, Continued

 

  (24) Income taxes

Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.

 

  (i) Current tax

Current tax is the expected tax payable or receivable on the taxable profit or loss for the year, using tax rates enacted or substantively enacted at the end of the reporting period and any adjustment to tax payable in respect of previous years. The taxable profit is different from the accounting profit for the period since the taxable profit is calculated excluding the temporary differences, which will be taxable or deductible in determining taxable profit (tax loss) of future periods, and non-taxable or non-deductible items from the accounting profit.

 

  (ii) Deferred tax

Deferred tax is recognized, using the asset-liability method, in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The Group recognizes a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries and associates, except to the extent that the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The Group recognizes a deferred tax asset for all deductible temporary differences arising from investments in subsidiaries and associates, to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.

The carrying amount of a deferred tax asset is reviewed at the end of each reporting period and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset only if (a) there is a legally enforceable right to offset the related current tax liabilities and assets, (b) they relate to income taxes levied by the same tax authority and (c) they intend to settle current tax liabilities and assets on a net basis. Income tax expense in relation to dividend payments is recognized when liabilities relating to the dividend payments are recognized.

 

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4. Significant Accounting Policies, Continued

 

  (25) Earnings per share

The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Parent Company by the weighted average number of ordinary shares outstanding during the period, adjusted for own shares held. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding, adjusted for own shares held, for the effects of all dilutive potential ordinary shares, which comprise convertible notes and share options granted to employees.

 

  (26) Discontinued operations

A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of operations that has been disposed of or is held for sale, or is a subsidiary acquired exclusively with a view to resale. When an operation is classified as a discontinued operation, the comparative consolidated statement of comprehensive income is re-presented as if the operation had been discontinued from the start of the comparative period.

 

  (27) New standards and interpretations not yet adopted

The following amendment to existing standards has been published and are mandatory for the Group for annual periods beginning on or after July 1, 2014. The Group has not early adopted it.

As of December 31, 2014, management is not able to evaluate the impact, if any, of applying this standard on its financial position and results of operations.

 

  1) K-IFRS 1019 ‘Employee Benefits’ – Employee contributions

Amendments to K-IFRS 1019 introduced a practical expedient to accounting for defined benefit plan, when employees or third parties pay contributions if certain criteria are met. According to the amendments, the entity is permitted to recognize those contributions as a reduction of the service cost in the period in which the related service is rendered, instead of forecast future contributions from employees or third parties and attribute them to periods or service as negative benefits.

 

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5. Operating Segments

The Group’s operating segments have been determined to be each business unit, for which the Group provides independent services and merchandise. The Group’s reportable segments are: 1) cellular services, which include cellular voice service, wireless data service and wireless internet services, and 2) fixed-line telecommunication services, which include telephone services, internet services, and leased line services. All other operating segments, which include the Group’s Internet portal services and other immaterial operations, do not meet the quantitative thresholds to be considered reportable segments and are presented as Others.

 

  (1) Segment information as of and for the years ended December 31, 2014 and 2013 is as follows:

 

(In millions of won)                                        
     2014  
     Cellular
Services
     Fixed-line
telecommunication
services
     Others     Total
segments
     Consolidation
adjustments
    Consolidated
amount
 

Total revenue

     15,248,039         3,119,845         1,884,784        20,252,668         (3,088,870     17,163,798   

Inter-segment revenue

     1,720,158         669,925         698,787        3,088,870         (3,088,870     —     

External revenue

     13,527,881         2,449,920         1,185,997        17,163,798         —          17,163,798   

Depreciation and amortization

     2,113,510         501,623         99,597        2,714,730         —          2,714,730   

Operating income (loss)

     1,754,433         80,423         (9,751     1,825,105         —          1,825,105   

Finance income and costs, net

                  (260,336

Gain related to investments in subsidiaries, associates and joint ventures, net

                  906,338   

Other non-operating income and expense, net

                  (217,279
               

 

 

 

Profit from continuing operations before income tax

  2,253,828   

Total assets

  23,451,471      3,434,020      3,202,833      30,088,324      (2,147,091   27,941,233   

Total liabilities

  9,626,724      2,172,454      924,683      12,723,861      (30,898   12,692,963   

 

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5. Operating Segments, Continued

 

(In millions of won)                                        
     2013  
     Cellular Services      Fixed-line
telecommunication
services
     Others     Total
segments
     Consolidation
adjustments
    Consolidated
Amount
 

Total revenue

     14,501,829         2,972,642         1,741,599        19,216,070         (2,614,016     16,602,054   

Inter-segment revenue

     1,186,297         648,253         779,466        2,614,016         (2,614,016     —     

External revenue

     13,315,532         2,324,389         962,133        16,602,054         —          16,602,054   

Depreciation and amortization

     2,019,531         522,155         119,937        2,661,623         —          2,661,623   

Operating income (loss)

     1,986,106         55,625         (30,622     2,011,109         —          2,011,109   

Finance income and costs, net

                  (457,811

Gain related to investments in subsidiaries, associates and joint ventures, net

                  706,509   

Other non-operating income and expense, net

                  (432,706
               

 

 

 

Profit from continuing operations before income tax

  1,827,101   

Total assets

  23,263,268      3,288,275      3,075,321      29,626,864      (3,050,349   26,576,515   

Total liabilities

  9,744,248      2,033,978      901,563      12,679,789      (269,831   12,409,958   

Intersegment sales and purchases are conducted on an arms-length basis and eliminated on consolidation. Since there are no intersegment sales of inventory, there is no unrealized intersegment profit to be eliminated on consolidation. The Group principally operates its business in its domestic market in Korea and the amounts outside of Korea are immaterial, therefore no entity-wide geographical information is presented.

No single customer contributed 10% or more to the Group’s total revenue for the years ended December 31, 2014 and 2013.

 

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6. Restricted Deposits

Deposits which are restricted in use as of December 31, 2014 and 2013 are summarized as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Short-term financial instruments

     

Charitable fund(*)

     86,000         76,500   

Other

     4,321         5,134   

Long-term financial instruments

     

Charitable fund(*)

     —           7,500   

Other

     612         89   

Guarantee deposits

     280         40   
  

 

 

    

 

 

 
  91,213      89,263   
  

 

 

    

 

 

 

 

(*) The Group established a trust fund for charitable purposes. Profits from the fund are donated to charitable institutions. As of December 31, 2014, the funds cannot be withdrawn.

 

7. Trade and Other Receivables

 

  (1) Details of trade and other receivables as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)    December 31, 2014  
     Gross
amount
     Allowances
for
impairment
     Carrying
amount
 

Current assets:

        

Accounts receivable – trade

     2,614,059         (221,909      2,392,150   

Short-term loans

     75,199         (687      74,512   

Accounts receivable – other

     769,115         (78,588      690,527   

Accrued income

     10,134         —           10,134   

Others

     3,865         —           3,865   
  

 

 

    

 

 

    

 

 

 
  3,472,372      (301,184   3,171,188   

Non-current assets:

Long-term loans

  82,735      (27,007   55,728   

Long-term accounts receivable - other

  3,596      —        3,596   

Guarantee deposits

  285,144      —        285,144   

Long-term accounts receivable - trade

  68,536      —        68,536   
  

 

 

    

 

 

    

 

 

 
  440,011      (27,007   413,004   
  

 

 

    

 

 

    

 

 

 
  3,912,383      (328,191   3,584,192   
  

 

 

    

 

 

    

 

 

 

 

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7. Trade and Other Receivables, Continued

 

  (1) Details of trade and other receivables as of December 31, 2014 and 2013 are as follows, Continued:

 

(In millions of won)    December 31, 2013  
     Gross
amount
     Allowances
for
impairment
     Carrying
Amount
 

Current assets:

        

Accounts receivable – trade

     2,482,001         (224,685      2,257,316   

Short-term loans

     80,129         (734      79,395   

Accounts receivable – other

     715,405         (71,802      643,603   

Accrued income

     11,970         (29      11,941   

Others

     2,548         —           2,548   
  

 

 

    

 

 

    

 

 

 
  3,292,053      (297,250   2,994,803   

Non-current assets:

Long-term loans

  84,176      (26,734   57,442   

Guarantee deposits

  249,600      —        249,600   

Long-term accounts receivable – trade

  13,154      —        13,154   
  

 

 

    

 

 

    

 

 

 
  346,930      (26,734   320,196   
  

 

 

    

 

 

    

 

 

 
  3,638,983      (323,984   3,314,999   
  

 

 

    

 

 

    

 

 

 

 

  (2) The movements in allowances for doubtful accounts of trade and other receivables during the years ended December 31, 2014 and 2013 were as follows:

 

(In millions of won)       
     2014      2013  

Balance at January 1

     323,984         300,668   

Increase of bad debt allowances

     63,697         79,330   

Reversal of allowances for doubtful accounts

     —           (359

Write-offs

     (89,529      (76,697

Other

     30,039         21,042   
  

 

 

    

 

 

 

Balance at December 31

  328,191      323,984   
  

 

 

    

 

 

 

 

  (3) Details of overdue but not impaired, and impaired trade and other receivable as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)                            
     December 31, 2014      December 31, 2013  
     Accounts
receivable -
trade
     Other
receivables
     Accounts
receivable -
trade
     Other
receivables
 

Neither overdue nor impaired

     1,831,243         1,089,001         1,882,607         938,131   

Overdue but not impaired

     76,671         3,481         46,773         2,030   

Impaired

     774,681         137,306         565,775         203,667   
  

 

 

    

 

 

    

 

 

    

 

 

 
  2,682,595      1,229,788      2,495,155      1,143,828   

Allowances for doubtful accounts

  (221,909   (106,282   (224,685   (99,299
  

 

 

    

 

 

    

 

 

    

 

 

 
  2,460,686      1,123,506      2,270,470      1,044,529   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Group establishes allowances for doubtful accounts based on the likelihood of recoverability of trade and other receivables based on their aging at the end of the period, past customer default experience, customer credit status, and economic and industrial factors.

 

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7. Trade and Other Receivables, Continued

 

  (4) The aging of overdue but not impaired accounts receivable as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)       
     December 31, 2014      December 31, 2013  
     Accounts
receivable -
trade
     Other
receivables
     Accounts
receivable -
trade
     Other
receivables
 

Less than 1 month

     25,254         1,795         12,036         20   

1 ~ 3 months

     26,469         213         15,686         1,220   

3 ~ 6 months

     11,641         608         3,610         516   

More than 6 months

     13,307         865         15,441         274   
  

 

 

    

 

 

    

 

 

    

 

 

 
  76,671      3,481      46,773      2,030   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

8. Inventories

Details of inventories as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)  
     December 31, 2014      December 31, 2013  
   Acquisition
cost
     Write-
down of
inventory
    Carrying
amount
     Acquisition
cost
     Write-
down of
inventory
    Carrying
amount
 

Merchandise

     252,063         (5,325     246,738         165,080         (3,152     161,928   

Finished goods

     1,930         (216     1,714         1,711         (34     1,677   

Work in process

     1,144         (131     1,013         —           —          —     

Raw materials and supplies

     19,242         (1,040     18,202         13,515         —          13,515   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
  274,379      (6,712   267,667      180,306      (3,186   177,120   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

There are no significant reversals of inventory write-downs for the periods presented.

 

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9. Investment Securities

 

  (1) Details of short-term investment securities as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Beneficiary certificates(*)

     277,003         102,828   

Current portion of long-term investment securities

     3,158         3,240   
  

 

 

    

 

 

 
  280,161      106,068   
  

 

 

    

 

 

 

 

(*) The distributions arising from beneficiary certificates as of December 31, 2014 were accounted for as accrued income.

 

  (2) Details of long-term investment securities as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Equity securities:

     

Marketable equity securities

     657,286         638,445   

Unlisted equity securities(*1)

     56,236         47,145   

Equity investments(*2)

     209,120         239,354   
  

 

 

    

 

 

 
  922,642      924,944   

Debt securities:

Public bonds(*3)

  158      356   

Investment bonds(*4)

  36,638      46,467   
  

 

 

    

 

 

 
  36,796      46,823   
  

 

 

    

 

 

 

Total

  959,438      971,767   

Less current portion of long-term investment securities

  (3,158   (3,240
  

 

 

    

 

 

 

Long-term investment securities

  956,280      968,527   
  

 

 

    

 

 

 

 

(*1) Unlisted equity securities whose fair value cannot be measured reliably are recorded at cost.
(*2) Equity investments are recorded at cost.
(*3) Details of maturity for the public bonds as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Less than 1 year

     158         356   

 

(*4) During the year ended December 31, 2014, the Parent Company exercised the conversion right for the convertible bonds of NanoEnTek, Inc., which were the Parent Company is able to exercise significant influence on NanoEnTek, Inc. classified as financial assets at fair value through profit or loss. As a result of this transaction, investments in associates have increased by ₩19,180 million and the difference between carrying amount of the financial assets at fair value and fair value of ₩1,352 million is accounted for as finance costs.

 

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10. Assets and Liabilities Classified as Held for Sale

 

  (1) Subsidiary

During the year ended December 31, 2014, the Group entered into a disposal contract regarding the Group’s ownership interests in Shenzhen E-eye High Tech Co., Ltd., the Parent Company’s subsidiary. Assets and liabilities of the subsidiary amounting to ₩10,510 million and ₩408 million, were reclassified to assets and liabilities held for sale, respectively, and the carrying amount in excess of the fair value less cost to sell was recognized as impairment loss.

 

  (2) Investments in associates

Non-current assets held for sale relating to investments in associates as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

TR Entertainment(*1)

     —           2,611   

SK Fans Co., Ltd.(*2)

     —           1,056   
  

 

 

    

 

 

 
  —        3,667   
  

 

 

    

 

 

 

 

(*1) A disposal contract for the Group’s entire ownership interests in TR Entertainment was entered into during the year ended December 31, 2013 and the investment in the associate was reclassified to assets classified held for sale and an impairment loss of ₩4,019 million was recognized. During the year ended December 31, 2014, the Group disposed of its investments in TR Entertainment.
(*2) During the year ended December 31, 2013, contract changes for SK Fans Co., Ltd. was made and the Group recognized the difference between the changes and the existing contractual amount as impairment loss. During the year ended December 31, 2014, the Group disposed of its investments in SK Fans Co., Ltd.

 

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11. Acquisition of Subsidiary

 

  (1) General information

The Parent Company acquired the ownership interests of Neosnetworks Co., Ltd., IRIVER LIMITED and shopkick, Inc. and they were newly included in the list of subsidiaries during the year ended December 31, 2014.

 

  1) Neosnetworks Co., Ltd.

On April 2, 2014, the Parent Company acquired the ownership interest of 66.7% of Neosnetworks Co., Ltd., which manages facility guarding services, in order to secure new growth engine in physical security market and obtained the control over Neosnetworks Co., Ltd.

Neosnetworks Co., Ltd. recognized revenue of ₩25,743 million and loss of ₩2,277 million, respectively, from the acquisition date to December 31, 2014.

 

  2) IRIVER LIMITED

On August 13, 2014, the Parent Company obtained ownership interests of 39.3% by acquiring 10,241,722 shares of IRIVER LIMITED from investment companies in order to develop smart phone applications and media devices such as Bluetooth speakers and ear phones for future growth and additionally acquired 4,960,317 shares by participating in the capital increase. As of the end of December 31, 2014, the Parent Company has the ownership interest of 49% of IRIVER LIMITED. After the Group acquired control over IRIVER LIMITED, IRIVER LIMITED has recognized revenue of ₩16,311 million and a net profit of ₩4,066 million.

 

  3) shopkick, Inc.

On October 10, 2014, shopkick Management Company, Inc., of which SKP America LLC., a subsidiary of the Parent Company, has the ownership interest of 95.2%, obtained control over shopkick, Inc. by purchasing the ownership interest of 100% of shopkick, Inc. for the purpose of acquiring the platform of its mobile commerce business in the United States and expansion of the Group’s global market position.

 

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11. Acquisition of Subsidiary, Continued

 

  (2) Consideration paid and identifiable assets and liabilities transferred

Consideration paid and identifiable assets acquired and liabilities assumed recognized at the acquisition date are as follows:

 

(In millions of won)                     
     Neosnetworks
Co., Ltd.
     IRIVER
LIMITED
     shopkick, Inc.  

Consideration paid

        

Cash and cash equivalents

     23,968         29,503         230,925   

Other current liabilities

     —           —           18,686   

Long-term payables - other (*)

     14,500         —           —     
  

 

 

    

 

 

    

 

 

 
  38,468      29,503      249,611   
  

 

 

    

 

 

    

 

 

 

Assets and liabilities in succession

Cash and cash equivalents

  16,631      3,098      13,881   

Accounts receivable – trade, net

  111      11,687      6,541   

Inventories, net

  —        11,780      727   

Property, equipment and intangible assets

  11,489      3,153      81,972   

Other assets

  1,289      6,824      6,236   

Accounts payable – trade

  (3,411   (7,113   (796

Borrowings and debentures

  (2,150   (2,293   —     

Other liabilities

  (3,305   (6,268   (13,008
  

 

 

    

 

 

    

 

 

 
  20,654      20,868      95,553   
  

 

 

    

 

 

    

 

 

 

Controlling interests

  20,654      8,193      91,006   

Non-controlling interests

  —        12,675      4,547   

 

(*) During the year ended December 31, 2014, the Parent Company acquired 31,310 shares of Neosnetworks Co., Ltd. (the ownership interest of 66.7%) by purchasing old shares from the pre-existing shareholders and participating in the capital increase. The Parent Company entered into a shareholders’ agreement which granted put options to the pre-existing shareholders for the remaining equity interest of Neosnetworks Co., Ltd. and call options to the Parent Company for those shares if certain conditions are met. In accordance with this shareholders’ agreement, the Group deemed that it assumed the residual equity of the pre-existing shareholders on the acquisition date, and the amount to be paid to the pre-existing shareholders for this acquisition in the future was recorded as long-term payables-other.

 

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12. Business Combinations

 

  (1) General information

PS&Marketing Corporation, a subsidiary of the Parent Company, acquired the retail distribution business of IT service department of SK Networks Co., Ltd. on April 30, 2014 in order to strengthen the mid/long-term distribution competitiveness by expanding the retail infrastructure and enlarging the direct management network.

Revenues and profit or loss recognized after the acquisition date by the acquired businesses of PS&Marketing Corporation are not disclosed as the estimate is practically impossible.

In January, 2013, the Parent Company acquired 50% ownership interest in SK Marketing & Company Co., Ltd., advertising and e-commerce agency, from SK Innovation Co., Ltd., a related party under common control, through the additional purchase of shares and obtained control over SK Marketing & Company Co., Ltd., and its subsidiary, M&Service Co., Ltd.

After obtaining control over SK Marketing & Company Co., Ltd, the Parent Company acquired the shares of SK Planet Co., Ltd. by investing its ownership interest of 100% of SK Marketing & Company Co., Ltd. as a form of investment in kind. On February 1, 2013, SK Planet Co., Ltd. merged with SK Marketing & Company Co., Ltd.

As the business combination which occurred during the years ended December 31, 2014 and 2013 was a business combination between entities under common control, the difference between the consideration and book value of net assets was recognized as a capital deficit and other capital adjustments.

 

  (2) Consideration paid and assets and liabilities transferred as of the acquisition date are as follows:

 

(In millions of won)              
     2014      2013  

Consideration paid

     

Cash and cash equivalents

     111,330         190,605   

Investments in associates (carrying value)

     —           141,534   

Accounts payables – other

     13,156         —     
  

 

 

    

 

 

 
  124,486      332,139   

Assets and liabilities transferred

Cash and cash equivalents

  —        95,800   

Accounts receivable – trade

  57,760      132,514   

Inventories

  94,441      3,472   

Property and equipment, and intangible assets

  13,010      68,699   

Other assets

  23,281      457,431   

Accounts payable – trade and other

  (78,821   (150,014

Other liabilities

  (13,826   (337,617
  

 

 

    

 

 

 
  95,845      270,285   

 

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Table of Contents
13. Investments in Associates and Joint Ventures

 

  (1) Investments in associates and joint ventures accounted for using the equity method as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)                   
          December 31, 2014      December 31, 2013  
     Country    Ownership
percentage
     Carrying
amount
     Ownership
percentage
     Carrying
amount
 

Investments in associates

              

SK China Company Ltd.(*1)

   China      9.6         35,817         9.6         37,434   

Korea IT Fund(*2)

   Korea      63.3         240,676         63.3         231,402   

Etoos Co., Ltd. (*3)

   Korea      —           —           15.6         12,029   

KEB HanaCard Co., Ltd.(*4)

   Korea      25.4         425,140         49.0         378,616   

Candle Media Co., Ltd.(*5)

   Korea      35.1         19,486         40.9         21,241   

NanoEnTek, Inc.(*6)

   Korea      26.0         36,527         9.2         9,312   

SK Industrial Development China Co., Ltd.

   Hong Kong      21.0         79,394         21.0         77,517   

Packet One Network(*1, 5)

   Malaysia      13.6         53,670         27.0         60,706   

SK Technology Innovation Company

   Cayman      49.0         44,052         49.0         53,874   

HappyNarae Co., Ltd.

   Korea      42.5         15,551         42.5         13,935   

SK hynix Inc.(*7)

   Korea      20.1         4,849,159         20.6         3,943,232   

SK MENA Investment B.V.

   Netherlands      32.1         14,015         32.1         13,477   

SKY Property Mgmt. Ltd.

   Virgin Island      33.0         248,534         33.0         238,278   

Xinan Tianlong Science and Technology Co., Ltd.

   China      49.0         25,874         49.0         26,562   

Daehan Kanggun BcN Co., Ltd. and others

   —        —           158,725         —           164,976   
        

 

 

       

 

 

 

Sub-total

  6,246,620      5,282,591   
        

 

 

       

 

 

 

Investments in joint ventures

Dogus Planet, Inc.(*8)

Turkey   50.0      11,441      50.0      10,105   

PT. Melon Indonesia

Indonesia   49.0      3,564      49.0      3,230   

Television Media Korea Ltd.

Korea   51.0      6,944      51.0      8,659   

Celcom Planet(*9)

Malaysia   51.0      16,605      —        —     

PT XL Planet Digital

Indonesia   50.0      12,914      50.0      20,712   
        

 

 

       

 

 

 

Sub-total

  51,468      42,706   
        

 

 

       

 

 

 

Total

  6,298,088      5,325,297   
        

 

 

       

 

 

 

 

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Table of Contents
13. Investments in Associates and Joint Ventures, Continued

 

  (1) Investments in associates and joint ventures accounted for using the equity method as of December 31, 2014 and 2013 are as follows, Continued:

 

(*1) Classified as investments in associates as the Group can exercise significant influence through its participation on the board of directors even though the Group has less than 20% of equity interests.
(*2) Investment in Korea IT Fund was classified as investment in associates as the Group has less than 50% of voting rights, and therefore does not have control over Korea IT Fund under the agreement.
(*3) Reclassified as available-for-sale financial assets in 2014 as the Group lost the right to appoint directors of this investee and lost significant influence on the investee.
(*4) During the year ended December 31, 2014, due to merger between Hana SK Card Co., Ltd., the Parent Company’s associate, and KEB Card Co., Ltd., the Group exchanged 57,647,058 shares of Hana SK Card Co., Ltd., with 67,627,587 shares of the surviving company, KEB HanaCard Co., Ltd.
(*5) The ownership percentage has been decreased due to disproportionate paid-in capital increase during the year ended December 31, 2014.
(*6) The carrying amount has increased due to the additional investment and the conversion of convertible bonds during the year ended December 31, 2014.
(*7) The ownership percentage has been decreased due to the conversion of convertible bonds issued by SK hynix Inc.
(*8) The carrying amount has increased due to the additional investment during the year ended December 31, 2014.
(*9) During the year ended December 31, 2014, it was established for online commerce business in Malaysia.

 

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13. Investments in Associates and Joint Ventures, Continued

 

  (2) The market price of investments in listed associates as of December 31, 2014 and 2013 are as follows:

 

(In millions of won, except for share and per share data)  
     December 31, 2014      December 31, 2013  
   Market
value per
share

(In won)
     Number of
shares
     Market
price
     Market
value
per
share

(In won)
     Number of
shares
     Market
price
 

Candle Media Co., Ltd.

     734         21,620,360         15,869         810         21,620,360         17,512   

NanoEnTek, Inc.

     5,710         5,870,290         33,519         5,170         1,807,130         9,343   

SK hynix Inc.

     47,750         146,100,000         6,976,275         36,800         146,100,000         5,376,480   

 

  (3) The financial information of the significant investees as of and for the years ended December 31, 2014 and 2013 is as follows:

 

(In millions of won)       
     As of and for the year ended December 31, 2014  
     SK hynix
Inc.
     KEB
HanaCard
Co.,

Ltd.(*)
     SKY
Property
Mgmt.
Ltd.
     Korea IT
Fund
 

Current assets

     10,363,514         6,716,612         172,775         122,026   

Non-current assets

     16,519,764         568,065         667,560         258,144   

Current liabilities

     5,765,304         848,140         62,868         —     

Non-current liabilities

     3,081,671         5,109,888         242,116         —     

Revenue

     17,125,566         305,756         81,502         18,883   

Profit (loss) from continuing operations

     4,195,169         (11,196      15,006         5,470   

Other comprehensive income (loss)

     (52,360      (734      (6,090      4,837   

Total comprehensive income (loss)

     4,142,809         (11,930      8,916         10,307   

 

(*) Revenue and net profit of Hana SK Card Co., Ltd. for pre-merger period, amounting to ₩853,506 million and ₩3,521 million, respectively, were not included.

 

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Table of Contents
13. Investments in Associates and Joint Ventures, Continued

 

  (3) The financial information of the significant investees as of and for the years ended December 31, 2014 and 2013 is as follows, Continued:

 

(In millions of won)    As of and for the year ended December 31, 2013  
     SK hynix
Inc.
     HanaSK
Card Co.,
Ltd.
     SKY
Property
Mgmt.
Ltd.
     Korea IT
Fund
 

Current assets

     6,653,123         4,687,020         106,122         132,968   

Non-current assets

     14,144,175         211,376         695,653         232,566   

Current liabilities

     3,078,240         2,053,942         137,544         6   

Non-current liabilities

     4,652,200         2,155,165         163,540         —     

Revenue

     14,165,102         853,506         76,834         8,161   

Profit from continuing operations

     2,872,857         3,521         14,408         2,128   

Other comprehensive income

     6,594         1,906         55,403         —     

Total comprehensive income

     2,879,451         5,427         69,811         2,128   

 

  (4) The condensed financial information of joint ventures as of and for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)       
     As of and for the year ended December 31, 2014  
     Television
Media
Korea Ltd.
    Dogus
Planet,
Inc.
    PT.
Melon
Indonesia
    PT XL
Planet
Digital
    Celcom
Planet
 

Current assets

     16,252        38,641        10,022        9,241        30,407   

Cash and cash equivalents

     5,104        6        4,763        6,710        30,400   

Non-current assets

     4,543        13,011        3,094        14,589        3,343   

Current liabilities

     7,188        28,406        5,689        4,198        1,182   

Account payable, other payables and provisions

     265        3,648        —          —          —     

Non-current liabilities

     464        377        102        124        —     

Account payable, other payables and provisions

     464        377        —          124        —     

Revenue

     16,403        23,897        11,826        1,019        —     

Depreciation and amortization

     (3,732     (2,402     (928     (1,452     (1

Interest income

     254        1,154        268        —          —     

Interest expense

     —          (6     —          —          —     

Income tax expense

     —          —          —          (5,334     —     

Profit (loss) from continuing operations

     (3,361     (37,146     523        (15,596     (1,479

Total comprehensive income (loss)

     (3,361     (37,146     523        (15,596     (1,479

 

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13. Investments in Associates and Joint Ventures, Continued

 

  (4) The condensed financial information of joint ventures as of and for the years ended December 31, 2014 and 2013 are as follows, Continued:

 

(In millions of won)       
     As of and for the year ended December 31, 2013  
     Television
Media
Korea Ltd.
     Dogus
Planet,
Inc.
     PT.
Melon
Indonesia
     PT XL
Planet
Digital
 

Current assets

     18,106         25,508         7,423         31,241   

Cash and cash equivalents

     14,532         10,723         4,428         30,288   

Non-current assets

     5,143         9,935         1,658         5,801   

Current liabilities

     6,385         15,471         2,338         2,133   

Account payable, other payables and provisions

     6,385         15,386         2,338         2,133   

Non-current liabilities

     359         142         100         14   

Account payable, other payables and provisions

     359         1         —           14   

Revenue

     14,139         7,509         7,475         —     

Depreciation and amortization

     (4,004      (1,315      (397      (84

Interest income

     410         1,598         289         357   

Interest expense

     —           (29      —           (3

Income tax expense

     —           —           —           (513

Profit (loss) from continuing operations

     (6,021      (29,278      (575      3,606   

Total comprehensive income (loss)

     (6,021      (29,278      (575      3,606   

 

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13. Investments in Associates and Joint Ventures, Continued

 

  (5) Reconciliations of financial information of significant associates to carrying amounts of investments in associates in the consolidated financial statements as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)       
     December 31, 2014  
     Net assets      Ownership
interests
(%)
     Net assets
attributable
to the
ownership
interests
     Cost-book
value
differentials
     Carrying
amount
 

Associates:

              

SK hynix Inc.(*)

     18,036,453         20.1         3,619,666         1,229,493         4,849,159   

KEB HanaCard Co., Ltd.

     1,326,649         25.4         337,266         87,874         425,140   

SKY Property Mgmt. Ltd.(*)

     527,479         33         174,068         74,466         248,534   

Korea IT Fund

     380,170         63.3         240,676         —           240,676   

 

(In millions of won)       
     December 31, 2013  
     Net assets      Ownership
interests
(%)
     Net assets
attributable
to the
ownership
interests
     Cost-book
value
differentials
     Carrying
amount
 

Associates:

              

SK hynix Inc.(*)

     13,066,474         20.6         2,687,806         1,255,426         3,943,232   

Hana SK Card Co., Ltd.

     689,290         49.0         337,752         40,864         378,616   

SKY Property Mgmt. Ltd.(*)

     494,004         33.0         163,021         75,257         238,278   

Korea IT Fund

     365,528         63.3         231,402         —           231,402   

 

(*) These entities prepare consolidated financial statements and net assets of these entities represent net assets attributable to owners of the parent company.

 

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13. Investments in Associates and Joint Ventures, Continued

 

  (6) Details of changes in investments in associates and joint ventures accounted for using the equity method for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)    2014  
     Beginning
balance
     Acquisition
and
disposition
     Share of
profits
(losses)
    Other
comprehensive
income

(loss)
    Impairment
loss
    Other
increase
(decrease)
    Ending
balance
 

Investments in associates

                

SK China Company Ltd.

     37,434         —           (365     (1,252     —          —          35,817   

Korea IT Fund

     231,402         —           3,243        6,031        —          —          240,676   

Etoos Co., Ltd.

     12,029         —           346        —          —          (12,375     —     

KEB HanaCard Co., Ltd.

     378,616         —           (739     (2,031     —          49,294        425,140   

Candle Media Co., Ltd.

     21,241         —           (1,701     (54     —          —          19,486   

NanoEnTek, Inc.

     9,312         7,778         284        (27     —          19,180        36,527   

SK Industrial Development China Co., Ltd.

     77,517         —           (791     2,668        —          —          79,394   

Packet One Network

     60,706         —           (11,845     4,809        —          —          53,670   

SK Technology Innovation Company

     53,874         —           (9,822     —          —          —          44,052   

HappyNarae Co., Ltd.

     13,935         —           1,688        (72     —          —          15,551   

SK hynix Inc.

     3,943,232         —           916,486        (10,559     —          —          4,849,159   

SK MENA Investment B.V.

     13,477         —           (4     542        —          —          14,015   

SKY Property Mgmt. Ltd.

     238,278         —           3,438        6,818        —          —          248,534   

Xinan Tianlong Science and Technology Co., Ltd.

     26,562         —           (688     —          —          —          25,874   

Daehan Kanggun BcN Co., Ltd. and others

     164,976         14,172         (18,126     1,324        (2,363     (1,258     158,725   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

  5,282,591      21,950      881,404      8,197      (2,363   54,841      6,246,620   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investments in joint ventures

  —        —        —        —        —        —        —     

Dogus Planet, Inc.

  10,105      19,677      (18,573   232      —        —        11,441   

PT. Melon Indonesia

  3,230      —        256      78      —        —        3,564   

Television Media Korea Ltd.

  8,659      —        (1,715   —        —        —        6,944   

Celcom Planet

  —        17,433      (656   —        —        (172   16,605   

PT XL Planet Digital

  20,712      —        (7,798   —        —        —        12,914   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

  42,706      37,110      (28,486   310      —        (172   51,468   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  5,325,297      59,060      852,918      8,507      (2,363   54,669      6,298,088   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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13. Investments in Associates and Joint Ventures, Continued

 

  (6) Details of changes in investments in associates and joint ventures accounted for using the equity method for the year ended December 31, 2014 and 2013 are as follows, Continued:

 

(In millions of won)    2013  
     Beginning
balance
     Acquisition
and
disposition
    Share of
profits
(losses)
    Other
comprehensive
income (loss)
    Impairment
loss
    Other
increase
(decrease)
    Ending
balance
 

Investments in associates

               

SK Marketing & Company Co., Ltd.(*1)

     145,333         —          (3,954     155        —          (141,534     —     

SK China Company Ltd.

     37,628         —          (7,643     7,449        —          —          37,434   

Korea IT Fund

     230,016         —          1,348        38        —          —          231,402   

JYP Entertainment Corporation (*2)

     4,232         —          1,000        58        —          (5,290     —     

Etoos Co., Ltd.

     12,037         —          56        (64     —          —          12,029   

HanaSK Card Co., Ltd.

     378,457         —          (612     771        —          —          378,616   

Candle Media Co., Ltd.

     21,935         —          (782     88        —          —          21,241   

NanoEnTek, Inc.

     9,276         —          25        11        —          —          9,312   

SK Industrial Development China Co., Ltd.

     77,967         —          (1,037     587        —          —          77,517   

Packet One Network

     88,389         25        (2,367     (1,843     (23,498     —          60,706   

SK Technology Innovation Company

     63,559         —          (9,108     (577     —          —          53,874   

ViKi, Inc. (*3)

     15,667         (14,636     (995     (36     —          —          —     

HappyNarae Co., Ltd.

     13,113         —          822        —          —          —          13,935   

SK hynix Inc.

     3,328,245         —          610,201        4,786        —          —          3,943,232   

SK MENA Investment B.V.

     13,666         —          —          (189     —          —          13,477   

SKY Property Mgmt. Ltd. (*4)

     —           —          5,532        43        —          232,703        238,278   

Xinan Tianlong Science and Technology Co., Ltd.

     —           25,731        831        —          —          —          26,562   

Daehan Kanggun BcN Co., Ltd. and others

     170,747         26,257        (17,899     (4,291     (5,547     (4,291     164,976   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

  4,610,267      37,377      575,418      6,986      (29,045   81,588      5,282,591   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investments in joint ventures

Dogus Planet, Inc.

  6,006      21,428      (13,027   (4,302   —        —        10,105   

PT. Melon Indonesia

  4,447      —        (282   (935   —        —        3,230   

Television Media Korea Ltd.

  11,757      —        (3,098   —        —        —        8,659   

PT XL Planet Digital

  —        19,713      1,549      —        —        (550   20,712   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

  22,210      41,141      (14,858   (5,237   —        (550   42,706   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  4,632,477      78,518      560,560      1,749      (29,045   81,039      5,325,297   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(*1) The entity was merged into SK Planet Co., Ltd., a subsidiary of the Parent Company during the year ended December 31, 2013.
(*2) JYP Entertainment Corporation was excluded from list of investments in associates as Loen Entertainment, Inc., which has ownership interests in JYP Entertainment Corporation, was excluded from consolidation scope.
(*3) Viki Inc. was sold during the year ended December 31, 2013.

 

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13. Investments in Associates and Joint Ventures, Continued

 

  (6) Details of changes in investments in associates and joint ventures accounted for using the equity method for the year ended December 31, 2014 and 2013 are as follows, Continued:
 

 

(*4) Investments in SKY Property Mgmt. Ltd. was reclassified from subsidiaries to investments to associates as portion of ownership interests were disposed during the year ended December 31, 2013.

 

  (7) As the Group discontinued the application of the equity method due to the carrying amount of the Group’s share being reduced to zero, the unrecognized accumulated equity losses as of December 31, 2014 are as follows:

 

(In millions of won)              
     Unrealized loss      Unrealized change in equity  
     Year ended
December 31,
2014
     Accumulated      Year ended
December 31,
2014
     Accumulated  

ULand Company Limited

     178         1,731         34         31   

Wave City Development Co., Ltd. and others

     1,508         5,229         —           334   
  

 

 

    

 

 

    

 

 

    

 

 

 
₩   1,686      6,960      34      365   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
14. Property and Equipment

 

  (1) Property and equipment as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)                            
     December 31, 2014  
     Acquisition cost      Accumulated
depreciation
     Accumulated
impairment loss
     Carrying
amount
 

Land

     766,780         —           —           766,780   

Buildings

     1,537,042         (603,175      —           933,867   

Structures

     737,494         (384,705      —           352,789   

Machinery

     27,088,067         (19,775,784      (1,468      7,310,815   

Other

     1,461,201         (960,450      (1,701      499,050   

Construction in progress

     704,400         —           —           704,400   
  

 

 

    

 

 

    

 

 

    

 

 

 
  32,294,984      (21,724,114   (3,169   10,567,701   
  

 

 

    

 

 

    

 

 

    

 

 

 
(In millions of won)       
     December 31, 2013  
     Acquisition cost      Accumulated
depreciation
     Accumulated
impairment loss
     Carrying
amount
 

Land

     732,206         —           —           732,206   

Buildings

     1,510,846         (554,155      —           956,691   

Structures

     716,724         (351,773      —           364,951   

Machinery

     24,994,337         (18,145,580      (1,698      6,847,059   

Other

     1,428,159         (894,217      (761      533,181   

Construction in progress

     762,519         —           —           762,519   
  

 

 

    

 

 

    

 

 

    

 

 

 
  30,144,791      (19,945,725   (2,459   10,196,607   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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14. Property and Equipment, Continued

 

  (2) Changes in property and equipment for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)  
     2014  
     Beginning
balance
     Acquisition      Disposal     Transfer     Depreciation     Impairment     Classified
as held
for sale
    Business
combination
     Ending
balance
 

Land

     732,206         8,306         (12     24,178        —          —          —          2,102         766,780   

Buildings

     956,691         5,862         (451     16,885        (48,745     —          —          3,625         933,867   

Structures

     364,951         8,909         (39     11,919        (32,951     —          —          —           352,789   

Machinery

     6,847,059         572,764         (28,101     1,979,590        (2,065,368     (2,879     (6     7,756         7,310,815   

Other

     533,181         1,124,067         (6,188     (1,022,999     (135,213     (49     (245     6,496         499,050   

Construction in progress

     762,519         1,101,691         (11,277     (1,147,666     —          (691     (176     —           704,400   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
  10,196,607      2,821,599      (46,068   (138,093   (2,282,277   (3,619   (427   19,979      10,567,701   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(In millions of won)  
     2013  
     Beginning
balance
     Acquisition      Disposal     Transfer     Depreciation     Impairment     Change of
consolidation
scope
     Ending
balance
 

Land

     704,908         6,865         (200     15,545        —          —          5,088         732,206   

Buildings

     886,371         1,128         (177     112,827        (47,429     —          3,971         956,691   

Structures

     363,484         17,850         (18     17,001        (33,366     —          —           364,951   

Machinery

     6,316,192         582,593         (13,183     1,951,267        (1,990,850     —          1,040         6,847,059   

Other

     637,212         1,190,739         (7,032     (1,157,150     (133,682     —          3,094         533,181   

Construction in progress

     804,552         1,113,576         (31,146     (1,131,703     —          (1,275     8,515         762,519   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
  9,712,719      2,912,751      (51,756   (192,213   (2,205,327   (1,275   21,708      10,196,607   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents
15. Investment Property

 

  (1) Investment property as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)                     
     December 31, 2014  
     Acquisition
cost
     Accumulated
depreciation
     Carrying
amount
 

Land

     10,418         —           10,418   

Buildings

     7,379         (2,800      4,579   
  

 

 

    

 

 

    

 

 

 
  17,797      (2,800   14,997   
  

 

 

    

 

 

    

 

 

 
(In millions of won)                     
     December 31, 2013  
     Acquisition
cost
     Accumulated
depreciation
     Carrying
amount
 

Land

     10,822         —           10,822   

Buildings

     7,657         (2,668      4,989   
  

 

 

    

 

 

    

 

 

 
  18,479      (2,668   15,811   
  

 

 

    

 

 

    

 

 

 

 

  (2) Changes in investment property for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)  
     2014  
     Beginning
balance
     Transfer      Depreciation      Ending
balance
 

Land

     10,822         (404      —           10,418   

Buildings

     4,989         (172      (238      4,579   
  

 

 

    

 

 

    

 

 

    

 

 

 
  15,811      (576   (238   14,997   
  

 

 

    

 

 

    

 

 

    

 

 

 
(In millions of won)  
     2013  
     Beginning
balance
     Transfer      Depreciation      Ending
balance
 

Land

     12,638         (1,816      —           10,822   

Buildings

     14,841         (8,737      (1,115      4,989   
  

 

 

    

 

 

    

 

 

    

 

 

 
  27,479      (10,553   (1,115   15,811   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (3) Fair value of investment property as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)                            
     December 31, 2014      December 31, 2013  
     Carrying
amount
     Fair value      Carrying
amount
     Fair value  

Land

     10,418         6,056         10,822         6,595   

Buildings

     4,579         4,288         4,989         4,737   
  

 

 

    

 

 

    

 

 

    

 

 

 
  14,997      10,344      15,811      11,332   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of investment property was appraised on the basis of market price by an independent appraisal company.

 

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15. Investment Property, Continued

 

  (4) Income (expense) from investment property for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     2014      2013  

Rent revenue

     896         1,373   

Operating expense

     (239      (476

 

16. Goodwill

 

  (1) Goodwill as of December 31, 2014 and 2013 is as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Goodwill related to acquisition of Shinsegi Telecom, Inc.

     1,306,236         1,306,236   

Goodwill related to acquisition of SK Broadband Co., Ltd.

     358,443         358,443   

Other goodwill

     252,916         68,582   
  

 

 

    

 

 

 
  1,917,595      1,733,261   
  

 

 

    

 

 

 

Goodwill is allocated to the following CGUs for the purpose of impairment testing.

 

    Shinsegi Telecom, Inc.(*1): cellular services

 

    SK Broadband Co., Ltd.(*2): fixed-line telecommunication services

 

    Other: other

 

  (*1) Shinsegi Telecom, Inc.

The recoverable amount of the CGU is based on its value in use calculated by applying the annual discount rate of 6.2% to the estimated future cash flows based on financial budgets for the next five years. An annual growth rate of 1.8% was applied for the cash flows expected to be incurred after five years and is not expected to exceed the Group’s long-term wireless telecommunication business growth rate. Management of the Group does not expect the total carrying amount of the CGU will exceed the total recoverable amount due to reasonably possible changes from the major assumptions used to estimate the recoverable amount.

 

  (*2) Goodwill related to acquisition of SK Broadband Co., Ltd.

The recoverable amount of the CGU is based on its value in use calculated by applying the annual discount rate of 5.2% to the estimated future cash flows based on financial budgets for the next five years. An annual growth rate of 2.2%, the Group’s long-term fixed-line telecommunication business growth rate, was applied for the cash flows expected to be incurred after five years. Management of the Group does not expect the total carrying amount of the CGU will exceed the total recoverable amount due to reasonably possible changes from the major assumptions used to estimate the recoverable amount.

 

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16. Goodwill, Continued

 

  (2) Details of changes in goodwill for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)       
     2014      2013  

Beginning balance

     1,733,261         1,744,483   

Increase due to business acquisition

     193,202         1,252   

Impairment loss

     (8,868      (9,981

Other(*)

     —           (2,493
  

 

 

    

 

 

 
  1,917,595      1,733,261   
  

 

 

    

 

 

 

 

(*) Other decrease represents effects of exchange rate changes in relation to the foreign subsidiaries and reclassification of assets held for sale.

Accumulated impairment losses for the years ended December 31, 2014 and 2013 are ₩18,849 million and ₩9,881 million, respectively.

 

17. Intangible Assets

 

  (1) Intangible assets as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)       
     2014  
     Acquisition cost      Accumulated
depreciation
     Accumulated
impairment
     Carrying
amount
 

Frequency use rights

     3,033,879         (1,649,835      —           1,384,044   

Land use rights

     64,136         (38,783      —           25,353   

Industrial rights

     144,497         (36,737      —           107,760   

Development costs

     162,493         (144,215      (9,947      8,331   

Facility usage rights

     146,112         (93,476      —           52,636   

Customer relations

     17,147         (10,743      —           6,404   

Memberships(*1)

     128,274         —           (34,155      94,119   

Other(*2)

     3,029,590         (2,223,627      (616      805,347   
  

 

 

    

 

 

    

 

 

    

 

 

 
  6,726,128      (4,197,416   (44,718   2,483,994   
  

 

 

    

 

 

    

 

 

    

 

 

 
(In millions of won)    2013  
     Acquisition cost      Accumulated
depreciation
     Accumulated
impairment
     Carrying
amount
 

Frequency use rights

     3,033,879         (1,369,308      —           1,664,571   

Land use rights

     48,031         (31,441      —           16,590   

Industrial rights

     91,027         (32,264      —           58,763   

Development costs

     148,714         (126,912      (11,675      10,127   

Facility usage rights

     143,937         (85,109      —           58,828   

Customer relations

     14,222         (7,889      —           6,333   

Memberships(*1)

     128,452         —           —           128,452   

Other(*2)

     2,747,121         (1,938,936      (1,067      807,118   
  

 

 

    

 

 

    

 

 

    

 

 

 
  6,355,383      (3,591,859   (12,742   2,750,782   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
17. Intangible Assets, Continued

 

  (1) Intangible assets as of December 31, 2014 and 2013 are as follows, Continued:

 

(*1) Memberships are classified as intangible assets with indefinite useful life and are not amortized.
(*2) Other intangible assets consist of computer software and usage rights to a research facility which the Group built and donated to a university and the Group is given rights-to-use for a definite number of years.

 

  (2) Details of changes in intangible assets for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)  
     2014  
     Beginning
balance
     Acquisition      Disposal     Transfer     Amortization     Impairment     Change of
consolidation
scope
     Ending
balance
 

Frequency use rights

     1,664,571         —           —          —          (280,527     —          —           1,384,044   

Land use rights

     16,590         15,560         (573     —          (8,483     —          2,259         25,353   

Industrial rights

     58,763         5,048         (180     —          (4,584     —          48,713         107,760   

Development costs

     10,127         1,253         (25     63        (4,048     (398     1,359         8,331   

Facility usage rights

     58,828         1,890         (30     382        (8,434     —          —           52,636   

Customer relations

     6,333         779         —          (39     (3,063     —          2,394         6,404   

Memberships(*)

     128,452         5,629         (5,810     (264     —          (34,155     267         94,119   

Other

     807,118         102,322         (9,919     171,858        (300,216     (449     34,633         805,347   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
  2,750,782      132,481      (16,537   172,000      (609,355   (35,002   89,625      2,483,994   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(*) The Group recognized the difference between recoverable amount and the carrying amount of memberships, amounting to ₩34,155 million as impairment loss for the year ended December 31, 2014.

 

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17. Intangible Assets, Continued

 

  (2) Details of changes in intangible assets for the years ended December 31, 2014 and 2013 are as follows, Continued:

 

 

(In millions of won)  
     2013  
     Beginning
balance
     Acquisition      Disposal     Transfer      Amortization     Impairment     Change of
consolidation
scope
    Ending
balance
 

Frequency use rights(*)

     1,693,868         1,046,833         (814,213     —           (261,917     —          —          1,664,571   

Land use rights

     16,062         7,378         (279     —           (6,571     —          —          16,590   

Industrial rights

     60,104         2,045         (75     485         (3,674     —          (122     58,763   

Development costs

     13,420         594         —          650         (5,230     (1,448     2,141        10,127   

Facility usage rights

     65,340         1,930         (75     9         (8,376     —          —          58,828   

Customer relations

     48,886         1,293         —          1,856         (45,702     —          —          6,333   

Memberships

     118,954         2,828         (997     —           —          —          7,667        128,452   

Other

     673,024         111,972         (21,751     325,529         (291,870     (1,695     11,909        807,118   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
  2,689,658      1,174,873      (837,390   328,529      (623,340   (3,143   21,595      2,750,782   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(*) The Group newly acquired 1.8GHz frequency use rights through auction during the year ended December 31, 2013 and returned the existing 1.8GHz frequency use rights as partial consideration in connection with the new acquisition. The Group recognized ₩199,613 million of loss on disposal of property and equipment and intangible assets with regard to this transaction.
(3) Research and development expenditures recognized as expense for the years ended December 31, 2014 and 2013 are as follows:

 

     2014      2013  

Research and development costs expensed as incurred

     390,943         352,385   

 

  (4) The carrying amount and residual useful lives of frequency usage rights as of the year ended December 31, 2014 are as followed, all of which are depreciated on a straight-line basis:

 

(In millions of won)
     Amount     

Description

   Commencement
of amortization
   Completion of
amortization

W-CDMA license

     198,542      

Frequency use rights relating to W-CDMA service

   Dec. 2003    Dec. 2016

W-CDMA license

     32,622      

Frequency use rights relating to W-CDMA service

   Oct. 2010    Dec. 2016

800MHz license

     263,536      

Frequency use rights relating to CDMA and LTE service

   Jul. 2011    Jun. 2021

1.8GHz license

     879,340      

Frequency use rights relating to LTE service

   Sep. 2013    Dec. 2021

WiBro license

     10,004      

WiBro service

   Mar. 2012    Mar. 2019
  

 

 

          
  1,384,044   
  

 

 

          

 

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Table of Contents
18. Borrowings and Debentures

 

  (1) Short-term borrowings as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
    

Lender

  Annual
interest
rate (%)
    December 31,
2014
    December 31,
2013
 

CP

   Samsung Securities Co., Ltd., etc.     2.16~3.09        206,000        200,000   

Short-term borrowings

   Korea Development Bank     2.48~4.28        160,600        60,000   
      

 

 

   

 

 

 
  366,600      260,000   
      

 

 

   

 

 

 

 

  (2) Long-term borrowings as of December 31, 2014 and 2013 are as follows:

 

(In millions of won, thousands of U.S. dollars and thousands of Chinese yuan)  

Lender

   Annual
interest rate (%)
   Maturity    December 31,
2014
     December 31,
2013
 

Korea Development Bank

   3.19    Jun. 16, 2014      —           1,648   

Shinhan Bank

   2.77    Jun. 15, 2015      1,712         5,136   

Kookmin Bank

   2.77    Jun. 15, 2016      4,874         8,124   

Kookmin Bank

   2.77    Mar. 15, 2017      4,496         5,996   

Kookmin Bank

   2.77    Mar. 15, 2018      8,600         8,600   

Shinhan Bank(*1)

   6M bank debenture
rate+1.58
   Apr. 30, 2016      10,000         —     

Korea Finance Corporation

   3.32    Jul. 30 ,2019      39,000         —     

Korea Finance Corporation

   2.94    Jul. 30 ,2019      10,000         —     

Export Kreditnamnden(*2)

   1.7    Apr. 29, 2022      94,903         99,975   
           (USD 86,338      (USD 94,736
        

 

 

    

 

 

 

Sub-total

  173,585      129,479   

Less present value discount on long-term borrowings

  (2,623   (3,287
        

 

 

    

 

 

 
  170,962      126,192   

Less current portion of long-term borrowings

  (21,242   (21,384
        

 

 

    

 

 

 

Long-term borrowings

  149,720      104,808   
        

 

 

    

 

 

 

 

(*1) As of December 31, 2014, the 6M bank debenture rate of Shinhan Bank is 2.17%.
(*2) For the years ended December 31, 2014 and 2013, the Group obtained long-term borrowings from Export Kreditnamnden, an export credit agency. The long-term borrowings are redeemed by installments on an annual basis from 2014 to 2022.

 

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18. Borrowings and Debentures, Continued

 

  (3) Debentures as of December 31, 2014 and 2013 are as follows:

 

(In millions of won, thousands of U.S. dollars and thousands of other currencies)  
     Purpose    Maturity    Annual interest
rate (%)
   December 31, 2014     December 31, 2013  

Unsecured private bonds

   Refinancing fund    2016    5.00      200,000        200,000   

Unsecured private bonds

      2014    5.00      —          200,000   

Unsecured private bonds

   Other fund    2015    5.00      200,000        200,000   

Unsecured private bonds

      2018    5.00      200,000        200,000   

Unsecured private bonds

      2016    5.54      40,000        40,000   

Unsecured private bonds

      2016    5.92      230,000        230,000   

Unsecured private bonds

   Operating fund    2016    3.95      110,000        110,000   

Unsecured private bonds

      2021    4.22      190,000        190,000   

Unsecured private bonds

   Operating and refinancing fund    2019    3.24      170,000        170,000   

Unsecured private bonds

      2022    3.30      140,000        140,000   

Unsecured private bonds

      2032    3.45      90,000        90,000   

Unsecured private bonds

   Operating fund    2023    3.03      230,000        230,000   

Unsecured private bonds

      2033    3.22      130,000        130,000   

Unsecured private bonds

      2019    3.30      50,000        —     

Unsecured private bonds

      2024    3.64      150,000        —     

Unsecured private bonds(*6)

      2029    4.73      55,188        —     

Unsecured private bonds(*6)

      2029    4.72      55,177        —     

Unsecured private bonds

   Refinancing fund    2019    2.53      160,000        —     

Unsecured private bonds

      2021    2.66      150,000        —     

Unsecured private bonds

      2024    2.82      190,000        —     

Unsecured private bonds(*1)

   Operating fund    2014    4.86      —          20,000   

Unsecured private bonds(*1)

      2015    4.62      10,000        10,000   

Unsecured private bonds(*2)

      2014    4.53      —          290,000   

Unsecured private bonds(*2)

      2014    4.40      —          100,000   

Unsecured private bonds(*2)

      2015    4.09      110,000        110,000   

Unsecured private bonds(*2)

      2015    4.14      110,000        110,000   

Unsecured private bonds(*2)

      2017    4.28      100,000        100,000   

Unsecured private bonds(*2)

      2015    3.14      130,000        130,000   

Unsecured private bonds(*2)

      2017    3.27      120,000        120,000   

Unsecured private bonds(*2)

      2016    3.05      80,000        —     

Unsecured private bonds(*2)

      2019    3.49      210,000        —     

Unsecured private bonds(*2)

      2019    2.76      130,000        —     

Unsecured private bonds(*3)

      2015    3.12      10,000        —     

Unsecured private bonds(*3)

      2016    3.24      10,000        —     

Unsecured private bonds(*3)

      2017    3.48      20,000        —     

Foreign global bonds

      2027    6.63      439,680        422,120   
              (USD     400,000     (USD     400,000

Exchangeable bonds(*5)

   Refinancing fund    2014    1.75      —          96,147   
      2014    3M Libor + 1.60      —          (USD       91,109

Floating rate notes

   Operating fund    2014    3M Libor + 1.60      —          263,825   
              —          (USD     250,000

Floating rate notes

      2014    SOR rate + 1.20      —          54,129   
              —          (SGD       65,000

Swiss unsecured private bonds

      2017    1.75      333,429        356,601   
              (CHF    300,000     (CHF     300,000

Foreign global bonds

      2018    2.13      769,440        738,710   
              (USD    700,000     (USD      700,000

Australia unsecured private bonds

      2017    4.75      269,727        281,988   
              (AUD    300,000     (AUD     300,000

 

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18. Borrowings and Debentures, Continued

 

  (3) Debentures as of December 31, 2014 and 2013 are as follows, Continued:

 

(In millions of won, thousands of U.S. dollars and thousands of other currencies)  
     Purpose    Maturity    Annual interest
rate (%)
   December 30, 2014     December 31, 2013  

Floating rate notes(*4)

   Operating fund    2020    3M Libor + 0.88      329,760        316,590   
            (USD 300,000   (USD 300,000

Foreign global bonds(*2)

      2018    2.88      329,760        316,590   
            (USD 300,000   (USD 300,000
           

 

 

   

 

 

 

Sub-total

  6,252,161      5,966,700   

Less discounts on bonds

  (33,531   (40,228
           

 

 

   

 

 

 
  6,218,630      5,926,472   

Less current portion of bonds

  (569,472   (1,020,893
           

 

 

   

 

 

 
  5,649,158      4,905,579   
           

 

 

   

 

 

 

 

(*1) Unsecured private bonds were issued by SK Telink Co., Ltd., a subsidiary of the Parent Company.
(*2) Unsecured private bonds were issued by SK Broadband Co., Ltd., a subsidiary of the Parent Company.
(*3) Unsecured private bonds were issued by PS&Marketing Corporation, a subsidiary of the Parent Company.
(*4) As of December 31, 2014, 3M Libor rate is 0.23%.
(*5) On April 7, 2009, the Group issued exchangeable bonds with a maturity of five years in the principal amount of USD 332,528,000 for USD 326,397,463 with a coupon rate of 1.75%.

The Group may redeem the principal amount after three years from the issuance date if the market price exceeds 130% of the exchange price during a predetermined period. The exchange right may be exercised during the period from May 18, 2009 to March 24, 2014.

Exchanges of notes for common shares may be prohibited under the Telecommunications Law or other legal restrictions which restrains foreign governments, individuals and entities from owning more than 49% of the Group’s voting stock. If such 49% ownership limitation is violated due to the exercise of exchange rights, the Group will pay the bond holder a cash settlement which will be determined at the average price of one day after a holder exercises its exchange right or the weighted average price for the following five or twenty business days. Unless either previously redeemed or exchanged, the notes are redeemable at 100% of the principal amount at maturity.

As of December 31, 2013, the principal amount and the fair value of the remaining exchangeable bonds were USD 57,046,000 and USD 91,108,508, respectively. Exchange for the remaining entire bonds was claimed during 2013 and redeemed by cash during the year ended December 31, 2014.

 

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18. Borrowings and Debentures, Continued

 

  (3) Debentures as of December 31, 2014 and 2013 are as follows, Continued:

 

(*6) The Group settled the difference of the measurement bases of accounting profit or loss between the bonds and related derivatives by appointing the structured bonds as designated financial liabilities at fair value through profit or loss.

The difference between the carrying amount of the designated financial liabilities at fair value through profit or loss and the amount required to pay at maturity is ₩10,365 million as of December 31, 2014.

 

19. Long-term Payables - Other

 

  (1) Long-term payables – other as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Payables related to acquisition of W-CDMA licenses

     657,001         828,721   

Other(*)

     27,566         9,864   
  

 

 

    

 

 

 
  684,567      838,585   
  

 

 

    

 

 

 

 

(*) Other includes vested compensation claims of employees who have rendered long-term service, etc.

 

  (2) As of December 31, 2014 and 2013, long-term payables – other consist of payables related to the acquisition of W-CDMA licenses for 2.1GHz, 800MHZ, 2.3GHz and 1.8GHz frequencies as follows:

 

(In millions of won)  
    Period of
repayment
    Coupon
rate(*1)
    Annual effective
interest rate(*2)
    December 31,
2014
    December 31,
2013
 

2.1GHz

    2012~2014        3.58     5.89     —          17,533   

800MHz

    2013~2015        3.51     5.69     69,416        138,833   

2.3GHz

    2014~2016        3.00     5.80     5,766        8,650   

1.8GHz

    2012~2021        2.43~3.00     4.84~5.25     824,841        942,675   
       

 

 

   

 

 

 
  900,023      1,107,691   

Present value discount on long-term payables – other

  (53,633   (72,170
       

 

 

   

 

 

 
  846,390      1,035,521   

Current portion of long-term payables – other

  (189,389   (206,800
       

 

 

   

 

 

 

Carrying amount at December 31

  657,001      828,721   
       

 

 

   

 

 

 

 

(*1) The Group applied an annual interest rate equal to the previous year average lending rate of public funds financing account less 1%.
(*2) The Group estimated the discount rate based on its credit ratings and corporate bond yield rate as there is no market interest rate available for long-term account payables-other.

 

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19. Long-term Payables – Other, continued

 

  (3) The repayment schedule of long-term payables – other related to acquisition of W-CDMA licenses as of December 31, 2014 is as follows:

 

(In millions of won)       
     Amount  

Less than 1 year

     190,134   

1~3 years

     238,552   

3~5 years

     235,669   

More than 5 years

     235,668   
  

 

 

 
  900,023   
  

 

 

 

 

20. Provisions

 

  (1) Changes in provisions for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)        
     For the year ended December 31, 2014      As of December 31, 2014  
     Beginning
balance
     Increase      Utilization     Reversal     Other     Ending
balance
     Current      Non-current  

Provision for handset subsidy(*1)

     53,923         41,802         (68,926     —          —          26,799         14,844         11,955   

Provision for restoration (*2)

     40,507         20,098         (702     (34     (142     59,727         35,865         23,862   

Other provisions

     451         155         (225     —          181        562         366         196   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 
  94,881      62,055      (69,853   (34   39      87,088      51,075      36,013   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

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20. Provisions, Continued

 

  (1) Changes in provisions for the years ended December 31, 2014 and 2013 are as follows, Continued:

 

(In millions of won)        
     For the year ended December 31, 2013      As of December 31, 2013  
     Beginning
balance
     Increase      Utilization     Reversal     Other     Ending
balance
     Current      Non-current  

Provision for handset subsidy

     353,383         9,416         (308,876     —          —          53,923         53,334         589   

Provision for restoration

     39,895         5,679         (712     (4,211     (144     40,507         13,441         27,066   

Other provisions

     590         —           (85     (17     (37     451         —           451   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 
  393,868      15,095      (309,673   (4,228   (181   94,881      66,775      28,106   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

(*1) The Group has provided handset subsidy to subscribers who purchase handsets on an installment basis and recognized provision for subsidy amounts which the Group is expected to pay in future periods.
(*2) In the course of the Group’s activities, base station and other assets are utilized on leased premises which are expected to have costs associated with restoring the location where these assets are situated upon ceasing their use on those premises. The associated cash outflows, which are long-term in nature, are generally expected to occur at the dates of exit of the assets to which they relate. These restoration costs are calculated on the basis of the identified costs for the current financial year, extrapolated into the future based on management’s best estimates of future trends in prices, inflation, and other factors, and are discounted to present value at a risk-adjusted rate specifically applicable to the liability. Forecasts of estimated future provisions are revised in light of future changes in business conditions or technological requirements. The Group records these restoration costs as property and equipment and subsequently allocates them to expense using a systematic and rational method over the asset’s useful life, and records the accretion of the liability as a charge to finance costs.

 

  (2) The followings are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period.

 

    

Key assumptions

Provision for handset subsidy

   estimation based on historical service retention period data

Provision for restoration

   estimation based on inflation assuming demolition of the relevant assets after six years

 

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21. Leases

 

  (1) Finance Leases

The Group has leased telecommunication equipment under finance lease agreements with Cisco Systems Capital Korea Ltd. Finance lease liabilities as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Finance Lease Liabilities

     

Current portion of long-term finance lease liabilities

     3,804         19,351   

Long-term finance lease liabilities

     26         3,867   
  

 

 

    

 

 

 
  3,830      23,218   
  

 

 

    

 

 

 

The Group’s related interest and principal as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31, 2014      December 31, 2013  
     Minimum
lease
payment
     Present
value
     Minimum
lease
payment
     Present
value
 

Less than 1 year

     3,909         3,804         20,039         19,351   

1~5 years

     26         26         3,974         3,867   
  

 

 

    

 

 

    

 

 

    

 

 

 

Sub-total

  3,935      3,830      24,013      23,218   
  

 

 

    

 

 

    

 

 

    

 

 

 

Current portion of long-term finance lease liabilities

  (3,804   (19,351
     

 

 

       

 

 

 

Long-term finance lease liabilities

        26      3,867   
     

 

 

       

 

 

 

 

  (2) Operating Leases

The Group entered into operating leases and sublease agreements in relation to rented office space and the expected future lease payments and lease revenues as of December 31, 2014 and 2013 (included in other non-operating income in the accompanying consolidated statements of income) are as follows:

 

(In millions of won)                            
     2014      2013  
     Lease
payments
     Lease
revenues
     Lease
payments
     Lease
revenues
 

Less than 1 year

     29,233         3,496         32,842         2,422   

1~5 years

     76,306         1,390         72,236         1,074   

More than 5 years

     49,582         1,043         65,013         1,026   
  

 

 

    

 

 

    

 

 

    

 

 

 
  155,121      5,929      170,091      4,522   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (3) Sale and Leaseback Transaction

For the year ended December 31, 2012, the Group disposed a portion of its property and equipment and investment property, and entered into lease agreements with respect to those assets. This sale and leaseback transaction is accounted for as an operating lease and the gain on disposal of the property and equipment is recognized in profit or loss. The Group recognized ₩14,075 million and ₩13,703 million of lease payments in relation to this lease agreement and ₩2,469 million and ₩269 million of lease revenues in relation to the sublease agreement for the years ended December 31, 2014 and 2013, respectively. Expected future lease payments and lease revenues are included in Note 21-(2).

 

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22. Defined Benefit Liabilities

 

  (1) Details of defined benefit liabilities as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Present value of defined benefit obligations

     437,844         312,494   

Fair value of plan assets

     (346,257      (238,293
  

 

 

    

 

 

 
  91,587      74,201   
  

 

 

    

 

 

 

 

  (2) Principal actuarial assumptions as of December 31, 2014 and 2013 are as follows:

 

     December 31,
2014
   December 31,
2013

Discount rate for defined benefit obligations

   2.23% ~ 3.70%    3.06% ~ 4.34%

Expected rate of salary increase

   2.51% ~ 7.39%    3.05% ~ 6.27%

Discount rate for defined benefit obligations is determined based on the Group’s credit ratings and yield rate of corporate bonds with similar maturities for estimated payment term of defined benefit obligations. Expected rate of salary increase is determined based on the Group’s historical promotion index, inflation rate and salary increase ratio in accordance with salary agreement.

 

  (3) Changes in defined benefit obligations for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)    For the year ended December 31  
     2014      2013  

Beginning balance

     312,494         244,866   

Current service cost

     109,625         89,802   

Interest cost

     12,630         9,370   

Remeasurement

     

- Demographic assumption

     2,859         (394

- Financial assumption

     28,287         (12,371

- Adjustment based on experience

     9,932         6,475   

Benefit paid

     (46,531      (42,948

Others(*)

     8,548         17,694   
  

 

 

    

 

 

 

Ending balance

  437,844      312,494   
  

 

 

    

 

 

 

 

(*) Others for the year ended December 31, 2014 include the effect of changes in the consolidation scope of ₩2,939 million, liabilities of ₩4,433 million succeeded due to transfer of employees from associates, and transfer to construction in progress, etc. Others for the year ended December 31, 2013 include the effect of changes in the consolidation scope of ₩(4,141) million, liabilities of ₩14,703 million succeeded due to business combination and transfer to construction in progress, etc.

 

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22. Defined Benefit Liabilities, Continued

 

  (4) Changes in plan assets for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)       
     2014      2013  

Beginning balance

     238,293         158,345   

Interest income

     9,538         6,332   

Actuarial gain

     50         122   

Contributions by employer directly to plan assets

     117,558         85,683   

Benefits paid

     (20,711      (23,827

Others(*)

     1,529         11,638   
  

 

 

    

 

 

 

Ending balance

  346,257      238,293   
  

 

 

    

 

 

 

 

(*) Others for the year ended December 31, 2014 include the effect of changes in the consolidation scope of ₩1,221 million. Others for the year ended December 31, 2013 include the effect of changes in the consolidation scope of ₩(3,074) million and assets of ₩14,334 million succeeded due to business combination.

The Group expects to make a contribution of ₩82,062 million to the defined benefit plans during the next financial year.

 

  (5) Expenses recognized in profit and loss (included in labor cost in the accompanying consolidated statements of income) and capitalized into construction-in-progress for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)       
     2014      2013  

Current service cost

     109,625         89,802   

Net interest cost

     3,092         3,038   
  

 

 

    

 

 

 
  112,717      92,840   
  

 

 

    

 

 

 

The above costs are recognized in labor cost, research and development, or capitalized into construction-in-progress.

 

  (6) Details of plan assets as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Equity instruments

     1,746         713   

Debt instruments

     70,778         48,901   

Short-term financial instruments, etc.

     273,733         188,679   
  

 

 

    

 

 

 
  346,257      238,293   
  

 

 

    

 

 

 

Actual return on plan assets for the years ended December 31, 2014 and 2013 amounted to ₩9,588 million and ₩6,472 million, respectively.

 

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22. Defined Benefit Liabilities, Continued

 

  (7) As of December 31, 2014, effects on defined benefit obligations if each of significant actuarial assumptions changes within expectable and reasonable range are as follows:

 

(In millions of won)              
     Increase      Decrease  

Discount rate (if changed by 0.5%)

     (17,290      17,988   

Expected salary increase rate (if changed by 0.5%)

     18,064         (17,431

The sensitivity analysis does not consider dispersion of all cash flows that are expected from the plan and provides approximate values of sensitivity for the assumptions used.

Weighted average durations of defined benefit obligations as of December 31, 2014 and 2013 are 9.10 years and 9.12 years, respectively.

 

23. Derivative Instruments

(1) Currency swap contracts under cash flow hedge accounting as of December 31, 2014 are as follows:

 

(In thousands of foreign currencies)

Borrowing
date

  

Hedged item

   Hedged risk    Contract
type
   Financial
institution
   Duration of
contract
Jul. 20, 2007   

Fixed-to-fixed cross currency swap (U.S. dollar denominated bonds face value of USD 400,000)

   Foreign currency
risk
   Currency
swap
   Morgan Stanley and
five other banks
   Jul. 20, 2007 ~
Jul. 20, 2027
Jun. 12, 2012   

Fixed-to-fixed cross currency swap (Swiss Franc denominated bonds face value of CHF 300,000)

   Foreign currency
risk
   Currency
swap
   Citibank and five
other banks
   Jun. 12, 2012 ~
Jun.12, 2017

Nov. 1,

2012

  

Fixed-to-fixed cross currency swap (U.S. dollar denominated bonds face value of USD 700,000)

   Foreign currency
risk
   Currency
swap
   Barclays and nine
other banks
   Nov. 1, 2012~
May 1, 2018

Jan. 17,

2013

  

Fixed-to-fixed cross currency swap (Australia dollar denominated bonds face value of AUD 300,000)

   Foreign currency
risk
   Currency
swap
   BNP Paribas and
three other banks
   Jan. 17, 2013 ~
Nov. 17, 2017

Mar. 7,

2013

  

Floating-to-fixed cross currency interest rate swap (U.S. dollar denominated bonds face value of USD 300,000)

   Foreign currency
risk and the
interest rate risk
   Currency interest
rate swap
   DBS Bank    Mar. 7, 2013 ~
Mar. 7, 2020
Oct. 29, 2013   

Fixed-to-fixed cross currency swap (U.S. dollar denominated bonds face value of USD 300,000)

   Foreign currency
risk
   Currency
swap
   Korea Development
Bank and others
   Oct. 29, 2013 ~
Oct. 26, 2018
Dec. 16, 2013   

Fixed-to-fixed cross currency swap (Australia dollar denominated bonds face value of USD 86,338)

   Foreign currency
risk
   Currency
swap
   Deutsche bank    Dec. 16, 2013 ~
Apr. 29, 2022

 

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23. Derivative Instruments, Continued

 

  (2) As of December 31, 2014, fair values of the above derivatives recorded in assets or liabilities and details of derivative instruments are as follows:

 

(In millions of won and thousands of foreign currencies)  
     Fair value  
     Cash flow hedge      Held for
trading
purpose
        

Hedged item

   Accumulated
gain (loss) on
valuation of
derivatives
    Tax
effect
    Accumulated
foreign
currency
translation
(gain) loss
    Others
(*)
        Total  

Non-current assets:

              

Structured bond (face value of KRW 100,000)

     —          —          —          —           8,713         8,713   

Fixed-to-fixed cross currency swap (U.S. dollar denominated bonds face value of USD 400,000)

     (40,360     (12,886     (17,545     129,806         —           59,015   

Fixed-to-fixed cross currency swap (U.S. dollar denominated bonds face value of USD 300,000)

     8,895        —          (6,588     —           —           2,307   
              

 

 

 

Total assets

  70,035   
              

 

 

 

Non-current liabilities:

Fixed-to-fixed cross currency swap (Swiss Franc denominated bonds face value of CHF 300,000)

  (8,725   (2,786   (29,993   —        —        (41,504

Fixed-to-fixed cross currency swap (U.S. dollar denominated bonds face value of USD 700,000)

  (22,903   (7,312   6,058      —        —        (24,157

Fixed-to-fixed cross currency swap (Australia dollar denominated bonds face value of AUD 300,000)

  2,588      826      (65,496   —        —        (62,082

Fixed-to-fixed cross currency interest rate swap
(U.S. dollar denominated bonds face value of USD 300,000)

  (4,369   (1,395   4,668      —        —        (1,096

Fixed-to-fixed long-term borrowings (U.S. dollar denominated bonds face value of USD 86,338)

  (4,439   (1,417   3,806      —        —        (2,050
              

 

 

 

Total liabilities

  (130,889
              

 

 

 

 

(*) Cash flow hedge accounting has been applied to the relevant contract from May 12, 2010. Others represent gain on valuation of currency swap incurred prior to the application of hedge accounting and was recognized through profit or loss prior to the year ended December 31, 2013.

 

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24. Share Capital and Capital Surplus (Deficit) and Other Capital Adjustments

The Parent Company’s outstanding share capital consists entirely of common stock with a par value of ₩500. The number of authorized, issued and outstanding common shares and capital surplus and other capital adjustments as of December 31, 2014 and 2013 are as follows:

 

(In millions of won, except for share data)              
     December 31,
2014
     December 31,
2013
 

Authorized shares

     220,000,000         220,000,000   

Issued shares(*1)

     80,745,711         80,745,711   

Share capital

     

Common stock

     44,639         44,639   

Capital surplus and other capital adjustments:

     

Paid-in surplus

     2,915,887         2,915,886   

Treasury stock (Note 25)

     (2,139,683      (2,139,683

Loss on disposal of treasury stock

     (18,087      (18,087

Hybrid bonds (Note 26)

     398,518         398,518   

Others(*2)

     (878,637      (839,126
  

 

 

    

 

 

 
  277,998      317,508   
  

 

 

    

 

 

 

 

(*1) For the years ended December 31, 2003, 2006 and 2009, the Parent Company retired 7,002,235 shares, 1,083,000 shares and 448,000 shares, respectively, of treasury stock which reduced its retained earnings before appropriation in accordance with the Korean Commercial Law. As a result, the Parent Company’s outstanding shares have decreased without change in the share capital.

There were no changes in share capital for years ended December 31, 2014 and 2013. Changes in number of shares outstanding for the years ended December 31, 2014 and 2013 are follows:

 

(In shares)    2014      2013  
     Issued
shares
     Treasury
stock
     Outstanding
shares
     Issued
shares
     Treasury
stock
    Outstanding
shares
 

Beginning issued shares

     80,745,711         9,809,375         70,936,336         80,745,711         11,050,712        69,694,999   

Disposal of treasury stock

     —           —           —           —           (1,241,337     1,241,337   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Ending issued shares

  80,745,711      9,809,375      70,936,336      80,745,711      9,809,375      70,936,336   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(*2) Others primarily consist of the excess of the consideration paid by the Group over the carrying values of net assets acquired from common control transactions with entities within the control of the Ultimate Controlling Entity (See Note 12).

 

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25. Treasury Stock

The Parent Company acquired treasury stock to provide stock dividends, merge with Shinsegi Telecom, Inc. and SK IMT Co, Ltd., increase shareholder value and to stabilize its stock prices when needed.

Treasury stock as of December 31, 2014 and 2013 are as follows:

 

(In millions of won, shares)              
     December 31,
2014
     December 31,
2013
 

Number of shares

     9,809,375         9,809,375   

Amount

     2,139,683         2,139,683   

 

26. Hybrid Bonds

Hybrid bonds classified as equity as of December 31, 2014 is as follows:

 

(In millions of won)  
     Type    Issuance date      Maturity     Annual
interest
rate(%)
    Amount  

Private hybrid bonds

   Blank coupon unguaranteed
subordinated bond
     June 7, 2013         June 7, 2073 (*1)      4.21 (*2)      400,000   

Issuance costs

               (1,482
            

 

 

 
  398,518   
            

 

 

 

Hybrid bonds issued by the Parent Company are classified as equity as there is no contractual obligation for delivery of financial assets to the bond holders. These are subordinated bonds which rank before common shareholders in the event of a liquidation or reorganization of the Parent Company.

 

(*1) The Parent Company has a right to extend the maturity under the same issuance terms without any notice or announcement. The Parent Company also has the right to defer interest payment at its sole discretion.
(*2) Annual interest rate is adjusted after five years from the issuance date.

 

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27. Retained Earnings

 

  (1) Retained earnings as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Appropriated:

     

Legal reserve

     22,320         22,320   

Reserve for research & manpower development

     151,533         155,767   

Reserve for business expansion

     9,476,138         9,376,138   

Reserve for technology development

     2,416,300         2,271,300   
  

 

 

    

 

 

 
  12,066,291      11,825,525   

Unappropriated

  2,122,300      1,276,970   
  

 

 

    

 

 

 
  14,188,591      13,102,495   
  

 

 

    

 

 

 

 

  (2) Legal reserve

The Korean Commercial Act requires the Parent Company to appropriate as a legal reserve at least 10% of cash dividends paid for each accounting period until the reserve equals 50% of outstanding share capital. The legal reserve may not be utilized for cash dividends, but may only be used to offset a future deficit, if any, or may be transferred to share capital.

 

  (3) Reserve for research & manpower development

The reserve for research and manpower development was appropriated in order to recognize certain tax deductible benefits through the early recognition of future expenditures for tax purposes. These reserves will be reversed from appropriated and retained earnings in accordance with the relevant tax laws. Such reversal will be included in taxable income in the year of reversal.

 

28. Reserves

 

  (1) Details of reserves, net of taxes, as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Unrealized fair value of available-for-sale financial assets

     7235,385         208,529   

Other comprehensive loss of investments in associates

     (163,808      (172,117

Unrealized fair value of derivatives

     (77,531      (35,429

Foreign currency translation differences for foreign operations

     1,465         (13,253
  

 

 

    

 

 

 
  (4,489   (12,270
  

 

 

    

 

 

 

 

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28. Reserves, Continued

 

  (2) Changes in reserves for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)    2014  
     Unrealized fair
value of
available-for-
sale financial
assets
    Other comprehensive
loss of investments in
associates
    Unrealized
fair value of
derivatives
    Foreign currency
translation
differences for
foreign operations
    Total  

Balance at January 1, 2014

     208,529        (172,117     (35,429     (13,253     (12,270

Changes

     30,945        8,381        (54,290     14,718        (246

Tax effect

     (4,089     (72     12,188        —          8,027   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

  235,385      (163,808   (77,531   1,465      (4,489
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(In millions of won)    2013  
     Unrealized fair
value of
available-for-
sale financial
assets
    Other comprehensive
loss of investments in
associates
    Unrealized
fair value of
derivatives
    Foreign currency
translation
differences for
foreign operations
    Total  

Balance at January 1, 2013

     207,063        (175,044     (46,652     (11,003     (25,636

Changes

     2,747        1,254        14,488        (2,250     16,239   

Tax effect

     (1,281     1,673        (3,265     —          (2,873
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

  208,529      (172,117   (35,429   (13,253   (12,270
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (3) Details of changes in unrealized fair value of available-for-sale financial assets for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)    2014  
     Before taxes      Income tax
effect
     After taxes  

Balance at January 1, 2014

     275,663         (67,134      208,529   

Amount recognized as other comprehensive loss during the year

     40,785         (6,470      34,315   

Amount reclassified to profit or loss

     (9,840      2,381         (7,459
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2014

  306,608      (71,223   235,385   
  

 

 

    

 

 

    

 

 

 
(In millions of won)    2013  
     Before taxes      Income tax
effect
     After taxes  

Balance at January 1, 2013

     272,917         (65,854      207,063   

Amount recognized as other comprehensive income during the year

     3,879         (1,529      2,350   

Amount reclassified to profit or loss

     (1,133      249         (884
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2013

  275,663      (67,134   208,529   
  

 

 

    

 

 

    

 

 

 

 

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28. Reserves, Continued

 

  (4) Details of changes in unrealized fair value of derivatives for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)    2014  
     Before taxes      Income tax
effect
     After taxes  

Balance at January 1, 2014

     (48,211      12,782         (35,429

Amount recognized as other comprehensive loss during the year

     (46,535      10,311         (36,224

Amount reclassified through profit or loss

     (7,755      1,877         (5,878
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2014

  (102,501   24,970      (77,531
  

 

 

    

 

 

    

 

 

 
(In millions of won)    2013  
     Before taxes      Income tax
effect
     After taxes  

Balance at January 1, 2013

     (62,698      16,046         (46,652

Amount recognized as other comprehensive income during the year

     11,833         (3,001      8,832   

Amount reclassified through profit or loss

     2,654         (263      2,391   
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2013

  (48,211   12,782      (35,429
  

 

 

    

 

 

    

 

 

 

 

29. Other Operating Expenses

Details of other operating expenses for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     2014      2013  

Other Operating Expenses:

     

Communication expenses

     58,622         62,193   

Utilities

     247,919         227,593   

Taxes and dues

     33,500         29,873   

Repair

     260,533         252,344   

Research and development

     390,943         352,385   

Training

     42,781         40,446   

Bad debt for accounts receivables - trade

     45,754         53,344   

Reversal of allowance for doubtful accounts

     —           (359

Travel

     28,912         31,762   

Supplies and other

     209,933         189,042   
  

 

 

    

 

 

 
  1,318,897      1,238,623   
  

 

 

    

 

 

 

.

 

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Table of Contents
30. Other Non-operating Income and Expenses

Details of other non-operating income and expenses for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     2014      2013  

Other Non-operating Income:

     

Fees

     8,199         7,303   

Gain on disposal of property and equipment and intangible assets

     8,792         7,991   

Others(*1)

     39,288         59,173   
  

 

 

    

 

 

 
  56,279      74,467   
  

 

 

    

 

 

 

Other Non-operating Expenses:

Impairment loss on property and equipment, and intangible assets

  47,489      13,770   

Loss on disposal of property and equipment and intangible assets

  32,950      267,468   

Donations

  67,823      82,057   

Bad debt for accounts receivable – other

  17,943      22,155   

Others(*2)

  107,353      121,723   
  

 

 

    

 

 

 
  273,558      507,173   
  

 

 

    

 

 

 

 

(*1) Others for the year ended December 31, 2014 primarily consists of VAT refund.
(*2) Others for the year ended December 31, 2014 and 2013 primarily consists of penalties.

 

31. Finance Income and Costs

(1) Details of finance income and costs for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     2014      2013  

Finance Income:

     

Interest income

     60,006         65,560   

Dividends

     13,048         10,197   

Gain on foreign currency transactions

     16,301         11,041   

Gain on foreign currency translations

     6,277         4,401   

Gain on disposal of long-term investment securities

     13,994         9,300   

Gain on valuation of derivative

     8,713         —     

Gain on settlement of derivatives

     7,998         7,716   

Gain relating to financial asset at fair value through profit or loss

     —           5,177   
  

 

 

    

 

 

 
  126,337      113,392   
  

 

 

    

 

 

 

 

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Table of Contents
31. Finance Income and Costs, Continued

 

(In millions of won)              
     2014      2013  

Finance Costs:

     

Interest expense

     323,910         331,834   

Loss on foreign currency transactions

     18,053         16,430   

Loss on foreign currency translations

     5,079         2,634   

Loss on disposal of long-term investment securities

     2,694         31,909   

Loss on valuation of derivatives

     10         2,106   

Loss on settlement of derivatives

     672         —     

Loss relating to financial asset at fair value through profit or loss

     1,352         —     

Loss relating to financial liability at fair value through profit or loss(*)

     10,370         134,232   

Other finance costs

     24,533         52,058   
  

 

 

    

 

 

 
  386,673      571,203   
  

 

 

    

 

 

 

 

(*) Loss relating to financial liability at fair value through profit or loss for the year ended December 31, 2013 represents 1) valuation loss related to exchangeable bond (issue price of USD 326,397,463) as a result of increase in stock price of the Parent Company and increase in foreign exchange rate, and 2) loss on repayment of debentures upon the claim for exchange.

 

  (2) Details of interest income included in finance income for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     2014      2013  

Interest income on cash equivalents and deposits

     33,417         41,907   

Interest income on installment receivables and others

     26,589         23,653   
  

 

 

    

 

 

 
  60,006      65,560   
  

 

 

    

 

 

 

 

  (3) Details of interest expense included in finance costs for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     2014      2013  

Interest expense on bank overdrafts and borrowings

     26,360         28,600   

Interest expense on debentures

     247,972         258,962   

Interest on finance lease liabilities

     504         1,333   

Others

     49,074         42,939   
  

 

 

    

 

 

 
  323,910      331,834   
  

 

 

    

 

 

 

 

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31. Finance Income and Costs, Continued

 

  (4) Finance income and costs by categories of financial instruments for the years ended December 31, 2014 and 2013 are as follows. Bad debt expenses (reversal of allowance for doubtful accounts) for accounts receivable – trade, loans and receivables are excluded and are explained in Note 7.

 

  (i) Finance income and costs

 

(In millions of won)    2014      2013  
     Finance
income
     Finance
costs
     Finance
income
     Finance
costs
 

Financial Assets:

           

Financial assets at fair value through profit or loss

     8,713         1,361         5,177         276   

Available-for-sale financial assets

     32,227         27,227         23,311         83,967   

Loans and receivables

     57,685         18,182         62,211         16,479   

Derivative financial instruments designated as hedged item

     7,998         672         7,716         1,830   
  

 

 

    

 

 

    

 

 

    

 

 

 

Sub-total

  106,623      47,442      98,415      102,552   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liabilities:

Financial liabilities at fair value through profit or loss

  —        10,370      —        134,232   

Financial liabilities measured at amortized cost

  19,714      328,861      14,977      334,419   
  

 

 

    

 

 

    

 

 

    

 

 

 

Sub-total

  19,714      339,231      14,977      468,651   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  126,337      386,673      113,392      571,203   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (ii) Other comprehensive income (loss)

 

(In millions of won)              
     2014      2013  

Financial Assets:

     

Available-for-sale financial assets

     26,855         2,009   

Derivative financial instruments designated as hedged item

     (20,301      12,240   
  

 

 

    

 

 

 

Sub-total

  6,554      14,249   
  

 

 

    

 

 

 

Financial Liabilities:

Derivative financial instruments designated as hedged item

  (21,801   (1,018
  

 

 

    

 

 

 

Sub-total

  (21,801   (1,018
  

 

 

    

 

 

 

Total

  (15,247   13,231   
  

 

 

    

 

 

 

 

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Table of Contents
31. Finance Income and Costs, Continued

 

  (5) Details of impairment losses for financial assets for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     2014      2013  

Available-for-sale financial assets

     24,533         52,058   

Bad debt for accounts receivable - trade

     45,754         53,344   

Bad debt for accounts receivable - other

     17,943         22,167   
  

 

 

    

 

 

 
  88,230      127,569   
  

 

 

    

 

 

 

 

32. Income Tax Expense for Continuing Operations

 

  (1) Income tax expenses for continuing operations for the years ended December 31, 2014 and 2013 consist of the following:

 

(In millions of won)              
     2014      2013  

Current tax expense

     

Current tax payable

     181,273         145,457   

Adjustments recognized in the period for current tax of prior periods

     (19,938      (16,696
  

 

 

    

 

 

 
  161,335      128,761   
  

 

 

    

 

 

 

Deferred tax expense

Changes in net deferred tax assets

  276,049      266,601   

Tax directly charged to equity

  16,929      (3,584

Changes in scope of consolidation

  —        8,919   

Others (exchange rate differences, etc.

  195      100   
  

 

 

    

 

 

 
  293,173      272,036   
  

 

 

    

 

 

 

Income tax for continuing operation

  454,508      400,797   
  

 

 

    

 

 

 

 

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32. Income Tax Expense for Continuing Operations, Continued

 

  (2) The difference between income taxes computed using the statutory corporate income tax rates and the recorded income taxes for the years ended December 31, 2014 and 2013 is attributable to the following:

 

(In millions of won)              
     2014      2013  

Income taxes at statutory income tax rates

     544,964         441,697   

Non-taxable income

     (32,277      (35,632

Non-deductible expenses

     61,580         74,311   

Tax credit and tax reduction

     (33,581      (37,893

Changes in unrealizable deferred taxes

     (43,820      (13,285

Others (income tax refund and tax rate differences, etc.)

     (42,358      (28,401
  

 

 

    

 

 

 

Income tax for continuing operation

  454,508      400,797   
  

 

 

    

 

 

 

Tax rates applied for the above taxable income for the years ended December 31, 2014 and 2013 are corporate income tax rates applied for taxable income in Republic of Korea, of which SK Telecom Co., Ltd., the Parent Company, is located.

 

  (3) Deferred taxes directly charged to (credited from) equity for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     2014      2013  

Net change in fair value of available-for-sale financial assets

     (4,089      (1,281

Share of other comprehensive income of associates

     (72      1,673   

Gain or loss on valuation of derivatives

     12,188         (3,265

Remeasurement of defined benefit liabilities

     8,902         (466

Loss on disposal of treasury stock

     —           (245
  

 

 

    

 

 

 
  16,929      (3,584
  

 

 

    

 

 

 

 

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32. Income Tax Expense for Continuing Operations, Continued

 

  (4) Details of changes in deferred tax assets (liabilities) for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)    2014  
     Beginning     Deferred tax
expense
(benefit)
    Directly added
to (deducted
from) equity
    Other     Ending  

Deferred tax assets (liabilities) related to temporary differences

          

Allowance for doubtful accounts

     56,427        (2,700     —          (149     53,578   

Accrued interest income

     (2,831     381        —          —          (2,450

Available-for-sale financial assets

     (589     (146     (4,089     —          (4,824

Investments in subsidiaries and associates

     (44,844     (165,663     (72     (464     (211,043

Property and equipment (depreciation)

     (333,633     (38,690     —          (9     (372,332

Provisions

     14,303        (6,699     —          (17     7,587   

Retirement benefit obligation

     16,089        2,390        8,902        (20     27,361   

Gain or loss on valuation of derivatives

     12,779        2        12,188        —          24,969   

Gain or loss on foreign currency translation

     19,572        (248     —          —          19,324   

Tax free reserve for research and manpower development

     (40,011     32,849        —          —          (7,162

Goodwill relevant to leased line

     31,025        (26,592     —          —          4,433   

Unearned revenue (activation fees)

     53,412        (27,435     —          —          25,977   

Others

     44,738        (61,274     —          854        (15,682
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  (173,563   (293,825   16,929      195      (450,264
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deferred tax assets related to unused tax loss carryforwards and unused tax credit carryforwards

Tax loss carryforwards

  31,060      652      —        —        31,712   

Tax credit carryforwards

  —        —        —        —        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  31,060      652      —        —        31,712   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  (142,503   (293,173   16,929      195      (418,552
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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32. Income Tax Expense for Continuing Operations, Continued

 

  (4) Details of changes in deferred tax assets (liabilities) for the years ended December 31, 2014 and 2013 are as follows, Continued:

 

(In millions of won)    2013  
     Beginning     Changes in
scope of
consolidation
    Deferred tax
expense
(benefit)
    Directly added
to (deducted
from) equity
    Other      Ending  

Deferred tax assets (liabilities) related to temporary differences

             

Allowance for doubtful accounts

     51,972        (2,323     6,773        —          5         56,427   

Accrued interest income

     (1,782     (756     (293     —          —           (2,831

Available-for-sale financial assets

     13,419        (45     (12,682     (1,281     —           (589

Investments in subsidiaries and associates

     66,969        51        (113,541     1,673        4         (44,844

Property and equipment (depreciation)

     (272,940     4,940        (65,633     —          —           (333,633

Provisions

     86,567        206        (72,470     —          —           14,303   

Retirement benefit obligation

     16,849        151        (445     (466     —           16,089   

Gain or loss on valuation of derivatives

     15,894        —          150        (3,265     —           12,779   

Gain or loss on foreign currency translation

     19,652        —          (80     —          —           19,572   

Tax free reserve for research and manpower development

     (31,093     —          (8,918     —          —           (40,011

Goodwill relevant to leased line

     68,675        —          (37,650     —          —           31,025   

Unearned revenue (activation fees)

     97,110        —          (43,698     —          —           53,412   

Others

     (23,804     (11,654     80,350        (245     91         44,738   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
  107,488      (9,430   (268,137   (3,584   100      (173,563
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Deferred tax assets related to unused tax loss carryforwards and unused tax credit carryforwards

Tax loss carryforwards

  16,609      18,350      (3,899   —        —        31,060   

Tax credit carryforwards

  1      (1   —        —        —        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
  16,610      18,349      (3,899   —        —        31,060   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
  124,098      8,919      (272,036   (3,584   100      (142,503
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

  (5) Details of temporary differences, unused tax loss carryforwards and unused tax credits carryforwards which are not recognized as deferred tax assets, as the Group does not believe it is probable that the deferred tax assets will be realizable in the future, in the consolidated statements of financial position as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Allowance for doubtful accounts

     155,634         152,341   

Investments in subsidiaries and associates

     422,033         719,974   

Other temporary differences

     314,188         221,264   

Unused tax loss carryforwards

     729,570         669,890   

Unused tax credit carryforwards

     2,438         —     
  

 

 

    

 

 

 
  1,623,863      1,763,469   
  

 

 

    

 

 

 

 

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32 Income Tax Expense for Continuing Operations, Continued

 

  (6) The expirations of unused tax loss carryforwards and unused tax credit carryforwards which are not recognized as deferred tax assets as of December 31, 2014 are as follows:

 

(In millions of won)              
     Unused
tax loss carryforwards
     Unused tax credit
carryforwards
 

Less than 1 year

     1,087         270   

1 ~ 2 years

     4,894         1041   

2 ~ 3 years

     —           155   

More than 3 years

     723,589         972   
  

 

 

    

 

 

 
  729,570      2,438   
  

 

 

    

 

 

 

 

33. Earnings per Share

 

  (1) Basic earnings per share

 

  1) Basic earnings per share for the years ended December 31, 2014 and 2013 are calculated as follows:

 

(In millions of won, shares)              
     2014      2013  

Basic earnings per share attributable to owners of the Parent Company from continuing operation:

     

Profit attributable to owners of the Parent Company from continuing operations

     1,801,178         1,463,097   

Interest on hybrid bonds

     (16,840      (8,420
  

 

 

    

 

 

 

Profit attributable to owners of the Parent Company from continuing operations on common shares

  1,784,338      1,454,677   

Weighted average number of common shares outstanding

  70,936,336      70,247,592   
  

 

 

    

 

 

 

Basic earnings per share from continuing operations (In won)

  25,154      20,708   
  

 

 

    

 

 

 

Basic earnings per share attributable to owners of the Parent Company:

Profit attributable to owners of the Parent Company

  1,801,178      1,638,964   

Interest on hybrid bond

  (16,840   (8,420
  

 

 

    

 

 

 

Profit attributable to owners of the Parent Company on common shares

  1,784,338      1,630,544   

Weighted average number of common shares outstanding

  70,936,336      70,247,592   
  

 

 

    

 

 

 

Basic earnings per share (In won)

  25,154      23,211   
  

 

 

    

 

 

 

 

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33 Earnings per Share, Continued

 

  (1) Basic earnings per share, Continued

 

  2) Profit attributable to owners of the Parent Company from continuing operation for the years ended December 31, 2014 and 2013 are calculated as follows:

 

(In millions of won)              
     2014      2013  

Profit attributable to owners of the Parent Company

     1,801,178         1,638,964   

Profit from discontinued operation attributable to owners of the Parent Company

     —           175,867   
  

 

 

    

 

 

 

Profit attributable to owners of the Parent Company from continuing operation

  1,801,178      1,463,097   
  

 

 

    

 

 

 

 

  3) The weighted average number of common shares outstanding for the years ended December 31, 2014 and 2013 are calculated as follows:

 

(In shares)              
     2014      2013  

Outstanding common shares

     80,745,711         80,745,711   

Weighted number of treasury stocks

     (9,809,375      (10,498,119
  

 

 

    

 

 

 

Weighted average number of common shares outstanding

  70,936,336      70,247,592   
  

 

 

    

 

 

 

 

  (2) Diluted earnings per share

For the year ended December 31, 2014, there were no potentially dilutive shares. The number of common shares outstanding in respect of the exchangeable common shares of exchangeable bonds is excluded from the diluted earnings per share calculation for the year ended December 31, 2013 as effect would have been anti-dilutive (diluted shares of 688,744). Therefore, diluted earnings per share for the years ended December 31, 2014 and 2013 are the same as basic earnings per share.

 

  (3) Basic earnings per share from discontinued operation

 

(In millions of won, shares)              
     2014      2013  

Profit from discontinued operation attributable to owners of the Parent Company

     —           175,867   

Weighted average number of common shares outstanding

     70,936,336         70,247,592   
  

 

 

    

 

 

 

Basic earnings per share (In won)

  —        2,503   
  

 

 

    

 

 

 

Diluted earnings per share from discontinued operation are the same as basic earnings per share from discontinued operation.

 

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34. Dividends

 

  (1) Details of dividends declared

Details of dividend declared for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won, except for face value and share data)  

Year

  

Dividend type

   Number of
shares
outstanding
     Face
value (In
won)
     Dividend
ratio
    Dividends  

2014

   Cash dividends (Interim)      70,936,336         500         200     70,937   
   Cash dividends (Year-end)      70,936,336         500         1680     595,865   
             

 

 

 
  666,802   
             

 

 

 

2013

Cash dividends (Interim)   70,508,482      500      200   70,508   
Cash dividends (Year-end)   70,936,336      500      1,680   595,865   
             

 

 

 
  666,373   
             

 

 

 

 

  (2) Dividends payout ratio

Dividends payout ratios for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)  

Year

   Dividends
calculated
     Profit      Dividends payout
ratio
 
2014      666,802         1,801,178         37.02
2013      666,373         1,638,964         40.66

 

  (3) Dividends yield ratio

Dividends yield ratios for the years ended December 31, 2014 and 2013 are as follows:

 

(In won)  

Year

   Dividend type    Dividend per share      Closing price at
settlement
     Dividend yield ratio  
2014    Cash dividend      9,400         268,000         3.51
2013    Cash dividend      9,400         230,000         4.09

 

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35. Categories of Financial Instruments

 

  (1) Financial assets by categories as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)  
     December 31, 2014  
     Financial
assets at
fair value
through
profit or
loss
     Available-
for-sale
financial
assets
     Loans and
receivables
     Derivative
financial
instruments
designated
as hedged
item
     Total  

Cash and cash equivalents

     —           —           834,429         —           834,429   

Financial instruments

     —           —           313,699         —           313,699   

Short-term investment securities

     —           280,161         —           —           280,161   

Long-term investment securities(*1)

     7,817         948,463         —           —           956,280   

Accounts receivable – trade

     —           —           2,460,686         —           2,460,686   

Loans and other receivables(*2)

     —           —           1,123,507         —           1,123,507   

Derivative financial assets

     8,713         —           —           61,322         70,035   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  16,530      1,228,624      4,732,321      61,322      6,038,797   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(In millions of won)  
     December 31, 2013  
     Financial
assets at
fair value
through
profit or
loss
     Available-
for-sale
financial
assets
     Loans and
receivables
     Derivative
financial
instruments
designated
as hedged
item
     Total  

Cash and cash equivalents

     —           —           1,398,639         —           1,398,639   

Financial instruments

     —           —           319,616         —           319,616   

Short-term investment securities

     —           106,068         —           —           106,068   

Long-term investment securities(*1)

     20,532         947,995         —           —           968,527   

Accounts receivable – trade

     —           —           2,270,471         —           2,270,471   

Loans and other receivables(*2)

     —           —           1,044,529         —           1,044,529   

Derivative financial assets(*3)

     10         —           —           41,712         41,722   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  20,542      1,054,063      5,033,255      41,712      6,149,572   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(*1) Long-term investment securities were designated as financial assets at fair value through profit of loss since the embedded derivative (conversion right option), which should be separated from the host contract, could not be separately measured.

 

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35. Categories of Financial Instruments, Continued

 

(*2) Details of loans and other receivables as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Short-term loans

     74,512         79,395   

Accounts receivable – other

     690,527         643,603   

Accrued income

     10,134         11,941   

Other current assets

     3,866         2,548   

Long-term loans

     55,728         57,442   

Long-term accounts receivable-other

     3,596         —     

Guarantee deposits

     285,144         249,600   
  

 

 

    

 

 

 
  1,123,507      1,044,529   
  

 

 

    

 

 

 

 

(*3) Derivative financial assets classified as financial assets at fair value through profit or loss is the fair value of conversion right of convertible bonds held by SK Communications Co., Ltd., a subsidiary of the Parent Company.

 

  (2) Financial liabilities by categories as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)    December 31, 2014  
     Financial
liabilities at
fair value
through
profit or loss
     Financial
liabilities
measured at
amortized
cost
     Derivative
financial
instruments
designated
as hedged
item
     Total  

Accounts payable – trade

     —           275,495         —           275,495   

Derivative financial liabilities

     —           —           130,889         130,889   

Borrowings

     —           537,562         —           537,562   

Debentures(*1)

     110,365         6,108,265         —           6,218,630   

Accounts payable - other and others (*3)

     —           3,241,615         —           3,241,615   
  

 

 

    

 

 

    

 

 

    

 

 

 
  110,365      10,162,937      130,889      10,404,191   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(In millions of won)    December 31, 2013  
     Financial
liabilities at
fair value
through
profit or
loss
     Financial
liabilities
measured at
amortized
cost
     Derivative
financial
instruments
designated
as hedged
item
     Total  

Accounts payable – trade

     —           214,716         —           214,716   

Derivative financial liabilities

     —           —           124,339         124,339   

Borrowings

     —           386,192         —           386,192   

Debentures(*2)

     96,147         5,830,324         —           5,927,471   

Accounts payable - other and others (*3)

     —           3,949,794         —           3,949,794   
  

 

 

    

 

 

    

 

 

    

 

 

 
  96,147      10,381,026      124,339      10,601,512   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
35. Categories of Financial Instruments, Continued

 

(*1) Bonds classified as financial liabilities at fair value through profit or loss as of December 31, 2014 are structured bonds and they were designated as financial liabilities at fair value through profit or loss in order to settle the difference of the measurement bases of accounting profit or loss between the related derivatives and bonds.
(*2) The entire amount of debentures as of December 31, 2013 was designated as financial liabilities at fair value through profit or loss as the fair value of the embedded derivative (conversion right option), which should be separated from the main contract, could not be separately measured.
(*3) Details of accounts payable – other and other payables as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Accounts payable – other

     1,381,850         1,864,024   

Withholdings

     1,760         1,549   

Accrued expenses

     952,418         988,193   

Current portion of long-term payables - other

     193,193         226,151   

Long-term payables – other

     684,567         838,585   

Finance lease liabilities

     26         3,867   

Other non-current liabilities

     27,801         27,425   
  

 

 

    

 

 

 
  3,241,615      3,949,794   
  

 

 

    

 

 

 

 

36. Financial Risk Management

 

  (1) Financial risk management

The Group is exposed to credit risk, liquidity risk and market risk. Market risk is the risk related to the changes in market prices, such as foreign exchange rates, interest rates and equity prices. The Group implements a risk management system to monitor and manage these specific risks.

The Group’s financial assets under financial risk management consist of cash and cash equivalents, financial instruments, available-for-sale financial assets, trade and other receivables. Financial liabilities consist of trade and other payables, borrowings, and debentures.

 

  1) Market risk

 

  (i) Currency risk

The Group is exposed to currency risk mainly on exchange fluctuations on recognized assets and liabilities. The Group manages currency risk by currency forward, etc. if needed to hedge currency risk on business transactions. Currency risk occurs on forecasted transaction and recognized assets and liabilities which are denominated in a currency other than the functional currency of the Group.

 

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36. Financial Risk Management, Continued

 

  (1) Financial risk management, Continued

 

  1) Market risk, Continued
 
  (i) Currency risk, Continued

 

Monetary foreign currency assets and liabilities as of December 31, 2014 are as follows:

 

(In millions of won, thousands of U.S. dollars, thousands of Euros, thousands of Japanese Yen, thousands of other currencies)  
     Assets      Liabilities  
     Foreign
currencies
     Won
translation
     Foreign
currencies
     Won
translation
 

USD

     162,382         178,323         1,877,566         2,063,802   

EUR

     5,259         7,059         2,352         3,143   

JPY

     29,184         268         5,174         48   

AUD

     79         66         —           —     

CHF

     —           —           298,536         268,411   

SGD

     —           —           298,956         332,269   

Others

     161,777         11,656         43,656         1,227   
     

 

 

       

 

 

 
  197,372      2,668,900   
     

 

 

       

 

 

 

In addition, the Group has entered into cross currency swaps to hedge against currency risk related to foreign currency borrowings and debentures. (See Note 23)

As of December 31, 2014, effects on income (loss) before income tax as a result of change in exchange rate by 10% are as follows:

 

(In millions of won)              
     If increased by 10%      If decreased by 10%  

USD

     5,913         (5,913

EUR

     356         (356

JPY

     22         (22

Others

     1,050         (1,050
  

 

 

    

 

 

 
  7,341      (7,341
  

 

 

    

 

 

 

 

  (ii) Equity price risk

The Group has equity securities which include listed and non-listed securities for its liquidity and operating purpose. As of December 31, 2014, available-for-sale equity instruments measured at fair value amount to ₩846,614 million.

 

  (iii) Interest rate risk

Since the Group’s interest bearing assets are mostly fixed-interest bearing assets, as such, the Group’s revenue and operating cash flow are not influenced by the changes in market interest rates. However, the Group still has interest rate risk arising from borrowings and debentures.

Accordingly, the Group performs various analysis of interest rate risk, which includes refinancing, renewal, alternative financing and hedging instrument option, to reduce interest rate risk and to optimize its financing.

 

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Table of Contents
36. Financial Risk Management, Continued

 

  (1) Financial risk management, Continued

 

  1) Market risk, Continued
 
  (iii) Interest rate risk, Continued

 

The interest rate risk arises from the Group’s floating-rate borrowings and bonds agreements. As of the year ended December 31, 2014, the floating-rate borrowings and bonds are ₩49,800 million and ₩329,760 million, respectively, and the Group has entered into interest rate swap agreements, as described in Note 23, for all floating-rate bonds to hedge the interest rate risk of floating-rate bonds. On the other hand, if the interest rate increases (decreases) 1% with all other variables held constant, income before income taxes as of the end of December 31, 2014, fluctuates as much as ₩498 million due to the interest expense on floating-rate borrowings that have not entered into an interest rate swap agreement.

 

  2) Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet his/her contractual obligations. The maximum credit exposure as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     2014      2013  

Cash and cash equivalents

     833,129         1,398,548   

Financial instruments

     313,699         319,616   

Available-for-sale financial assets

     15,498         35,174   

Accounts receivable – trade

     2,460,686         2,270,471   

Loans and receivables

     1,123,507         1,044,529   

Derivative financial assets

     70,035         41,712   

Financial assets at fair value through profit or loss

     7,817         20,532   
  

 

 

    

 

 

 
  4,824,371      5,130,582   
  

 

 

    

 

 

 

To manage credit risk, the Group evaluates the credit worthiness of each customer or counterparty considering the party’s financial information, its own trading records and other factors; based on such information, the Group establishes credit limits for each customer or counterparty.

For the year ended December 31, 2014, the Group has no trade and other receivables or loans which have indications of significant impairment loss or are overdue for a prolonged period. As a result, the Group believes that the possibility of default is remote. Also, the Group’s credit risk can rise due to transactions with financial institutions related to its cash and cash equivalents, financial instruments and derivatives. To minimize such risk, the Group has a policy to deal with high credit worthy financial institutions. The amount of maximum exposure to credit risk of the Group is the carrying amount of financial assets as of December 31, 2014.

In addition, the aging of trade and other receivables that are overdue at the end of the reporting period but not impaired is stated in Note 7 and the analysis of financial assets that are individually determined to be impaired at the end of the reporting period is stated in Note 31.

 

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36. Financial Risk Management, Continued

 

  (1) Financial risk management, Continued

 

  3) Liquidity risk

The Group’s approach to managing liquidity is to ensure that it will always maintain sufficient cash and cash equivalents balances and have enough liquidity through various committed credit lines. The Group manages liquidity risks by maintaining credit lines in case of insufficient liquidity generated by operating activities.

Contractual maturities of financial liabilities as of December 31, 2014 are as follows:

 

(In millions of won)  
     Carrying amount      Contractual
cash flows
     Less than 1
year
     1 - 5
years
     More than
5 years
 

Accounts payable - trade

     275,495         275,495         275,494         —           —     

Borrowings(*1)

     537,562         555,407         386,814         129,047         39,546   

Debentures(*1)

     6,218,630         7,516,339         770,663         4,082,384         2,663,292   

Accounts payable - other and others(*2)

     3,241,615         3,271,633         2,421,297         598,447         251,889   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  10,273,302      11,618,874      3,854,268      4,809,878      2,954,727   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Group does not expect that the cash flows included in the maturity analysis could occur significantly earlier or at different amounts.

 

(*1) Includes estimated interest to be paid and excludes discounts on borrowings and debentures.
(*2) Excludes discounts on accounts payable-other and others.

As of December 31, 2014, periods which cash flows from cash flow hedge derivatives is expected to be incurred are as follows:

 

(In millions of won)  
     Carrying
amount
    Contractual
cash flows
    Less than
1 year
    1 - 5
years
    More than
5 years
 

Assets

     61,322        64,440        6,288        42,448        15,704   

Liabilities

     (130,889     (137,344     (15,145     (121,463     (736
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  (69,567   (72,904   (8,857   (79,015   14,968   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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36. Financial Risk Management, Continued

 

  (2) Capital management

The Group manages its capital to ensure that it will be able to continue as a business while maximizing the return to shareholders through the optimization of its debt and equity balance. The overall strategy of the Group is the same as that of the group as of and for the year ended 31 December 2013.

The Group monitors its debt-equity ratio as a capital management indicator. This ratio is calculated as total liabilities divided by total equity which are extracted from the financial statements.

Debt-equity ratio as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)             
     December 31,
2014
    December 31,
2013
 

Liabilities

     12,692,963        12,409,958   

Equity

     15,248,270        14,166,557   
  

 

 

   

 

 

 

Debt-equity ratio

  83.24   87.60
  

 

 

   

 

 

 

 

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36. Financial Risk Management, Continued

 

  (3) Fair value

 

  1) Fair value and carrying amount of financial assets and liabilities including fair value hierarchy as of December 31, 2014 are as follows:

 

(In millions of won)  
     Carrying amount      Level 1      Level 2      Level 3      Total  

Financial assets that can be measured at fair value

              

Financial assets at fair value through profit or loss

     16,530         —           8,713         7,817         16,530   

Derivative financial assets

     61,322         —           61,322         —           61,322   

Available-for-sale financial assets

     846,614         657,286         47,002         142,326         846,614   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  924,466      657,286      117,037      150,143      924,466   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial assets that cannot be measured at fair value

Cash and cash equivalents(*1)

  834,429      —        —        —        —     

Available-for-sale financial assets(*1,2)

  382,010      —        —        —        —     

Accounts receivable – trade and others(*1)

  3,584,193      —        —        —        —     

Financial instruments(*1)

  313,699      —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  5,114,331      —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities that can be measured at fair value

Financial liabilities at fair value through profit or loss

  110,365      —        110,365      —        110,365   

Derivative financial liabilities

  130,889      —        130,889      —        130,889   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  241,254      —        241,254      —        241,254   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities that cannot be measured at fair value

Accounts payable – trade(*1)

  275,495      —        —        —        —     

Borrowings

  537,562      —        548,583      —        548,583   

Debentures

  6,108,265      —        6,514,832      —        6,514,832   

Accounts payable - other and others(*1)

  3,241,615      —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  10,162,937      —        7,063,415      —        7,063,415   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
36. Financial Risk Management, Continued

 

  (3) Fair value, Continued

 

  2) Fair value and carrying amount of financial assets and liabilities including fair value hierarchy as of December 31, 2013 are as follows:

 

(In millions of won)                                   
     Carrying amount      Level 1      Level 2      Level 3      Total  

Financial assets that can be measured at fair value

              

Financial assets at fair value through profit or loss

     20,542         —           20,532         10         20,542   

Derivative financial assets

     41,712         —           41,712         —           41,712   

Available-for-sale financial assets

     839,647         638,445         46,414         154,788         839,647   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  901,901      638,445      108,658      154,798      901,901   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial assets that cannot be measured at fair value

Cash and cash equivalents(*1)

  1,398,639      —        —        —        —     

Available-for-sale financial assets(*1,2)

  214,416      —        —        —        —     

Accounts receivable – trade and others(*1)

  3,314,999      —        —        —        —     

Financial instruments(*1)

  319,616      —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  5,247,670      —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities that can be measured at fair value

Financial liabilities at fair value through profit or loss

  96,147      96,147      —        —        96,147   

Derivative financial liabilities

  124,339      —        124,339      —        124,339   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  220,486      96,147      124,339      —        220,486   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities that cannot be measured at fair value

Accounts payable – trade(*1)

  214,716      —        —        —        —     

Borrowings

  386,192      —        399,247      —        399,247   

Debentures

  5,830,324      —        5,946,586      —        5,946,586   

Accounts payable - other and others(*1)

  3,949,794      —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  10,381,026      —        6,345,833      —        6,345,833   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(*1) Does not include fair values of financial assets and liabilities of which fair values have not been measured as carrying amounts are closed to the reasonable approximate fair values.
(*2) Equity instruments which do not have quoted price in an active market for the identical instruments (inputs for level 1) are measured at cost in accordance with K-IFRS 1039 as such equity instruments cannot be reliably measured using other methods.

Fair value of the financial instruments that are traded in an active market (available-for-sale financial assets, financial liabilities at fair value through profit or loss, etc.) is measured based on the bid price at the end of the reporting date.

 

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36. Financial Risk Management, Continued

 

  (3) Fair value, Continued

 

The management uses various valuation methods for valuation of fair value of financial instruments that are not traded in an active market. Fair value of available-for-sale securities is determined using the market approach methods and financial assets through profit or loss are measured using the option pricing model. In addition, derivative financial contracts and long-term liabilities are measured using the present value methods. Inputs used to such valuation methods include swap rate, interest rate, and risk premium, and the Group performs valuation using the inputs which are consistent with natures of assets and liabilities being evaluated.

Fair values of accounts receivable – trade, and accounts payable—trade are considered to be carrying amount less impairment and fair value of financial liabilities for the disclosure purpose is estimated by discounting contractual future cash flows using the current market interest rate used for the similar financial instruments by the Group.

Interest rates used by the Group for the fair value measurement as of December 31, 2014 are as follows:

 

     Interest rate  

Derivative instruments

     1.90% ~ 2.40%   

Borrowings and debentures

     2.55 ~ 2.68

3) There have been no transfers from Level 2 to Level 1 in 2014 and changes of financial assets classified as Level 3 for the year ended December 31, 2014 are as follows:

 

     Balance at
Jan. 1
     Acquisition      Gain for
the period
     Other
comprehensive
loss
    Disposal     Balance at
Dec. 31
 

Financial assets at fair value through profit or loss

     10         5,000         2,817         —          (10     7,817   

Available-for-sale financial assets

     154,788         34,611         —           (2,339     (44,734     142,326   

 

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Table of Contents
36. Financial Risk Management, Continued

 

  (4) Enforceable master netting agreement or similar agreement

Carrying amount of financial instruments recognized of which offset agreements are applicable as of December 31, 2014 are as follows:

 

(In millions of won)                                        
            Gross offset     Net financial
instruments
     Relevant amount not
offset on the statements
of financial position
        
     Gross financial
instruments
recognized
     financial
instruments
recognized
    presented on the
statements of
financial position
     Financial
instruments
    Cash
collaterals
received
     Net
amount
 

Financial assets:

               

Derivatives(*)

     48,057         —          48,057         (45,892     —           2,165   

Accounts receivable – trade and other

     128,794         (117,568     11,226         —          —           11,226   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
  176,851      (117,568   59,283      (45,892   —        13,391   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Financial liabilities:

Derivatives(*)

  45,892      —        45,892      (45,892   —        —     

Accounts payable – other and others

  117,568      (117,568   —        —        —        —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
  163,460      (117,568   45,892      (45,892   —        —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Carrying amount of financial instruments recognized of which offset agreements are applicable as of December 31, 2013 are as follows:

 

(In millions of won)                                        
     Gross
financial
     Gross offset
financial
   

Net financial
instruments

presented on the

     Relevant amount not
offset on the statements
of financial position
        
     instruments
recognized
     instruments
recognized
    statements of
financial position
     Financial
instruments
    Cash
collaterals
received
     Net
amount
 

Financial assets:

               

Derivatives(*)

     28,870         —          28,870         (28,870     —           —     

Accounts receivable – trade and others

     138,897         (127,055     11,842         —          —           11,842   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
  167,767      (127,055   40,712      (28,870   —        11,842   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Financial liabilities:

Derivatives(*)

  43,536      —        43,536      (28,870   —        14,666   

Accounts payable – others

  127,055      (127,055   —        —        —        —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
  170,591      (127,055   43,536      (28,870   —        14,666   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(*) The Group entered into derivative contracts which include enforceable master netting arrangement in accordance with International Swap and Derivatives Association (ISDA). Generally, all contracts made with the identical currencies are settled from one party to another by combining one net amount. In this case, all contracts are liquidated and paid off at net amount by evaluating liquidation value if credit events such as bankruptcy occur.

ISDA agreements do not allow the Group to exercise rights of set-off unless credit events such as bankruptcy occur. Therefore, assets and liabilities recognized in accordance with the agreements cannot be offset as the Group does not have enforceable rights of set-off.

 

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37. Transactions with Related Parties

 

  (1) List of related parties

 

Relationship

  

Interest rate

Ultimate Controlling Entity    SK Holding Co., Ltd.
Subsidiaries    SK Planet Co., Ltd. and 39 others (See Note 1)
Joint venture    Dogus Planet, Inc. and 4 others
Associates    SK hynix Inc. and 59 others
Affiliates    The Ultimate Controlling Entity’s investee under equity method, the Ultimate Controlling Entity’s subsidiaries and associates, etc.

 

  (2) Compensation for the key management

The Parent Company considers registered directors who have substantial role and responsibility in planning, operating, and controlling of the business as key management. The considerations given to such key management for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     2014      2013  

Salaries

     2,600         2,263   

Provision for retirement benefits

     907         1,012   
  

 

 

    

 

 

 
  3,507      3,275   
  

 

 

    

 

 

 

Compensation for the key management includes salaries, non-monetary salaries and contributions made in relation to the pension plan.

 

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37. Transactions with Related Parties, Continued

 

  (3) Transactions with related parties for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)         2014  

Scope

  

Company

   Operating
revenue and
others
     Operating
expense and
others
     Acquisition of
property and
equipment
     Loans      Loans
collection
 

Ultimate Controlling Entity

  

SK Holding Co., Ltd.(*1)

     530         226,772         —           —           —     

Associates

  

F&U Credit information Co., Ltd.

     2,395         45,417         —           —           —     
  

HappyNarae Co., Ltd.

     253         6,492         10,418         —           —     
  

SK hynix Inc.

     12,964         3,391         —           —           —     
  

SK USA, Inc.

     —           2,153         —           —           —     
  

SK Wyverns Baseball Club., Ltd.

     901         22,402         —           —           204   
  

KEB HanaCard Co., Ltd.(*2)

     39,828         5,416         —           —           —     
  

Others

     5,852         15,150         —           45         —     
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  62,193      100,421      10,418      45      204   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

SK Engineering & Construction Co., Ltd.

  3,385      42,964      460,783      —        —     

SK C&C Co., Ltd.

  18,309      360,842      168,778      —        —     

SK Networks Co., Ltd.

  16,230      1,509,017      5,388      —        —     

SK Networks Services Co., Ltd.

  13,017      106,273      2,583      —        —     

SK Telesys Co., Ltd.

  494      64,038      205,538      —        —     

SK Energy Co., Ltd.

  22,650      944      —        —        —     

SK Gas Co., Ltd.

  10,115      —        —        —        —     

Others

  25,537      38,868      12,628      —        —     
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  109,737      2,122,946      855,698      —        —     
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  172,460      2,450,139      866,116      45      204   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(*1) Operating expense and others include ₩191,416 million of dividends paid by the Parent Company.

 

(*2) During the year ended December 31, 2014, due to merger between Hana SK Card Co., Ltd., the Parent Company’s associate and KEB Card Co., Ltd., the Group exchanged 57,647,058 shares of Hana SK Card Co., Ltd., with 67,627,587 shares of the merged company, KEB HanaCard Co., Ltd. (See Note 13.(1)).

 

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37. Transactions with Related Parties, Continued

 

(In millions of won)         2013  

Scope

  

Company

   Operating
revenue and
others
     Operating
expense and
others
     Acquisition of
property and
equipment
     Loans      Loans
collection
 

Ultimate Controlling Entity

  

SK Holding Co., Ltd.(*)

     1,912         226,023         —           —           —     

Associates

  

F&U Credit information Co., Ltd.

     1,753         43,931         —           —           —     
  

HappyNarae Co., Ltd.

     281         6,217         10,542         —           —     
  

SK hynix Inc.

     3,178         1,160         —           —           —     
  

SK USA, Inc.

     —           2,086         —           —           —     
  

SK Wyverns Baseball Club., Ltd.

     363         —           —           —           204   
  

HanaSK Card Co., Ltd.(*2)

     11,129         14,342         —           —           —     
  

Others

     3,171         3,734         125         1,200         —     
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  19,875      71,470      10,667      1,200      204   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

SK Engineering & Construction Co., Ltd.

  5,564      37,978      484,006      —        —     

SK C&C Co., Ltd.

  4,041      357,945      206,298      —        —     

SK Networks Co., Ltd.

  51,996      1,463,341      6,241      —        —     

SK Networks Services Co., Ltd.

  6,165      108,972      3,057      —        —     

SK Telesys Co., Ltd.

  1,554      99,381      234,319      —        —     

SK Energy Co., Ltd.

  20,831      2,422      —        —        —     

SK Gas Co., Ltd.

  6,656      —        —        —        —     

Others

  30,905      43,759      11,724      —        —     
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  127,712      2,113,798      945,645      —        —     
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  149,499      2,411,291      956,312      1,200      204   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(*) Operating expense and others include ₩191,416 million of dividends paid by the Parent Company.

 

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37. Transactions with Related Parties, Continued

 

  (4) Account balances as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)         2014  
          Accounts receivable      Accounts payable  

Scope

  

Company

   Loans      Accounts receivable-
trade, and others
     Accounts payable –
trade, and others
 

Ultimate Controlling Entity

  

SK Holding Co., Ltd.

     —           90         —     

Associates

  

HappyNarae Co., Ltd.

     —           13         2,650   
  

F&U Credit information Co., Ltd.

     —           148         797   
  

SK hynix Inc.

     —           2,800         2,840   
  

SK Wyverns Baseball Club Co., Ltd.

     1,221         —           —     
  

Wave City Development Co., Ltd.

     1,200         38,412         —     
  

Daehan Kanggun BcN Co., Ltd.

     22,148         —           —     
  

KEB HanaCard Co., Ltd.

     —           1,998         59   
  

Others

     —           543         1,285   
     

 

 

    

 

 

    

 

 

 
  24,569      43,914      7,631   
     

 

 

    

 

 

    

 

 

 

Other

SK Engineering & Construction Co., Ltd.

  —        897      27,282   

SK C&C Co., Ltd.

  —        1,393      121,145   

SK Networks. Co., Ltd.

  —        2,608      238,351   

SK Networks Services Co., Ltd.

  —        16      2,922   

SK Telesys Co., Ltd.

  —        321      3,037   

SK innovation co., ltd.

  —        1,641      271   

SK Energy Co., Ltd.

  —        4,781      79   

SK Gas Co., Ltd.

  —        2,143      47   

Others

  —        2,813      9,342   
     

 

 

    

 

 

    

 

 

 
  —        16,613      402,476   
     

 

 

    

 

 

    

 

 

 

Total

  24,569      60,617      410,107   
     

 

 

    

 

 

    

 

 

 

 

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Table of Contents
37. Transactions with Related Parties, Continued

 

(In millions of won)         2013  
          Accounts receivable      Accounts payable  

Scope

  

Company

   Loans      Accounts receivable-
trade, and others
     Accounts payable –
trade, and others
 

Ultimate Controlling Entity

  

SK Holding Co., Ltd.

     —           334         —     

Associates

  

HappyNarae Co., Ltd.

     —           27         16,317   
  

F&U Credit information Co., Ltd.

     —           258         585   
  

SK hynix Inc.

     —           392         —     
  

SK Wyverns Baseball Club Co., Ltd.

     1,425         —           —     
  

Wave City Development Co., Ltd.

     1,200         38,412         —     
  

Daehan Kanggun BcN Co., Ltd.

     22,102         —           —     
  

SK USA, Inc.

     —           —           436   
  

Hana Card Co., Ltd.

     —           3,723         468   
  

Others

     —           10         947   
     

 

 

    

 

 

    

 

 

 
  24,727      42,822      18,753   
     

 

 

    

 

 

    

 

 

 

Other

SK Engineering & Construction Co., Ltd.

  —        988      92,058   

SK C&C Co., Ltd.

  —        182      127,571   

SK Networks. Co., Ltd.

  —        5,930      118,759   

SK Networks Services Co., Ltd.

  —        3      5,048   

SK Telesys Co., Ltd.

  —        412      70,467   

SK innovation co., ltd.

  —        1,480      286   

SK Energy Co., Ltd.

  —        5,457      7,438   

SK Gas Co., Ltd.

  —        1,469      47   

Others

  —        3,223      31,592   
     

 

 

    

 

 

    

 

 

 
  —        19,144      453,266   
     

 

 

    

 

 

    

 

 

 

Total

  24,727      62,300      472,019   
     

 

 

    

 

 

    

 

 

 

 

  (5) As of December 31, 2014, there are no collateral and guarantee provided by the Group to related parties nor by related parties to the Group.

 

  (6) M&Service Co., Ltd., a subsidiary of the Parent Company, entered into performance agreement with SK Energy Co., Ltd. and provides a blank note to SK Energy Co., Ltd., with regard to this transaction.

 

  (7) There were additional investments in associates and joint ventures during the year ended December 31, 2014. (See Note 13)

 

  (8) For the year ended December 31, 2014, the Group acquired convertible bonds with a face value of ₩6,000 million from Health Connect Co., Ltd. at the face value. The convertible bonds are included in long-term investment securities.

 

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Table of Contents
38. Commitments and Contingencies

 

  (1) Collateral assets and commitments

SK Broadband Co., Ltd., a subsidiary of the Parent Company, has pledged its properties as collateral for leases on buildings in the amount of ₩14,230 million as of December 31, 2014.

SK Broadband Co., Ltd., has guaranteed for employees’ borrowings relating to employee stock ownership and provided short-term financial instruments amounting to ₩2,071 million as collateral as of December 31, 2014.

In addition, Neosnetworks Co., Ltd., a subsidiary of the Parent Company, has pledged its properties as collateral for facility funds borrowings in the amount of ₩2,071 million as of December 31, 2014.

 

  (2) Contingencies

As of December 31, 2014, the claim amount of pending litigations of SK Communications Co., Ltd., a subsidiary of the Parent Company, amounts to ₩2,097 million. The ultimate outcome of such litigation is not expected to have a material effect on the Group’s financial position or performance results.

 

  (3) Guarantee provided

PS&Marketing Corporation, a subsidiary of the Parent Company, obtained ₩3,000 million of payment guarantees related to handsets purchased from the Apple Computer Korea Ltd.

 

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Table of Contents
39. Discontinued Operation

 

  (1) Discontinued operation

During the year ended December 31, 2013, SK Planet Co., Ltd., a subsidiary of the Parent Company, sold 52.6% of its ownership interests (13,294,369 shares) in Loen Entertainment, Inc., to Star Invest Holdings Limited. Consideration for the sale amounted to ₩265,887 million. Loen Entertainment was a subsidiary of SK Planet Co., Ltd. and is engaged in the release of music discs as its primary business, The Group’s ownership interests after the disposition is 15.0% and Loen Entertainment, Inc. was excluded from the Group’s consolidated financial statements as of the date of the sale.

 

  (2) Results of discontinued operations

Results of discontinued operations included in the consolidated statements of income for the year ended December 31, 2013 are as follows. The consolidated statement of income presented for comparative purposes was restated in order to present discontinued operation segregated from the Group’s continuing operations.

 

(In millions of won)       
     2013  

Results of discontinued operations:

  

Revenue

     167,033   

Expense

     (140,204
  

 

 

 

Operating income generated by discontinued operations

  26,829   

Non-operating income

  3,189   

Gain on disposal relating to discontinued operations

  214,352   

Income tax expense

  (61,125
  

 

 

 

Gain from discontinued operations

  183,245   
  

 

 

 

Attributable to :

Owners of the Parent Company

  175,867   

Non-controlling interests

  7,378   

 

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Table of Contents
39. Discontinued Operation, Continued

 

  (3) Cash flows from discontinued operations

Cash flows from discontinued operations for the year ended December 31, 2013 are as follows:

 

(In millions of won)       
     2013  

Cash flow from discontinued operations:

  

Net cash provided by operating activities

     40,884   

Net cash provided by investing activities

     179,490   

Net cash used in financing activities

     (4,780
  

 

 

 
  215,594   
  

 

 

 

 

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Table of Contents
40. Statements of Cash Flows

 

  (1) Adjustments for income and expenses from operating activities for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     2014      2013  

Interest income

     (60,006      (67,359

Dividend

     (13,048      (10,197

Gain on foreign currency translation

     (6,277      (4,401

Gain on disposal of long-term investment securities

     (13,994      (9,300

Gain on valuation of derivatives

     (8,713      —     

Gain on settlement of derivatives

     (7,998      (7,716

Gain related to investments in subsidiaries and associates, net

     (906,338      (921,861

Gain on disposal of property and equipment and intangible assets

     (8,792      (7,991

Reversal of allowance for doubtful accounts

     —           (359

Gain relating to financial asset at fair value through profit or loss

     —           (5,177

Other income

     (608      (3,951

Interest expenses

     323,910         331,834   

Loss on foreign currency translation

     5,079         2,634   

Loss on disposal of long-term investment securities

     2,694         31,909   

Impairment loss on long-term investment securities

     24,533         52,058   

Loss on valuation of derivatives

     10         2,106   

Loss on settlement of derivatives

     672         —     

Income tax expense

     454,508         461,922   

Expense related to defined benefit plan

     112,717         92,840   

Depreciation and amortization

     2,891,870         2,829,784   

Bad debt expenses

     45,754         57,163   

Loss on disposal of property and equipment and intangible assets

     32,950         267,702   

Impairment loss on property and equipment and intangible assets

     47,489         14,399   

Loss relating to financial assets at fair value through profit or loss

     1,352         —     

Loss relating to financial liabilities at fair value through profit or loss

     10,370         134,232   

Bad debt for accounts receivable - other

     17,943         22,167   

Impairment loss on other investment securities

     22,749         6,136   

Other expenses

     10,169         6,802   
  

 

 

    

 

 

 
  2,978,995      3,275,376   
  

 

 

    

 

 

 

 

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40. Statements of Cash Flows, Continued

 

  (2) Changes in assets and liabilities from operating activities for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)    2014      2013  

Accounts receivable - trade

     (168,839)         (267,754

Accounts receivable - other

     (52,137      (41,243

Accrued income

     14         (502

Advance payments

     (62,873      (26,064

Prepaid expenses

     (36,808      (1,583

V.A.T. refund receivable

     7,200         (5,442

Inventories

     (171      (39,610

Long-term accounts receivables - other

     80         —     

Guarantee deposits

     (12,699      59,431   

Accounts payable - trade

     (37,790      (4,708

Accounts payable - other

     (296,875      (131,142

Advanced receipts

     20,701         (2,916

Withholdings

     306,515         22,025   

Deposits received

     (4,395      (1,745

Accrued expenses

     (79,831      98,081   

V.A.T. payable

     2,711         (3,901

Unearned revenue

     (140,295      (188,589

Provisions

     (38,469      (226,644

Long-term provisions

     29,532         (72,398

Plan assets

     (96,847      (61,856

Retirement benefit payment

     (46,531      (42,948

Others

     474         (30,362
  

 

 

    

 

 

 
  (707,333)      (969,870
  

 

 

    

 

 

 

 

  (3) Significant non-cash transactions for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)       
     2014      2013  

Transfer of construction in progress to property and equipment, and intangible assets

     2,238,620         2,320,528   

Transfer of other property and equipment and others to construction in progress

     1,090,954         1,188,826   

Increase(decrease) of accounts payable - other related to acquisition of property and equipment and intangible assets

     (184,614      350,735   

Return of the existing 1.8GHz frequency use rights

     —           614,600   

 

110


Table of Contents
SK TELECOM CO., LTD.
Separate Financial Statements
December 31, 2014 and 2013
(With Independent Auditors’ Report Thereon)


Table of Contents

Contents

 

     Page  

Independent Auditors’ Report

     1   

Separate Statements of Financial Position

     3   

Separate Statements of Income

     5   

Separate Statements of Comprehensive Income

     6   

Separate Statements of Changes in Equity

     7   

Separate Statements of Cash Flows

     8   

Notes to the Separate Financial Statements

     10   

Independent Accountant’s Review Report on Internal Accounting Control System (“IACS”)

     100   

Report on the Assessment of Internal Accounting Control System (“IACS”)

     101   


Table of Contents

Independent Auditors’ Report

Based on a report originally issued in Korean

To The Board of Directors and Shareholders

SK Telecom Co., Ltd.:

We have audited the accompanying separate financial statements of SK Telecom Co., Ltd. (the “Company”) which comprise the separate statements of financial position as at December 31, 2014 and 2013, the separate statements of income, comprehensive income, changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Separate Financial Statements

Management is responsible for the preparation and fair presentation of these separate financial statements in accordance with Korean International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of separate financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these separate financial statements based on our audits. We conducted our audits in accordance with Korean Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the separate financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the separate financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the separate financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the separate financial statements 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 entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the separate financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the separate financial statements present fairly, in all material respects, the separate financial position of the Company as at December 31, 2014 and 2013 and of its separate financial performance and its separate cash flows for the years then ended in accordance with Korean International Financial Reporting Standards.

 

1


Table of Contents

Other Matter

The accompanying separate statement of finance position of the company as of December 31, 2013, and the related separate statements of income, comprehensive income, changes in equity and cash flows for the year then ended, were audited by us in accordance with the previous auditing standards generally accepted in the Republic of Korea.

The procedures and practices utilized in the Republic of Korea to audit such separate financial statements may differ from those generally accepted and applied in other countries.

KPMG Samjong Accounting Corp.

Seoul, Korea

February 23, 2015

 

This report is effective as of February 23, 2015, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying separate financial statements and notes thereto. Accordingly, the readers of the audit report should understand that the above audit report has not been updated to reflect the impact of such subsequent events or circumstances, if any.

 

2


Table of Contents
(In millions of won)    Note      December 31,
2014
     December 31,
2013
 

Assets

        

Current Assets:

        

Cash and cash equivalents

     30,31       248,311         448,459   

Short-term financial instruments

     5,30,31         143,000         166,000   

Short-term investment securities

     7,30,31         197,161         102,042   

Accounts receivable - trade, net

     6,30,31,32         1,559,281         1,513,138   

Short-term loans, net

     6,30,31,32         67,989         72,198   

Accounts receivable - other, net

     6,30,31,32         305,990         388,475   

Prepaid expenses

        86,070         82,837   

Inventories, net

        23,694         24,596   

Non-current assets held for sale

     8         —           3,667   

Advanced payments and other

     6,30,31         58,417         16,370   
     

 

 

    

 

 

 

Total Current Assets

  2,689,913      2,817,782   
     

 

 

    

 

 

 

Non-Current Assets:

Long-term financial instruments

  5,30,31      69      7,569   

Long-term investment securities

  7,30,31      608,797      729,703   

Investments in subsidiaries and associates

  9      8,181,769      8,010,121   

Property and equipment, net

  10,32      7,705,906      7,459,986   

Goodwill

  11      1,306,236      1,306,236   

Intangible assets, net

  12      1,928,169      2,239,167   

Long-term loans, net

  6,30,31,32      38,457      39,925   

Long-term prepaid expenses

  28,551      23,007   

Guarantee deposits

  5,6,30,31,32      156,807      152,057   

Long-term derivative financial assets

  17,30,31      67,728      41,712   

Other non-current assets

  60      154   
     

 

 

    

 

 

 

Total Non-Current Assets

  20,022,549      20,009,637   
     

 

 

    

 

 

 

Total Assets

  22,712,462      22,827,419   
     

 

 

    

 

 

 

See accompanying notes to the separate financial statements.

 

3


Table of Contents
(In millions of won)    Note      December 31,
2014
     December 31,
2013
 

Liabilities and Equity

        

Current Liabilities:

        

Short-term borrowings

     13,30,31       200,000         260,000   

Current installments of debentures and long-term borrowings, net

     13,30,31         211,863         622,703   

Current installments of long-term payables – other

     14,30,31         189,389         206,800   

Accounts payable – other

     30,31,32         1,086,485         1,556,201   

Withholdings

     30,31         801,119         574,166   

Accrued expenses

     30,31         615,488         653,742   

Income tax payable

     27         91,315         104,564   

Unearned revenue

        92,783         178,569   

Derivative financial liabilities

     17,30,31         —           21,170   

Provisions

     15         50,456         66,559   

Advanced receipts

        39,148         43,599   
     

 

 

    

 

 

 

Total Current Liabilities

  3,378,046      4,288,073   
     

 

 

    

 

 

 

Non-Current Liabilities:

Debentures, excluding current installments, net

  13,30,31      4,655,137      4,014,777   

Long-term borrowings, excluding current installments

  13,30,31      80,147      85,125   

Long-term payables - other

  14,30,31      657,001      828,721   

Long-term unearned revenue

  19,544      50,894   

Defined benefit liabilities

  16      15,555      22,886   

Long-term derivative financial liabilities

  17,30,31      130,889      100,210   

Long-term provisions

  15      27,676      19,537   

Deferred tax liabilities

  27      144,876      44,601   

Other non-current liabilities

  30,31      61,370      57,187   
     

 

 

    

 

 

 

Total Non-Current Liabilities

  5,792,195      5,223,938   
     

 

 

    

 

 

 

Total Liabilities

  9,170,241      9,512,011   
     

 

 

    

 

 

 

Equity

Share capital

  1,18      44,639      44,639   

Capital surplus and other capital adjustments

  18,19,20      433,894      433,894   

Retained earnings

  21,22      12,996,790      12,665,699   

Reserves

  23      66,898      171,176   
     

 

 

    

 

 

 

Total Equity

  13,542,221      13,315,408   
     

 

 

    

 

 

 

Total Liabilities and Equity

  22,712,462      22,827,419   
     

 

 

    

 

 

 

See accompanying notes to the separate financial statements.

 

4


Table of Contents
(In millions of won except for per share data)    Note      2014     2013  

Operating revenue:

     4,32        

Revenue

        13,012,644        12,860,379   
     

 

 

   

 

 

 

Operating expense:

  32   

Labor cost

  588,635      598,885   

Commissions paid

  5,591,245      5,333,869   

Depreciation and amortization

  2,095,702      2,006,896   

Network interconnection

  771,786      770,125   

Leased line

  370,549      412,217   

Advertising

  213,605      237,291   

Rent

  377,112      362,659   

Cost of products that have been resold

  457,049      399,810   

Other operating expenses

  24      809,801      768,943   
     

 

 

   

 

 

 
  11,275,484      10,890,695   
     

 

 

   

 

 

 

Operating income

  1,737,160      1,969,684   

Finance income

  26      82,276      81,196   

Finance costs

  26      (293,338   (422,764

Other non-operating income

  25      37,422      47,618   

Other non-operating expenses

  25      (184,177   (417,252

Loss relating to investments in subsidiaries and associates

  9      (57,593   (37,685
     

 

 

   

 

 

 

Profit before income tax

  1,321,750      1,220,797   

Income tax expense

  27      293,209      310,640   
     

 

 

   

 

 

 

Profit for the year

1,028,541      910,157   
     

 

 

   

 

 

 

Earnings per share

  28   

Basic earnings per share (in won)

14,262      12,837   
     

 

 

   

 

 

 

Diluted earnings per share (in won)

14,262      12,837   
     

 

 

   

 

 

 

See accompanying notes to the separate financial statements.

 

5


Table of Contents
(In millions of won)    Note      2014     2013  

Profit for the year

        1,028,541        910,157   

Other comprehensive income (loss)

       

Items that will never be reclassified to profit or loss:

       

Remeasurement of defined benefit liabilities

     16         (13,808     5,927   

Items that are or may be reclassified subsequently to profit or loss:

       

Net change in unrealized fair value of available-for-sale financial assets

     23         (66,103     4,795   

Net change in unrealized fair value of derivatives

     17,23         (38,175     11,793   
     

 

 

   

 

 

 

Other comprehensive income (loss) for the year

  (118,086   22,515   
     

 

 

   

 

 

 

Total comprehensive income

910,455      932,672   
     

 

 

   

 

 

 

See accompanying notes to the separate financial statements.

 

6


Table of Contents
(In millions of won)                                                      
          Capital surplus (deficit) and other capital adjustments                    
    Share
capital
    Paid-in
surplus
    Treasury
stock
    Loss on disposal of
treasury stock
    Hybrid
bond
    Other     Retained
earnings
    Reserves     Total equity  

Balance, January 1, 2013

    44,639        2,915,887        (2,410,451     (18,855     —          (722,741     12,413,981        154,588        12,377,048   

Cash dividends

    —          —          —          —          —          —          (655,946     —          (655,946

Issuance of hybrid bond

    —          —          —          —          398,518        —          —          —          398,518   

Interest on hybrid bond

    —          —          —          —          —          —          (8,420     —          (8,420

Treasury stock

    —          —          270,768        768        —          —          —          —          271,536   

Total comprehensive income

                 

Profit for the year

    —          —          —          —          —          —          910,157        —          910,157   

Other comprehensive income

    —          —          —          —          —          —          5,927        16,588        22,515   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  —        —        —        —        —        —        916,084      16,588      932,672   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2013

44,639      2,915,887      (2,139,683   (18,087   398,518      (722,741   12,665,699      171,176      13,315,408   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 1, 2014

44,639      2,915,887      (2,139,683   (18,087   398,518      (722,741   12,665,699      171,176      13,315,408   

Cash dividends

  —        —        —        —        —        —        (666,802   —        (666,802

Interest on hybrid bond

  —        —        —        —        —        —        (16,840   —        (16,840

Total comprehensive income

Profit for the year

  —        —        —        —        —        —        1,028,541      —        1,028,541   

Other comprehensive loss

  —        —        —        —        —        —        (13,808   (104,278   (118,086
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  —        —        —        —        —        —        1,014,733      (104,278   910,455   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2014

44,639      2,915,887      (2,139,683   (18,087   398,518      (722,741   12,996,790      66,898      13,542,221   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the separate financial statements.

 

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(In millions of won)    Note      2014     2013  

Cash flows from operating activities:

       

Cash generated from operating activities

       

Profit for the year

      1,028,541        910,157   

Adjustments for income and expenses

     34         2,886,389        3,120,427   

Changes in assets and liabilities related to operating activities

     34         (334,898     (714,862
     

 

 

   

 

 

 

Sub-total

  3,580,032      3,315,722   

Interest received

  20,954      29,695   

Dividends received

  13,048      20,641   

Interest paid

  (224,119   (246,632

Income tax paid

  (168,482   (96,953
     

 

 

   

 

 

 

Net cash provided by operating activities

  3,221,433      3,022,473   
     

 

 

   

 

 

 

Cash flows from investing activities:

Cash inflows from investing activities:

Decrease in short-term financial instruments, net

  30,500      13,300   

Collection of short-term loans

  197,925      279,815   

Decrease in long-term financial instruments

  2,522      —     

Proceeds from disposal of long-term investment securities

  54,218      29,762   

Proceeds from disposal of investments in subsidiaries and associates

  —        1,808   

Proceeds from disposal of property and equipment

  25,677      3,148   

Proceeds from disposal of intangible assets

  1,127      965   

Proceeds from disposal of assets held for sale

  3,667      190,393   

Collection of long-term loans

  3,660      11,727   

Proceeds from disposal of other non-current assets

  93      290   
     

 

 

   

 

 

 

Sub-total

  319,389      531,208   

Cash outflows for investing activities:

Increase in short-term investment securities, net

  (94,802   (45,031

Increase in short-term loans

  (195,700   (275,913

Increase in long-term financial instruments

  (2,522   (7,500

Acquisition of long-term investment securities

  (28,801   (9,313

Acquisition of investments in subsidiaries and associates

  (210,060   (206,791

Acquisition of property and equipment

  (2,319,016   (2,201,354

Acquisition of intangible assets

  (91,060   (179,069

Increase in long-term loans

  (45   —     
     

 

 

   

 

 

 

Sub-total

  (2,942,006   (2,924,971
     

 

 

   

 

 

 

Net cash used in investing activities

    (2,622,617   (2,393,763
     

 

 

   

 

 

 

See accompanying notes to the separate financial statements.

 

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(In millions of won)    2014     2013  

Cash flows from financing activities:

    

Cash inflows from financing activities:

    

Proceeds from long-term borrowings

   3,552        96,455   

Issuance of hybrid bond

     —          398,518   

Issuance of debentures

     797,364        1,014,859   

Cash inflows from settlement of derivatives

     119        20,026   
  

 

 

   

 

 

 

Sub-total

  801,035      1,529,858   

Cash outflows for financing activities:

Decrease in short-term borrowings, net

  (60,000   (70,000

Repayment of long-term borrowings

  (12,814   (457,110

Repayment of long-term account payables-other

  (207,668   (161,575

Repayment of debentures

  (629,940   (621,976

Payment of cash dividends

  (666,802   (655,946

Payment of interest on hybrid bond

  (16,840   —     

Cash outflows from settlement of derivatives

  (5,882   —     
  

 

 

   

 

 

 

Sub-total

    (1,599,946   (1,966,607
  

 

 

   

 

 

 

Net cash used in financing activities

  (798,911   (436,749
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

  (200,095   191,961   

Cash and cash equivalents at beginning of the year

  448,459      256,577   

Effects of exchange rate changes on cash and cash equivalents

  (53   (79
  

 

 

   

 

 

 

Cash and cash equivalents at end of the year

248,311      448,459   
  

 

 

   

 

 

 

See accompanying notes to the separate financial statements.

 

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1. Reporting Entity

SK Telecom Co., Ltd. (“the Company”) was incorporated in March 1984 under the laws of the Republic of Korea (“Korea”) to engage in providing cellular telephone communication services in Korea. The Company mainly provides wireless telecommunications in Korea. The Company’s common shares and depositary receipts (DRs) are listed on the Stock Market of Korea Exchange, the New York Stock Exchange and the London Stock Exchange. As of December 31, 2014, the Company’s total issued shares are held by the following:

 

     Number of
shares
     Percentage of
total shares issued (%)
 

SK Holdings Co., Ltd.

     20,363,452         25.22   

National Pension Service

     5,722,692         7.09   

Institutional investors and other minority stockholders

     44,850,192         55.54   

Treasury stock

     9,809,375         12.15   
  

 

 

    

 

 

 

Total number of shares

  80,745,711      100.00   
  

 

 

    

 

 

 

 

2. Basis of Presentation

 

  (1) Statement of compliance

These separate financial statements were prepared in accordance with (“K-IFRS”), as prescribed in the Act on External Audit of Stock Companies in the Republic of Korea.

These financial statements are separate financial statements prepared in accordance with K-IFRS No.1027, ‘Separate Financial Statements’ presented by a parent, an investor with joint control of, of significant influence over, an investee, in which the investments are accounted for at cost.

The separate financial statements were authorized for issuance by the Board of Directors on February 5, 2015, which will be submitted for approval at the shareholders’ meeting to be held on March 20, 2015.

 

  (2) Basis of measurement

The separate financial statements have been prepared on the historical cost basis, except for the following material items in the separate statement of financial position:

 

    derivative financial instruments are measured at fair value

 

    financial instruments at fair value through profit or loss are measured at fair value

 

    available-for-sale financial assets are measured at fair value

 

    liabilities for defined benefit plans are recognized at the net of the total present value of defined benefit obligations less the fair value of plan assets

 

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  (3) Functional and presentation currency

These separate financial statements are presented in Korean won, which is the Company’s functional currency and the currency of the primary economic environment in which the Company operates.

 

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2. Basis of Presentation, Continued

 

  (4) Use of estimates and judgments

The preparation of the separate financial statements in conformity with K-IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period prospectively.

 

  1) Critical judgments

Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the financial statements is included in the following notes:

 

    revenue (See Note 4.(21))

 

    classification of lease (See Note 4.(13))

 

  2) Assumptions and estimation uncertainties

Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year are included in the following notes: allowance for doubtful accounts, estimated useful lives of property and equipment and intangible assets, impairment of goodwill, recognition of provision, measurement of defined benefit obligations and recognition of deferred tax assets (liabilities).

 

  3) Fair value measurement

A number of the Company’s accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities. The Company has an established control framework with respect to the measurement of fair values. This includes a valuation team that has overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values, and reports directly to the finance executive.

The valuation team regularly reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or pricing services, is used to measure fair values, then the valuation team assesses the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of K-IFRS, including the level in the fair value hierarchy in which such valuations should be classified.

 

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When measuring the fair value of an asset or a liability, the Company uses market observable data as far as possible. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows.

 

    Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

    Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

 

    Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

 

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2. Basis of Presentation, Continued

 

  (4) Use of estimates and judgments, Continued

 

If the inputs used to measure the fair value of an asset or a liability fall into different levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The Company recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.

Information about assumptions used for fair value measurements are included in Note 31.

 

  (5) Common control transactions

SK Holdings Co., Ltd. (“the Ultimate Controlling Entity”) is the Ultimate Controlling Entity of the Company because it controls the Company. Accordingly, gains and losses from business acquisitions and dispositions involving entities that are under the control of the Ultimate Controlling Entity are accounted for as common control transactions within equity.

 

3. Changes in Accounting Policies

Except for the changes below, the Company has consistently applied the accounting policies set out in Note 4 to all periods presented in these financial statements.

The Company has adopted the following amendments to standards with a date of initial application of January 1, 2014.

 

  (1) Offsetting financial assets and financial liabilities

The Company has adopted amendments to K-IFRS 1032, ‘Offsetting Financial Assets and Financial Liabilities’ since January 1, 2014. The amendments clarify the meaning of ‘currently has a legally enforceable right of set-off’. According to the amendments, the right to set off should not be contingent on a future event, and legally enforceable in the normal course of business, in the event of default, and in the event of insolvency or bankruptcy of the entity and all of the counterparties. The amendments also state that some gross settlement systems would be considered equivalent to net settlement if they eliminate or result in insignificant credit and liquidity risk and process receivables and payables in a single settlement process or cycle.

There is no material impact of the application of this amendment on the Company’s financial statements.

 

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4. Significant Accounting Policies

The significant accounting policies applied by the Company in preparation of its separate financial statements in accordance with K-IFRSs are included below. The accounting policies set out below have been applied consistently to all periods presented in these separate financial statements except for those as described in Note 3.

 

  (1) Operating segments

The Company presents disclosures relating to operating segments on its separate financial statements in accordance with K-IFRS No. 1108, ‘Operating Segments’ and such disclosures are not separately disclosed on these separate financial statements.

 

  (2) Investments in subsidiaries and associates

These separate financial statements are prepared and presented in accordance with K-IFRS No. 1027, ‘Separate Financial Statements’. The Company applied the cost method to investments in subsidiaries and associates in accordance with K-IFRS No. 1027. Dividends from a subsidiary or associate are recognized in profit or loss when the right to receive the dividend is established.

 

  (3) Cash and cash equivalents

Cash and cash equivalents comprise cash balances and call deposits with maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Company in the management of its short-term commitments.

 

  (4) Inventories

Inventories are stated at the acquisition cost using the average method. During the period, a perpetual inventory systems is used to value inventories, which is adjusted to the physical inventory counts performed at the period end. When the net realizable value of inventories is less than the acquisition cost, the carrying amount is reduced to the net realizable value and any difference is charged to current operations as operating expenses. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.

 

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4. Significant Accounting Policies, Continued

 

  (5) Non-derivative financial assets

The Company recognizes and measures non-derivative financial assets by the following four categories: financial assets at fair value through profit or loss, held-to-maturity investments, loans and receivables and available-for-sale financial assets. The Company recognizes financial assets in the separate statement of financial position when the Company becomes a party to the contractual provisions of the instrument.

Upon initial recognition, non-derivative financial assets are measured at their fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the asset’s acquisition or issuance.

 

  (i) Financial assets at fair value through profit or loss

A financial asset is classified as financial assets are classified at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Upon initial recognition, transaction costs are recognized in profit or loss when incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss.

 

  (ii) Held-to-maturity investments

A non-derivative financial asset with a fixed or determinable payment and fixed maturity, for which the Company has the positive intention and ability to hold to maturity, are classified as held-to-maturity investments. Subsequent to initial recognition, held-to-maturity investments are measured at amortized cost using the effective interest rate method.

 

  (iii) Loans and receivables

Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method except for loans and receivables of which the effect of discounting is immaterial.

 

  (iv) Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified as financial assets at fair value through profit or loss, held-to-maturity investments or loans and receivables. Subsequent to initial recognition, they are measured at fair value, which changes in fair value, net of any tax effect, recorded in other comprehensive income in equity. Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at cost.

 

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4. Significant Accounting Policies, Continued

 

  (5) Non-derivative financial assets, Continued

 

  (v) De-recognition of financial assets

The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Company is recognized as a separate asset or liability. If the Company retains substantially all the risks and rewards of ownership of the transferred financial assets, the Company continues to recognize the transferred financial assets and recognizes financial liabilities for the consideration received.

 

  (vi) Offsetting between financial assets and financial liabilities

Financial assets and financial liabilities are offset and the net amount is presented in the statement of financial position only when the Company currently has a legally enforceable right to offset the recognized amounts, and there is the intention to settle on a net basis or to realize the asset and settle the liability simultaneously.

 

  (6) Derivative financial instruments, including hedge accounting

Derivatives are initially recognized at fair value. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below.

 

  (i) Hedge accounting

The Company holds forward exchange contracts, interest rate swaps, currency swaps and other derivative contracts to manage interest rate risk and foreign exchange risk. The Company designated derivatives as hedging instruments to hedge the risk of changes in the fair value of assets, liabilities or firm commitments (a fair value hedge) and foreign currency risk of highly probable forecasted transactions or firm commitments (a cash flow hedge).

On initial designation of the hedge, the Company formally documents the relationship between the hedging instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship

 

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Table of Contents

Fair value hedge

Changes in the fair value of a derivative hedging instrument designated as a fair value hedge are recognized in profit or loss. The gain or loss from remeasuring the hedging instrument at fair value for a derivative hedging instrument and the gain or loss on the hedged item attributable to the hedged risk are recognized in profit or loss in the same line item of the statement of income. The Company discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, or if the hedge no longer meets the criteria for hedge accounting. Any adjustment arising from gain or loss on the hedged item attributable to the hedged risk is amortized to profit or loss from the date the hedge accounting is discontinued.

 

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4. Significant Accounting Policies, Continued

 

  (6) Derivative financial instruments, including hedge accounting, Continued

 

Cash flow hedge

When a derivative is designated to hedge the variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecasted transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognized in other comprehensive income, net of tax, and presented in the hedging reserve in equity. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss on the hedging instrument that has been recognized in other comprehensive income is reclassified to profit or loss in the periods during which the forecasted transaction occurs. If the forecasted transaction is no longer expected to occur, then the balance in other comprehensive income is recognized immediately in profit or loss.

 

  (ii) Separable embedded derivatives

Embedded derivatives are separated from the host contract and accounted for separately only if the following criteria have been met:

 

  (a) the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract;

 

  (b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and

 

  (c) the hybrid instrument is not measured at fair value with changes in fair value recognized in profit or loss.

Changes in the fair value of separable embedded derivatives are recognized immediately in profit or loss.

 

  (iii) Other derivative financial instruments

Changes in the fair value of other derivative financial instrument not designated as a hedging instrument are recognized immediately in profit or loss.

 

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4. Significant Accounting Policies, Continued

 

  (7) Impairment of financial assets

A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. However, losses expected as a result of future events, regardless of likelihood, are not recognized.

Objective evidence that a financial asset is impaired includes following loss events:

 

    significant financial difficulty of the issuer or obligor;

 

    a breach of contract, such as default or delinquency in interest or principal payments;

 

    the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider;

 

    it becoming probable that the borrower will enter bankruptcy or other financial reorganization;

 

    the disappearance of an active market for that financial asset because of financial difficulties; or

 

    observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group.

In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment.

If financial assets have objective evidence that they are impaired, impairment losses should be measured and recognized.

 

  (i) Financial assets measured at amortized cost

An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of its estimated future cash flows discounted at the asset’s original effective interest rate. If it is not practicable to obtain the instrument’s estimated future cash flows, impairment losses would be measured by using prices from any observable current market transactions. The Company can recognize impairment losses directly or establish a provision to cover impairment losses. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the previously recognized impairment loss shall be reversed either directly or by adjusting an allowance account.

 

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Table of Contents
4. Significant Accounting Policies, Continued

 

  (7) Impairment of financial assets, Continued

 

  (ii) Financial assets carried at cost

If there is objective evidence that an impairment loss has occurred on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, the amount of the impairment loss is measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment losses shall not be reversed.

 

  (iii) Available-for-sale financial assets

When a decline in the fair value of an available-for-sale financial asset has been recognized in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss that had been recognized in other comprehensive income shall be reclassified from equity to profit or loss as a reclassification adjustment even though the financial asset has not been derecognized. Impairment losses recognized in profit or loss for an investment in an equity instrument classified as available-for-sale shall not be reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss shall be reversed, with the amount of the reversal recognized in profit or loss.

 

  (8) Property, plant and equipment

Property, plant and equipment are initially measured at cost and after initial recognition, are carried at cost less accumulated depreciation and accumulated impairment losses. The cost of property, plant and equipment includes expenditures arising directly from the construction or acquisition of the asset, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management and the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

Subsequent to initial recognition, an item of property, plant and equipment is carried at its cost less any accumulated depreciation and any accumulated impairment losses.

 

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Table of Contents
4. Significant Accounting Policies, Continued

 

  (8) Property, plant and equipment, Continued

 

Subsequent costs are recognized in the carrying amount of property, plant and equipment at cost or, if appropriate, as separate items if it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing are recognized in profit or loss as incurred.

Property, plant and equipment, except for land, are depreciated on a straight-line basis over estimated useful lives that appropriately reflect the pattern in which the asset’s future economic benefits are expected to be consumed. A component that is significant compared to the total cost of property, plant and equipment is depreciated over its separate useful life.

Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognized as other non-operating income (loss).

The estimated useful lives of the Company’s property, plant and equipment are as follows:

 

     Useful lives (years)

Buildings and structures

   15, 30

Machinery

   3 ~ 6

Other property, plant and equipment (“Other PP&E”)

   4 ~ 10

Depreciation methods, useful lives and residual values are reviewed at the end of each reporting date and adjusted, if appropriate. The change is accounted for as a change in an accounting estimate.

 

  (9) Borrowing costs

The Company capitalizes borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Other borrowing costs are recognized in expense as incurred. A qualifying asset is an asset that requires a substantial period of time to get ready for its intended use or sale. Financial assets and inventories that are manufactured or otherwise produced over a short period of time are not qualifying assets. Assets that are ready for their intended use or sale when acquired are not qualifying assets.

To the extent that the Company borrows funds specifically for the purpose of obtaining a qualifying asset, the Company determines the amount of borrowing costs eligible for capitalization as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings. To the extent that the Company borrows funds generally and uses them for the purpose of obtaining a qualifying asset, the Company shall determine the amount of borrowing costs eligible for capitalization by applying a capitalization rate to the expenditures on that asset. The capitalization rate shall be the weighted average of the borrowing costs applicable to the borrowings of the Company that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs that the Company capitalizes during a period shall not exceed the amount of borrowing costs incurred during that period.

 

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4. Significant Accounting Policies, Continued

 

  (10) Intangible assets

Intangible assets are measured initially at cost and, subsequently, are carried at cost less accumulated amortization and accumulated impairment losses.

Amortization of intangible assets except for goodwill is calculated on a straight-line basis over the estimated useful lives of intangible assets from the date that they are available for use. The residual value of intangible assets is zero. However, as there are no foreseeable limits to the periods over which club memberships are expected to be available for use, this intangible asset is determined as having indefinite useful lives and not amortized.

The estimated useful lives of the Company’s intangible assets are as follows:

 

     Useful lives (years)

Frequency use rights

   6.3 ~ 13.1

Land use rights

   5

Industrial rights

   5, 10

Development costs

   5

Facility usage rights

   10, 20

Other

   3 ~ 20

Amortization periods and the amortization methods for intangible assets with finite useful lives are reviewed at the end of each reporting period. The useful lives of intangible assets that are not being amortized are reviewed at the end of each reporting period to determine whether events and circumstances continue to support indefinite useful life assessments for those assets. Changes are accounted for as changes in accounting estimates.

Expenditures on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, are recognized in profit or loss as incurred. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development and to use or sell the asset. Other development expenditures are recognized in profit or loss as incurred.

Subsequent expenditures are capitalized only when they increase the future economic benefits embodied in the specific asset to which it relates. All other expenditures, including expenditures on internally generated goodwill and brands, are recognized in profit or loss as incurred.

 

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4. Significant Accounting Policies, Continued

 

  (11) Government grants

Government grants are not recognized unless there is reasonable assurance that the Company will comply with the grant’s conditions and that the grant will be received.

(i) Grants related to assets

Government grants whose primary condition is that the Company purchase, construct or otherwise acquire long-term assets are deducted in calculating the carrying amount of the asset. The grant is recognized in profit or loss over the life of a depreciable asset as a reduction to depreciation expense.

(ii) Grants related to income

Government grants which are intended to compensate the Company for expenses incurred are deducted from the related expenses.

 

  (12) Impairment of non-financial assets

The carrying amounts of the Company’s non-financial assets, other than assets arising from employee benefits, inventories, deferred tax assets and non-current assets held for sale, are reviewed at the end of the reporting period to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill and intangible assets that have indefinite useful lives or that are not yet available for use, irrespective of whether there is any indication of impairment, are tested for impairment annually by comparing their recoverable amount to their carrying amount.

The Company estimates the recoverable amount of an individual asset, if it is impossible to measure the individual recoverable amount of an asset, then the Company estimates the recoverable amount of cash-generating unit (“CGU”). A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. The value in use is estimated by applying a pre-tax discount rate that reflect current market assessments of the time value of money and the risks specific to the asset or CGU for which estimated future cash flows have not been adjusted, to the estimated future cash flows expected to be generated by the asset or CGU.

An impairment loss is recognized in profit or loss if the carrying amount of an asset or a CGU exceeds its recoverable amount.

 

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Goodwill acquired in a business combination is allocated to each CGU that is expected to benefit from the synergies arising from the goodwill acquired. Any impairment identified at the CGU level will first reduce the carrying value of goodwill and then be used to reduce the carrying amount of the other assets in the CGU on a pro rata basis. Except for impairment losses in respect of goodwill which are never reversed, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

 

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4. Significant Accounting Policies, Continued

 

  (13) Leases

The Company classifies and accounts for leases as either a finance or operating lease, depending on the terms. Leases where the Company assumes substantially all of the risks and rewards of ownership are classified as finance leases. All other leases are classified as operating leases.

 

  (i) Finance leases

At the commencement of the lease term, the Company recognizes as finance assets and finance liabilities in its separate statements of financial position, the lower amount of the fair value of the leased property and the present value of the minimum lease payments, each determined at the inception of the lease. Any initial direct costs are added to the amount recognized as an asset.

Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent rents are charged as expenses in the periods in which they are incurred.

The depreciable amount of a leased asset is allocated to each accounting period during the period of expected use on a systematic basis consistent with the depreciation policy the lessee adopts for depreciable assets that are owned. If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the asset is fully depreciated over the shorter of the lease term and its useful life. The Company reviews to determine whether the leased asset may be impaired.

 

  (ii) Operating leases

Leases where the lessor retains a significant portion of the risks and rewards of ownership are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are recognized in profit or loss on a straight-line basis over the period of the lease.

 

  (iii) Determining whether an arrangement contains a lease

Determining whether an arrangement is, or contains, a lease shall be based on the substance of the arrangement and requires an assessment of whether fulfillment of the arrangement is dependent on the use of a specific asset or assets (the asset) and the arrangement conveys a right to use the asset.

At inception or reassessment of the arrangement, the Company separates payments and other consideration required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the Company concludes for a financial lease that it is impracticable to separate the payments reliably, the Company recognizes an asset and a liability at an amount equal to the fair value of the underlying asset that was identified as the subject of the lease. Subsequently, the liability shall be reduced as payments are made and an imputed finance charge on the liability recognized using the purchaser’s incremental borrowing rate of interest.

 

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4. Significant Accounting Policies, Continued

 

  (14) Non-current assets held for sale

Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. In order to be classified as held for sale, the asset (or disposal group) must be available for immediate sale in its present condition and its sale must be highly probable. The assets or disposal group that are classified as non-current assets held for sale are measured at the lower of their carrying amount and fair value less cost to sell. The Company recognizes an impairment loss for any initial or subsequent write-down of an asset (or disposal group) to fair value less costs to sell, and a gain for any subsequent increase in fair value less costs to sell, up to the cumulative impairment loss previously recognized in accordance with K-IFRS No. 1036, ‘Impairment of Assets’.

A non-current asset that is classified as held for sale or part of a disposal group classified as held for sale is not depreciated (or amortized).

 

  (15) Non-derivative financial liabilities

The Company classifies non-derivative financial liabilities into financial liabilities at fair value through profit or loss or other financial liabilities in accordance with the substance of the contractual arrangement and the definitions of financial liabilities. The Company recognizes financial liabilities in the separate statement of financial position when the Company becomes a party to the contractual provisions of the financial liability.

 

  (i) Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss include financial liabilities held for trading or designated as such upon initial recognition. Subsequent to initial recognition, financial liabilities at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. Upon initial recognition, transaction costs that are directly attributable to the acquisition are recognized in profit or loss as incurred.

 

  (ii) Other financial liabilities

Non-derivative financial liabilities other than financial liabilities at fair value through profit or loss are classified as other financial liabilities. At the date of initial recognition, other financial liabilities are measured at fair value minus transaction costs that are directly attributable to the acquisition. Subsequent to initial recognition, other financial liabilities are measured at amortized cost using the effective interest method.

The Company derecognizes a financial liability from the separate statements of financial position when it is extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expires).

 

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4. Significant Accounting Policies, Continued

 

  (16) Employee benefits

 

  (i) Short-term employee benefits

Short-term employee benefits are employee benefits that are due to be settled within 12 months after the end of the period in which the employees render the related service. When an employee has rendered service to the Company during an accounting period, the Company recognizes the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service.

 

  (ii) Other long-term employee benefits

Other long-term employee benefits include employee benefits that are settled beyond 12 months after the end of the period in which the employees render the related service, and are calculated at the present value of the amount of future benefit that employees have earned in return for their service in the current and prior periods. Any changes from remeasurements are recognized through profit or loss in the period in which they arise.

 

  (iii) Retirement benefits: defined contribution plans

When an employee has rendered service to the Company during a period, the Company recognizes the contribution payable to a defined contribution plan in exchange for that service as a liability (accrued expense), after deducting any contribution already paid. If the contribution already paid exceeds the contribution due for service before the end of the reporting period, the Company recognizes that excess as an asset (prepaid expense) to the extent that the prepayment will lead to a reduction in future payments or a cash refund.

 

  (iv) Retirement benefits: defined benefit plans

As of the end of reporting period, defined benefit liabilities relating to defined benefit plans are recognized as present value of defined benefit obligations net of fair value of plan assets.

The calculation is performed annually by an independent actuary using the projected unit credit method. When the fair value of plan assets exceeds the present value of the defined benefit obligations, the Company recognizes an asset, to the extent of the present value of any economic benefits available in the form of refunds from the plan or reduction in the future contributions to the plan.

Remeasurements of the net defined benefit liability comprise of actuarial gains and losses, the return on plan assets excluding amounts included in net interest on the net defined benefit liability, and any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability and recognized in other comprehensive income. The Group determines net interests on net defined benefit liability (asset) by multiplying discount rate determined at the beginning of the annual reporting period and considers changes in net defined benefit liability (asset) from contributions and benefit payments. Net interest costs and other costs relating to the defined benefit plan are recognized through profit or loss.

 

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When the plan amendment or curtailment occurs, gains or losses on amendment or curtailment in benefits for the past service provided are recognized through profit or loss. The Company recognizes gain or loss on a settlement when the settlement of defined benefit plan occurs.

 

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4. Significant Accounting Policies, Continued

 

  (17) Provisions

Provisions are recognized when the Company has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

The risks and uncertainties that inevitably surround many events and circumstances are taken into account in reaching the best estimate of a provision. Where the effect of the time value of money is material, provisions are determined at the present value of the expected future cash flows.

Where some or all of the expenditures required to settle a provision are expected to be reimbursed by another party, the reimbursement shall be recognized when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The reimbursement shall be treated as a separate asset.

Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimates. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed.

A provision shall be used only for expenditures for which the provision was originally recognized.

 

  (18) Foreign currencies

Transactions in foreign currencies are translated to the respective functional currencies of Company entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated to the functional currency using the reporting date’s exchange rate. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined.

Foreign currency differences arising on retranslation are recognized in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments, a financial liability designated as a hedge of the net investment in a foreign operation, or qualifying cash flow hedges, which are recognized in other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.

 

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  (19) Equity capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issuance of ordinary shares and share options are recognized as a deduction from equity, net of any tax effects.

When the Company repurchases its share capital, the amount of the consideration paid is recognized as a deduction from equity and classified as treasury shares. The profits or losses from the purchase, disposal, reissue, or retirement of treasury shares are not recognized as current profit or loss. If the Company acquires and retains treasury shares, the consideration paid or received is directly recognized in equity.

 

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4. Significant Accounting Policies, Continued

 

  (20) Hybrid bond

The Company recognizes a financial instrument issued by the Company as an equity instrument if it does not include contractual obligation to deliver financial assets including cash to the counter party.

 

  (21) Revenue

Revenue from the sale of goods, rendering of services or use of assets is measured at the fair value of the consideration received or receivable. Returns, trade discounts and volume rebates, and are recognized as a reduction of revenue.

(i) Services

Revenue from cellular services consists of revenue from basic charges, voice charges, data charges, data-roaming services and interconnection charges. Such revenues are recognized as services are performed. Revenues received for the activation of service are deferred and recognized over the average customer retention period.

Revenue from services rendered is recognized in profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to surveys of work performed.

 

  (ii) Goods sold

Revenue is recognized when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably.

When two or more revenue generating activities or deliverables are sold under a single arrangement, each deliverable that is considered to be a separate unit of account is accounted for separately. The allocation of consideration from a revenue arrangement to its separate units of account is based on the relative fair values of each unit.

 

  (iii) Customer loyalty programmes

For customer loyalty programmes, the fair value of the consideration received or receivable in respect of the initial sale is allocated between the award credits and the other components of the sale. The amount allocated to the award credits is estimated by reference to the fair value of the services to be provided with respect to the redeemable award credits. The fair value of the services to be provided with respect to the redeemable portion of the award credits granted to the customers in accordance with customer loyalty programmes is estimated taking into account the expected redemption rate and timing of the expected redemption. Considerations allocated to the award credits are deferred and revenue is recognized when the award credits are recovered and the Company performs its obligation to provide the service. The amount of revenue recognized is based on the relative size of the total award credits that are expected to be redeemed and the redeemed award credits in exchange for services.

 

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4. Significant Accounting Policies, Continued

 

  (22) Finance income and finance costs

Finance income comprises interest income on funds invested (including available-for-sale financial assets), dividend income, gains on the disposal of available-for-sale financial assets, changes in the fair value of financial assets at fair value through profit or loss, and gains on hedging instruments that are recognized in profit or loss. Interest income is recognized as it accrues in profit or loss, using the effective interest method. Dividend income is recognized in profit or loss on the date that the Company’s right to receive payment is established.

Finance costs comprise interest expense on borrowings, unwinding of the discount on provisions, changes in the fair value of financial assets at fair value through profit or loss, and losses on hedging instruments that are recognized in profit or loss. Interest expense on borrowings and debentures are recognized in profit or loss using the effective interest rate method.

 

  (23) Income taxes

Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to items recognized directly in equity or in other comprehensive income.

 

  (i) Current tax

Current tax is the expected tax payable or receivable on the taxable profit or loss for the year, using tax rates enacted or substantively enacted at the end of the reporting period and any adjustment to tax payable in respect of previous years. The taxable profit is different from the accounting profit for the period since the taxable profit is calculated excluding the temporary differences, which will be taxable or deductible in determining taxable profit (tax loss) of future periods, and non-taxable or non-deductible items from the accounting profit.

 

  (ii) Deferred tax

Deferred tax is recognized, using the asset-liability method, in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The Company recognizes a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries and associates, except to the extent that the Company is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The Company recognizes a deferred tax asset for all deductible temporary differences arising from investments in subsidiaries and associates, to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.

 

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The carrying amount of a deferred tax asset is reviewed at the end of each reporting period and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized.

 

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4. Significant Accounting Policies, Continued

 

  (23) Income taxes, Continued

 

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset only if (a) there is a legally enforceable right to offset the related current tax liabilities and assets, (b) they relate to income taxes levied by the same tax authority and (c) they intend to settle current tax liabilities and assets on a net basis. Income tax expense in relation to dividend payments is recognized when liabilities relating to the dividend payments are recognized.

 

  (24) Earnings per share

The Company presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period, adjusted for own shares held. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding, adjusted for own shares held, for the effects of all dilutive potential ordinary shares, which comprise convertible notes and share options granted to employees.

 

  (25) New standards and interpretations not yet adopted

The following new standards, interpretations and amendments to existing standards have been published and are mandatory for the Company for annual periods beginning on or after January 1, 2014, and the Company has not early adopted them.

As of December 31, 2014, management is not able to evaluate the impact, if any, of applying these standards on its financial position and results of operations.

1) K-IFRS 1019 ‘Employee Benefits’ – Employee contributions

Amendments to K-IFRS 1019 introduced a practical expedient to accounting for defined benefit plan, when employees or third parties pay contributions if certain criteria are met. According to the amendments, the entity is permitted to recognize those contributions as a reduction of the service cost in the period in which the related service is rendered, instead of forecast future contributions from employees or third parties and attribute them to periods or service as negative benefits. This amendment is effective for annual periods beginning on or after July 1, 2014, with early adoption permitted.

 

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2) K-IFRS 1027 ‘Separate Financial Statements’

Amendments to K-IFRS 1027 introduced equity accounting as a third option in the entity’s separate financial statements, in addition to the existing cost and equity method options. This amendment is effective for annual periods beginning on or after January 1, 2016, with early adoption permitted.

 

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5. Restricted Deposits

Deposits which are restricted in use as of December 31, 2014 and 2013 are summarized as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Short-term financial instruments Charitable fund(*)

     85,500         76,000   

Long-term financial instruments Charitable fund(*)

     —           7,500   

Other

     69         69   

Guarantee deposits

     280         40   
  

 

 

    

 

 

 
85,849      83,609   
  

 

 

    

 

 

 

 

(*) The Company established a trust fund for charitable purposes. Profits from the fund are donated to charitable institutions. As of December 31, 2014, the funds cannot be withdrawn.

 

6. Trade and Other Receivables

 

  (1) Details of trade and other receivables as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)    December 31, 2014  
     Gross
amount
     Allowances for
impairment
     Carrying
amount
 

Current assets:

        

Accounts receivable - trade

     1,665,941         (106,660      1,559,281   

Short-term loans

     68,676         (687      67,989   

Accounts receivable - other

     366,821         (60,831      305,990   

Accrued income

     6,354         —           6,354   
  

 

 

    

 

 

    

 

 

 
  2,107,792      (168,178   1,939,614   

Non-current assets:

Long-term loans

  60,130      (21,673   38,457   

Guarantee deposits

  156,807      —        156,807   
  

 

 

    

 

 

    

 

 

 
  216,937      (21,673   195,264   
  

 

 

    

 

 

    

 

 

 
2,324,729      (189,851   2,134,878   
  

 

 

    

 

 

    

 

 

 

 

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(In millions of won)    December 31, 2013  
     Gross
Amount
     Allowances for
impairment
     Carrying
amount
 

Current assets:

        

Accounts receivable - trade

     1,614,466         (101,328      1,513,138   

Short-term loans

     72,928         (730      72,198   

Accounts receivable - other

     439,209         (50,734      388,475   

Accrued income

     5,682         —           5,682   
  

 

 

    

 

 

    

 

 

 
  2,132,285      (152,792   1,979,493   

Non-current assets:

Long-term loans

  61,613      (21,688   39,925   

Guarantee deposits

  152,057      —        152,057   
  

 

 

    

 

 

    

 

 

 
  213,670      (21,688   191,982   
  

 

 

    

 

 

    

 

 

 
2,345,955      (174,480   2,171,475   
  

 

 

    

 

 

    

 

 

 

 

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6. Trade and Other Receivables, Continued

 

  (2) The movement in allowance for doubtful accounts of trade and other receivables during the years ended December 31, 2014 and 2013 were as follows:

 

(In millions of won)              
     2014      2013  

Balance at January 1

     174,480         153,337   

Increase of bad debt allowances

     43,186         52,835   

Write-offs

     (49,926      (51,063

Collection of receivables previously written-off

     22,111         19,371   
  

 

 

    

 

 

 

Balance at December 31

189,851      174,480   
  

 

 

    

 

 

 

 

  (3) Details of overdue but not impaired, and impaired trade and other receivable as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)    December 31, 2014      December 31, 2013  
     Accounts
receivable -
trade
     Other
receivables
     Accounts
receivable -
trade
     Other
receivables
 

Neither overdue nor impaired

     1,182,627         553,014         1,169,946         622,679   

Overdue but not impaired

     47,663         —           32,705         —     

Impaired

     435,651         105,774         411,815         108,810   
  

 

 

    

 

 

    

 

 

    

 

 

 
  1,665,941      658,788      1,614,466      731,489   

Allowances for doubtful accounts

  (106,660   (83,191   (101,328   (73,152
  

 

 

    

 

 

    

 

 

    

 

 

 
1,559,281      575,597      1,513,138      658,337   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company establishes allowances for doubtful accounts based on the likelihood of recoverability of trade and other receivables based on their aging at the end of the period, past customer default experience, customer credit status, and economic and industrial factors.

 

  (4) The aging of overdue but not impaired accounts receivable as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Less than 1 month

     12,045         9,549   

1 ~ 3 months

     15,222         6,975   

3 ~ 6 months

     8,591         2,565   

More than 6 months

     11,805         13,616   
  

 

 

    

 

 

 
47,663      32,705   
  

 

 

    

 

 

 

 

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7. Investment Securities

 

  (1) Details of short-term investment securities as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Beneficiary certificates(*)

     197,003         101,414   

Current portion of long-term investment securities

     158         628   
  

 

 

    

 

 

 
197,161      102,042   
  

 

 

    

 

 

 

 

(*) The interest distributions arising from beneficiary certificates as of December 31, 2014, were accounted for as accrued income.

 

  (2) Details of long-term available-for-sale financial assets as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Equity securities:

     

Marketable equity securities

     490,741         574,321   

Unlisted equity securities(*1)

     28,696         22,870   

Equity investments(*2)

     73,054         111,792   
  

 

 

    

 

 

 
  592,491      708,983   

Debt securities:

Public bonds(*3)

  158      356   

Investment bonds(*4)

  16,306      20,992   
  

 

 

    

 

 

 
  16,464      21,348   
  

 

 

    

 

 

 

Total

  608,955      730,331   

Less current portion of long-term investment securities

  (158   (628
  

 

 

    

 

 

 

Long-term investment securities

608,797      729,703   
  

 

 

    

 

 

 

 

(*1) Unlisted equity securities whose fair value cannot be measured reliably are recorded at cost.
(*2) Equity investments are recorded at cost.
(*3) Details of maturity for the public bonds as of December 30, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Less than 1 year

     158         356   

 

(*4) During the year ended December 31, 2014, the Company exercised the conversion right for the convertible bonds of NanoEnTek, Inc., which were the Parent Company is able to exercise significant influence on NanoEnTek, Inc. classified as financial assets at fair value through profit or loss. As a result of this transaction, investments in associates have increased by ₩19,180 million and the difference between carrying amount of the financial assets at fair value and fair value of ₩1,352 million is accounted for as finance costs. In addition, during the year ended December 31, 2014, the Company classified the convertible bonds of IRIVER LIMITED, amounting to ₩7,817 million, as financial assets at fair value through profit or loss and the difference between carrying amount and fair value was accounted for as gain or loss relating to financial assets at fair value through profit or loss.

 

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8. Non-current Assets Held for Sale

Non-current assets held for sale as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Investments in associates:

     

TR Entertainment(*1)

     —           2,611   

SK Fans Co., Ltd.(*2)

     —           1,056   
  

 

 

    

 

 

 
—        3,667   
  

 

 

    

 

 

 

 

(*1) A disposal contract for the Company’s entire ownership interests in TR Entertainment was entered into during the year ended December 31, 2013 and the investment in the associate was reclassified to assets classified held for sale and an impairment loss of ₩4,019 million was recognized. During the year ended December 31, 2014, the Company disposed of its investments in TR Entertainment.
(*2) During the year ended December 31, 2013, contract changes for SK Fans Co., Ltd. was made and the Company recognized the difference between the changes and the existing contractual amount as impairment loss. During the year ended December 31, 2014, the Company disposed of its investments in SK Fans Co., Ltd.

 

9. Investments in Subsidiaries and Associates

 

  (1) Investments in subsidiaries and associates as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Investments in subsidiaries

     3,614,750         3,453,988   

Investments in associates

     4,567,019         4,556,133   
  

 

 

    

 

 

 
8,181,769      8,010,121   
  

 

 

    

 

 

 

 

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9. Investments in Subsidiaries and Associates, Continued

 

  (2) Details of investments in subsidiaries as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)    December 31, 2014      December 31,
2013
 
     Number of
shares
     Ownership
(%)
     Carrying
amount
     Carrying
amount
 

SK Telink Co., Ltd.

     1,082,272         83.5       144,740         144,740   

SK Broadband Co., Ltd.

     149,638,354         50.6         1,242,247         1,242,247   

PS&Marketing Corporation(*1)

     66,000,000         100.0         313,934         213,934   

Service Ace Co., Ltd.

     4,385,400         100.0         21,927         21,927   

Service Top Co., Ltd.

     2,856,200         100.0         14,281         14,281   

Network O&S Co., Ltd.

     3,000,000         100.0         15,000         15,000   

SK Planet Co., Ltd.

     72,927,317         100.0         1,538,020         1,538,020   

Neosnetworks Co., Ltd.(*2)

     31,310         66.7         23,968         —     

IRIVER LIMITED(*3)

     15,202,039         49.0         54,503         —     

SK Telecom China Holdings Co., Ltd.

     —           100.0         29,116         29,116   

SKT Vietnam PTE. Ltd.

     180,476,700         73.3         2,364         2,364   

SKT Americas, Inc.(*4)

     122         100.0         83,871         76,764   

YTK Investment Ltd.(*5)

     —           100.0         27,945         69,464   

Atlas Investment(*4)

     —           100.0         77,050         60,347   

SK Global Healthcare Business Group Ltd.

     —           100.0         25,784         25,784   
        

 

 

    

 

 

 
  3,614,750      3,453,988   
        

 

 

    

 

 

 

 

(*1) The Company participated in increasing paid-in capital and additionally obtained 20,000,000 shares.
(*2) During the year ended December 31, 2014, the Company acquired 31,310 shares of Neosnetworks Co., Ltd. (the ownership interest of 66.7%) by purchasing old shares from the pre-existing shareholders and participating in the capital increase. The Company entered into a shareholders’ agreement which granted put options to the pre-existing shareholders for the remaining equity interest of Neosnetworks Co., Ltd. and call options to the Company for those shares if certain conditions are met.
(*3) The Company newly acquired 10,241,722 shares of IRIVER LIMITED and additionally acquired 4,960,317 shares by participating in the capital increase during the year ended December 31, 2014.
(*4) The carrying amount increased due to additional investment during the year ended December 31, 2014.
(*5) For the year ended December 31, 2014, carrying amount in excess of the fair value less cost to sell of ₩41,519 million was recognized as impairment loss.

 

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9. Investments in Subsidiaries and Associates, Continued

 

  (3) Details of investments in associates as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)    December 31, 2014      December 31,
2013
 
     Number of
shares
     Ownership
percentage
(%)
     Carrying
amount
     Carrying
amount
 

SK China Company Ltd.(*1)

     720,000         9.6         47,830         47,830   

HappyNarae Co., Ltd.

     680,000         42.5         12,250         12,250   

Korea IT Fund(*2)

     190         63.3         220,957         220,957   

Wave City Development Co., Ltd.(*1)

     382,000         19.1         1,532         1,532   

KEB HanaCard Co., Ltd.(*3)

     67,627,587         25.4         430,044         400,000   

Daehan Kanggun BcN Co., Ltd.

     1,675,126         29.0         8,340         8,340   

NanoEnTek, Inc.(*4)

     5,870,290         26.0         37,959         11,000   

SK Industrial Development China Co., Ltd.

     77,762,360         21.0         83,691         83,691   

Packet One Network(*1,5)

     2,265,944         13.6         60,706         60,706   

SK Technology Innovation Company(*6)

     14,700         49.0         45,864         85,873   

SK hynix Inc.

     146,100,000         20.1         3,374,725         3,374,725   

SK MENA Investment B.V.

     9,772,686         32.1         14,485         14,485   

SK Latin America Investment S.A.

     9,448,937         32.1         14,243         14,243   

SKY Property Mgmt. Ltd.

     12,639         33.0         145,656         145,656   

SK Wyverns Baseball Club Co., Ltd. and others(*6)

     —           —           68,737         74,845   
        

 

 

    

 

 

 
  4,567,019      4,556,133   
        

 

 

    

 

 

 

 

(*1) Classified as investments in associates because the Company can exercise significant influence over the associate through participation on the associate’s board of directors.
(*2) Classified as an investment in associate because the Company has less than 50% of the voting rights of the board of directors.
(*3) During the year ended December 31, 2014, due to merger between Hana SK Card Co., Ltd., the Company’s associate, and KEB Card Co., Ltd., the Company exchanged 57,647,058 shares of Hana SK Card Co., Ltd., with 67,627,587 shares of the surviving company, KEB HanaCard Co., Ltd.
(*4) The number of shares increased by 2,812,374 and 1,250,786, respectively, due to a conversion of convertible bond and the additional investment during the year ended December 31, 2014.

 

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(*5) The ownership percentage decreased due to unequal increase in paid-in capital during the year ended December 31, 2014.
(*6) During the year ended December 31, 2014, the difference between the recoverable amount and carrying amount of shares of SK Technology Innovation Company and Gemini, amounting to ₩46,116 million, was recognized as impairment loss.

 

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9. Investments in Subsidiaries and Associates, Continued

 

  (4) The market price of investments in listed subsidiaries as of December 31, 2014 and 2013 are as follows:

 

(In millions of won, except for share data)  
     December 31, 2014      December 31, 2013  
   Market
value
per
share
(In won)
     Number of
shares
     Market
price
     Market
value
per
share
(In won)
     Number of
shares
     Market
price
 

IRIVER LIMITED

     6,370         15,202,039         96,837         —           —           —     

SK Broadband Co., Ltd.

     4,380         149,638,354         655,416         4,375         149,638,354         654,668   

 

10. Property and Equipment

 

  (1) Property and equipment as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)       
     December 31, 2014  
     Acquisition cost      Accumulated
depreciation
     Carrying amount  

Land

   448,255         —           448,255   

Buildings

     1,033,307         (464,433      568,874   

Structures

     735,507         (384,592      350,915   

Machinery

     20,502,955         (15,225,026      5,277,929   

Other

     1,213,336         (782,858      430,478   

Construction in progress

     629,455         —           629,455   
  

 

 

    

 

 

    

 

 

 
  24,562,815      (16,856,909   7,705,906   
  

 

 

    

 

 

    

 

 

 
(In millions of won)       
     December 31, 2013  
     Acquisition cost      Accumulated
depreciation
     Carrying amount  

Land

   416,991         —           416,991   

Buildings

     1,015,619         (430,244      585,375   

Structures

     714,814         (351,721      363,093   

Machinery

     18,807,106         (13,862,018      4,945,088   

Other

     1,223,845         (751,013      472,832   

Construction in progress

     676,607         —           676,607   
  

 

 

    

 

 

    

 

 

 
  22,854,982      (15,394,996   7,459,986   
  

 

 

    

 

 

    

 

 

 

 

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10. Property and Equipment, Continued

 

  (2) Changes in property and equipment for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)  
     2014  
     Beginning
balance
     Acquisition      Disposal     Transfer     Depreciation     Ending
balance
 

Land

   416,991         7,502         (12     23,774        —          448,255   

Buildings

     585,375         1,722         (135     16,311        (34,399     568,874   

Structures

     363,093         8,908         (39     11,843        (32,890     350,915   

Machinery

     4,945,088         208,645         (19,955     1,724,311        (1,580,160     5,277,929   

Other

     472,832         1,093,655         (4,074     (1,025,891     (106,044     430,478   

Construction in progress

     676,607         776,239         (14,922     (808,469     —          629,455   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
  7,459,986      2,096,671      (39,137   (58,121   (1,753,493   7,705,906   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
(In millions of won)  
     2013  
     Beginning
balance
     Acquisition      Disposal     Transfer     Depreciation     Ending
balance
 

Land

   395,968         6,865         (21     14,179        —          416,991   

Buildings

     607,973         729         (139     11,045        (34,233     585,375   

Structures

     363,364         17,779         (18     15,315        (33,347     363,093   

Machinery

     4,532,811         205,190         (6,250     1,735,502        (1,522,165     4,945,088   

Other

     579,448         1,162,131         (3,491     (1,157,528     (107,728     472,832   

Construction in progress

     639,526         841,444         (25,105     (779,258     —          676,607   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
7,119,090      2,234,138      (35,024   (160,745   (1,697,473   7,459,986   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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11. Goodwill

Goodwill as of December 31, 2014 and 2013 is as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Goodwill related to acquisition of Shinsegi Telecom, Inc.

     1,306,236         1,306,236   

The recoverable amount of the CGU is based on its value in use calculated by applying the annual discount rate of 6.2% to the estimated future cash flows based on financial budgets for the next five years. An annual growth rate of 1.8% was applied for the cash flows expected to be incurred after five years and is not expected to exceed the Company’s long-term wireless business growth. Management of the Company does not expect the total carrying amount of the CGU will exceed the total recoverable amount due to reasonably possible changes from the major assumptions used to estimate the recoverable amount.

 

12. Intangible Assets

 

  (1) Intangible assets as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)       
     2014  
     Acquisition cost      Accumulated
depreciation
     Accumulated
impairment
     Carrying
amount
 

Frequency use rights

     3,033,879         (1,649,835      —           1,384,044   

Land use rights

     43,192         (29,176      —           14,016   

Industrial rights

     37,770         (27,187      —           10,583   

Development costs

     99,215         (99,215      —           —     

Facility usage rights

     45,636         (29,793      —           15,843   

Memberships(*1)

     81,955         —           (18,490      63,465   

Other(*2)

     1,840,574         (1,400,356      —           440,218   
  

 

 

    

 

 

    

 

 

    

 

 

 
5,182,221      (3,235,562   (18,490   1,928,169   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(In millions of won)       
     2013  
     Acquisition cost      Accumulated
depreciation
     Carrying
amount
 

Frequency use rights

     3,033,879         (1,369,308      1,664,571   

Land use rights

     34,755         (25,003      9,752   

Industrial rights

     32,860         (23,747      9,113   

Development costs

     101,957         (101,957      —     

Facility usage rights

     43,461         (27,306      16,155   

Memberships(*1)

     82,815         —           82,815   

Other(*2)

     1,702,751         (1,245,990      456,761   
  

 

 

    

 

 

    

 

 

 
5,032,478      (2,793,311   2,239,167   
  

 

 

    

 

 

    

 

 

 

 

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12. Intangible Assets, Continued

 

  (1) Intangible assets as of December 31, 2014 and 2013 are as follows, Continued:

 

(*1) Memberships are classified as intangible assets with indefinite useful life and are not amortized.
(*2) Other intangible assets primarily consist of computer software and usage rights to a research facility which the Company built and donated to a university and the Company is given rights-to-use for a definite number of years.

 

  (2) Details of changes in intangible assets for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)  
     2014  
     Beginning
balance
     Acquisition      Disposal     Transfer      Amortization     Impairment
loss
    Ending
balance
 

Frequency use rights

   1,664,571         —           —          —           (280,527     —          1,384,044   

Land use rights

     9,752         8,737         —          —           (4,473     —          14,016   

Industrial rights

     9,113         4,959         (2     —           (3,487     —          10,583   

Facility usage rights

     16,155         1,890         (30     382         (2,554     —          15,843   

Memberships(*)

     82,815         —           (860     —           —          (18,490     63,465   

Other

     456,761         75,474         (592     72,760         (164,185     —          440,218   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
  2,239,167      91,060      (1,484   73,142      (455,226   (18,490   1,928,169   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(*) The Company recognized the difference between recoverable amount and the carrying amount of memberships, amounting to ₩18,490 million as impairment loss for the year ended December 31, 2014.

 

(In millions of won)  
     2013  
     Beginning
balance
     Acquisition      Disposal     Transfer      Amortization     Ending balance  

Frequency use rights(*)

   1,693,868         1,046,833         (814,213     —           (261,917     1,664,571   

Land use rights

     9,815         4,275         (51     —           (4,287     9,752   

Industrial rights

     9,769         1,910         (74     —           (2,492     9,113   

Development costs

     665         —           —          —           (665     —     

Facility usage rights

     16,786         1,930         (75     9         (2,495     16,155   

Memberships

     81,518         2,131         (834     —           —          82,815   

Other

     375,451         53,599         (184     174,086         (146,191     456,761   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
  2,187,872      1,110,678      (815,431   174,095      (418,047   2,239,167   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(*) The Company newly acquired 1.8GHz frequency use rights through auction during the year ended December 31, 2013 and returned the existing 1.8GHz frequency use rights as partial consideration in connection with the new acquisition. The Company recognized ₩199,613 million of loss on disposal of property and equipment and intangible assets with regard to this transaction.

 

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Table of Contents
12. Intangible Assets, Continued

 

  (3) Research and development expenditure recognized as expense for the years ended December 31, 2014 and 2013 are as follows:

 

     2014      2013  

Research and development costs expensed as incurred

       240,562         231,767   

 

  (4) The carrying amount and residual useful lives of frequency usage rights as of December 31, 2014 are as follows, all of which are depreciated on a straight-line basis:

 

(In millions of won)
     Amount     

Description

  

Commencement of
amortization

  

Completion of
amortization

W-CDMA license

   198,542      

Frequency use rights relating to W-CDMA service

   Dec. 2003    Dec. 2016

W-CDMA license

     32,622      

Frequency use rights relating to W-CDMA service

   Oct. 2010    Dec. 2016

800MHz license

     263,536      

Frequency use rights relating to CDMA and LTE service

   Jul. 2011    Jun. 2021

1.8GHz license

     879,340      

Frequency use rights relating to LTE service

   Sep. 2013    Dec. 2021

WiBro license

     10,004      

WiBro service

   Mar. 2012    Mar. 2019
  

 

 

          
  1,384,044   
  

 

 

          

 

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Table of Contents
13. Borrowings and Debentures

 

  (1) Short-term borrowings as of December 31, 2014 and 2013 are as follows:

 

(In millions of won and thousands of U.S. dollars)  

Lender

   Annual
interest rate
(%)
    

Maturity

   December 31,
2014
     December 31,
2013
 

Kookmin Bank

     3.48       Jan. 3, 2014    —           60,000   

Korea Development Bank

     2.48       Apr. 30, 2015      100,000         —     

CP

     3.09       Jan. 3, 2014      —           100,000   
     3.09       Jan. 6, 2014      —           100,000   
     2.37       Jan. 15, 2015      100,000         —     
        

 

 

    

 

 

 
  200,000      260,000   
        

 

 

    

 

 

 

 

  (2) Long-term borrowings as of December 31, 2014 and 2013 are as follows:

 

(In millions of won and thousands of U.S. dollars)  

Lender

   Annual
interest rate
(%)
    

Maturity

   December 31,
2014
     December 31,
2013
 

Export Kreditnamnden(*)

     1.70       Apr. 29, 2022    94,903         99,975   
             (USD 86,338      (USD 94,736
        

 

 

    

 

 

 
  94,903      99,975   

Less present value discount on long-term borrowings

  (2,623   (3,287
        

 

 

    

 

 

 
  92,280      96,688   

Less current portion of long-term borrowings

  (12,133   (11,563
        

 

 

    

 

 

 
80,147      85,125   
        

 

 

    

 

 

 

 

(*) For the years ended December 31, 2014 and 2013, the Company obtained long-term borrowings from Export Kreditnamnden, an export credit agency. The long-term borrowings are redeemed by installments on an annual basis from 2014 to 2022.

 

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Table of Contents
13. Borrowings and Debentures, Continued

 

  (3) Debentures as of December 31, 2014 and 2013 are as follows:

 

(In millions of won, thousands of U.S. dollars, and thousands of other currencies)  
    

Purpose

   Maturity      Annual
interest rate

(%)
   December 31, 2014     December 31, 2013  

Unsecured private bonds

   Refinancing fund      2016       5.00    200,000        200,000   

Unsecured private bonds

        2014       5.00      —          200,000   

Unsecured private bonds

   Other fund      2015       5.00      200,000        200,000   

Unsecured private bonds

        2018       5.00      200,000        200,000   

Unsecured private bonds

        2016       5.54      40,000        40,000   

Unsecured private bonds

        2016       5.92      230,000        230,000   

Unsecured private bonds

   Operating fund      2016       3.95      110,000        110,000   

Unsecured private bonds

        2021       4.22      190,000        190,000   

Unsecured private bonds

   Operating and refinancing fund      2019       3.24      170,000        170,000   

Unsecured private bonds

        2022       3.30      140,000        140,000   

Unsecured private bonds

        2032       3.45      90,000        90,000   

Unsecured private bonds

   Operating fund      2023       3.03      230,000        230,000   

Unsecured private bonds

        2033       3.22      130,000        130,000   

Unsecured private bonds

        2019       3.30      50,000        —     

Unsecured private bonds

        2024       3.64      150,000        —     

Unsecured private bonds(*3)

        2029       4.73      55,188        —     

Unsecured private bonds(*3)

        2029       4.72      55,177        —     

Unsecured private bonds

        2019       2.53      160,000        —     

Unsecured private bonds

  

Refinancing fund

     2021       2.66      150,000        —     

Unsecured private bonds

        2024       2.82      190,000        —     

Foreign global bonds

   Operating fund      2027       6.63      439,680        422,120   
              (USD 400,000     (USD 400,000

Exchangeable bonds (*2)

   Refinancing fund      2014       1.75      —          96,147   
                (USD 91,109

Floating rate notes (*1)

  

Operating fund

     2014       3M Libor + 1.60      —          263,825   
                (USD 250,000

Floating rate notes

        2014       SOR rate + 1.20      —          54,129   
                (SGD 65,000

Swiss unsecured private bonds

        2017       1.75      333,429        356,601   
              (CHF 300,000     (CHF 300,000

Foreign global bonds

        2018       2.13      769,440        738,710   
              (USD 700,000     (USD 700,000

Australian unsecured private bonds

        2017       4.75      269,727        281,988   
              (AUD 300,000     (AUD 300,000

Floating rate notes (*1)

        2020       3M Libor + 0.88      329,760        316,590   
                (USD 300,000     (USD 300,000
           

 

 

   

 

 

 
  4,882,401      4,660,110   

Less discounts on bonds

  (27,534   (34,193
           

 

 

   

 

 

 
  4,854,867      4,625,917   

Less current portion of bonds

  (199,730   (611,140
           

 

 

   

 

 

 
4,655,137      4,014,777   
           

 

 

   

 

 

 

 

(*1) As of December 31, 2014, 3M Libor rate is 0.23%.

 

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Table of Contents
13. Borrowings and Debentures, Continued

 

  (3) Debentures as of December 31, 2014 and 2013 are as follows, Continued:

 

(*2) On April 7, 2009, the Company issued exchangeable bonds with a maturity of five years in the principal amount of USD 332,528,000 for USD 326,397,463 with a coupon rate of 1.75%.

The Company may redeem the principal amount after three years from the issuance date if the market price exceeds 130% of the exchange price during a predetermined period. The exchange right may be exercised during the period from May 18, 2009 to March 24, 2014.

Exchanges of notes for common shares may be prohibited under the Telecommunications Law or other legal restrictions which restrains foreign governments, individuals and entities from owning more than 49% of the Company’s voting stock. If such 49% ownership limitation is violated due to the exercise of exchange rights, the Company will pay the bond holder a cash settlement which will be determined at the average price of one day after a holder exercises its exchange right or the weighted average price for the following five or twenty business days. Unless either previously redeemed or exchanged, the notes are redeemable at 100% of the principal amount at maturity.

As of December 31, 2013, the principal amount and the fair value of the remaining exchangeable bonds were USD 57,046,000 and USD 91,108,508, respectively. Exchange for the remaining entire bonds was claimed during 2013 and redeemed by cash during the year ended December 31, 2014.

 

(*3) The Company settled the difference of the measurement bases of accounting profit or loss between the bonds and related derivatives by appointing the structured bonds as designated financial liabilities at fair value through profit or loss.

The difference between the carrying amount of the designated financial liabilities at fair value through profit or loss and the amount required to pay at maturity is ₩10,365 million as of December 31, 2014.

 

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14. Long-term Payables - Other

 

  (1) As of December 31, 2014 and 2013, long-term payables - other consist of payables related to the acquisition of W-CDMA licenses for 2.1GHz, 800MHZ, 2.3GHz and 1.8GHz frequencies as follows (See Note 12):

 

(In millions of won)  
     Period of
repayment
   Coupon
rate
   Annual effective
interest rate(*)
   December 31,
2014
    December 31,
2013
 

2.1GHz

   2012~2014    3.58%    5.89%    —          17,533   

800MHz

   2013~2015    3.51%    5.69%      69,416        138,833   

2.3GHz

   2014~2016    3.00%    5.80%      5,766        8,650   

1.8GHz

   2012~2021    2.43~3.00%    4.84~5.25%      824,841        942,675   
           

 

 

   

 

 

 
  900,023      1,107,691   

Present value discount on long-term payables – other

  (53,633   (72,170
           

 

 

   

 

 

 
  846,390      1,035,521   

Less current portion of long-term payables – other

    (190,134   (207,668

Current portion of present value discount on long-term payables – other

  745      868   
           

 

 

   

 

 

 

Carrying amount at December 31

657,001      828,721   
           

 

 

   

 

 

 

 

(*) The Company estimated the discount rate based on its credit ratings and corporate bond yield rate as there is no market interest rate available for long-term payables-other.

 

  (2) The repayment schedule of long-term payables – other related to acquisition of W-CDMA licenses as of December 31, 2014 is as follows:

 

(In millions of won)

   Amount  

Less than 1 year

   190,134   

1~3 years

     238,552   

3~5 years

     235,669   

More than 5 years

     235,668   
  

 

 

 
  900,023   
  

 

 

 

 

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15. Provisions

Change in provisions for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)    For the year ended December 31, 2014      As of December 31, 2014  
     Beginning
balance
     Increase      Utilization     Ending
balance
     Current      Non-
current
 

Provision for handset Subsidy(*1)

     53,923         41,802         (68,926     26,799         14,844         11,955   

Provision for restoration(*2)

     32,173         19,699         (539     51,333         35,612         15,721   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
86,096      61,501      (69,465   78,132      50,456      27,676   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(In millions of won)    For the year ended December 31, 2013      As of December 31, 2013  
     Beginning
balance
     Increase      Utilization     Reversal     Ending
balance
     Current      Non-
current
 

Provision for handset subsidy(*1)

   353,383         9,416         (308,876     —          53,923         53,334         589   

Provision for restoration(*2)

     32,791         3,761         (406     (3,973     32,173         13,225         18,948   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 
  386,174      13,177      (309,282   (3,973   86,096      66,559      19,537   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

(*1) The Company has provided handset subsidy to subscribers who purchase handsets on an installment basis and recognized a provision for subsidy amounts which the Company is expected to pay in future periods.
(*2) In the course of the Company’s activities, base station and other assets are utilized on leased premises which are expected to have costs associated with restoring the location where these assets are situated upon ceasing their use on those premises. The associated cash outflows, which are long-term in nature, are generally expected to occur at the dates of exit of the assets to which they relate. These restoration costs are calculated on the basis of the identified costs for the current financial year, extrapolated into the future based on management’s best estimates of future trends in prices, inflation, and other factors, and are discounted to present value at a risk-adjusted rate specifically applicable to the liability. Forecasts of estimated future provisions are revised in light of future changes in business conditions or technological requirements. The Company records these restoration costs as property and equipment and subsequently allocates them to expense using a systematic and rational method over the asset’s useful life, and records the accretion of the liability as a charge to finance costs.

 

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  (2) The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period.

 

    

Key assumptions

Provision for handset subsidy    estimation based on historical service retention period data
Provision for restoration    estimation based on inflation assuming demolition of the relevant assets after six years

 

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16. Defined Benefit Liabilities

 

  (1) Details of defined benefit liabilities as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Present value of defined benefit obligations

   195,130         154,460   

Fair value of plan assets

       (179,575      (131,574
  

 

 

    

 

 

 
15,555      22,886   
  

 

 

    

 

 

 

 

  (2) Principal actuarial assumptions as of December 31, 2014 and 2013 are as follows:

 

     December 31,
2014
    December 31,
2013
 

Discount rate for defined benefit obligations

     2.91     3.96

Expected rate of salary increase

     3.80     4.32

Discount rate for defined benefit obligations is determined based on the Company’s credit ratings and yield rate of corporate bonds with similar maturities for estimated payment term of defined benefit obligations. Expected rate of salary increase is determined based on the Company’s historical promotion index, inflation rate and salary increase ratio in accordance with salary agreement.

 

  (3) Changes in defined benefit obligations for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)    For the year ended December 31  
     2014      2013  

Beginning balance

   154,460         133,098   

Current service cost

     33,457         33,920   

Interest cost

     6,415         4,977   

Remeasurement

     

- Demographic assumption

     —           (981

- Financial assumption

     8,231         (9,099

- Adjustment based on experience

     11,500         3,837   

Benefit paid

     (21,887      (15,566

Others(*)

     2,954         4,274   
  

 

 

    

 

 

 

Ending balance

  195,130      154,460   
  

 

 

    

 

 

 

 

(*) Others for the years ended December 31, 2014 and 2013 include transfer to construction in progress and liabilities succeeded in relation to transfer of executives from affiliates.

 

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16. Defined Benefit Liabilities, Continued

 

  (4) Changes in plan assets for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)       
     2014      2013  

Beginning balance

   131,574         98,147   

Interest income

     5,302         3,535   

Actuarial gain

     1,514         1,578   

Contributions to the plan

     48,500         34,000   

Benefit paid

     (7,315      (5,748

Others

     —           62   
  

 

 

    

 

 

 

Ending balance

  179,575      131,574   
  

 

 

    

 

 

 

The Company expects to make a contribution of ₩41,725 million to the defined benefit plans during the next financial year.

 

  (5) Expenses recognized in profit and loss (included in labor cost in the accompanying statements of income) and capitalized into construction-in-progress for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)       
     2014      2013  

Current service cost

   33,457         33,920   

Net Interest cost

     1,113         1,442   
  

 

 

    

 

 

 
  34,570      35,362   
  

 

 

    

 

 

 

The above costs are recognized in labor cost, research and development, or capitalized into construction-in-progress.

 

  (6) Details of plan assets as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Equity instruments

   951         405   

Debt instruments

     52,614         33,320   

Short-term financial instruments, etc.

     126,010         97,849   
  

 

 

    

 

 

 
  179,575      131,574   
  

 

 

    

 

 

 

Actual return on plan assets for the years ended December 31, 2014 and 2013 amounted to ₩6,816 million and ₩5,113 million, respectively.

 

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16. Defined Benefit Liabilities, Continued

 

  (7) As of December 31, 2014, effects on defined benefit obligations if each of significant actuarial assumptions changes within expectable and reasonable range are as follows:

 

(In millions of won)              
     Increase      Decrease  

Discount rate (if changed by 0.5%)

     (7,253      7,786   

Expected salary increase rate (if changed by 0.5%)

     7,857         (7,383

The sensitivity analysis does not consider dispersion of all cash flows that are expected from the plan and provides approximate values of sensitivity for the assumptions used.

Weighted average durations of defined benefit obligations as of December 31, 2014 and 2013 are 8.42 years and 8.49 years, respectively.

 

17. Derivative Instruments

 

  (1) Currency swap contracts under cash flow hedge accounting as of December 31, 2014 are as follows:

 

(In thousands of foreign currencies)  

Borrowing

date

  

Hedged item

   Hedged risk    Contract
type
   Financial
institution
   Duration of
contract
 

Jul. 20,

2007

  

Fixed-to-fixed cross currency swap (U.S. dollar denominated bonds face value of USD 400,000)

   Foreign currency
risk
   Currency
swap
   Morgan Stanley and
five other banks
    
 
Jul. 20, 2007 ~
Jul. 20, 2027
  
  

Jun. 12,

2012

  

Fixed-to-fixed cross currency swap (Swiss Franc denominated bonds face value of CHF 300,000)

   Foreign currency
risk
   Currency
swap
   Citibank and five
other banks
    
 
Jun. 12, 2012 ~
Jun. 12, 2017
  
  

Nov. 1,

2012

  

Fixed-to-fixed cross currency swap (U.S. dollar denominated bonds face value of USD 700,000)

   Foreign currency
risk
   Currency
swap
   Barclays and nine
other banks
    
 
Nov. 1, 2012 ~
May. 1, 2018
  
  

Jan. 17,

2013

  

Fixed-to-fixed cross currency swap (Australia dollar denominated bonds face value of AUD 300,000)

   Foreign currency
risk
   Currency
swap
   BNP Paribas and
three other banks
    
 
Jan. 17, 2013 ~
Nov. 17, 2017
  
  

Mar. 7,

2013

  

Floating-to-fixed cross currency interest rate swap (U.S. dollar denominated bonds face value of USD 300,000)

   Foreign currency
risk and the
interest rate risk
   Currency
interest rate
swap
   DBS Bank     
 
Mar. 7, 2013 ~
Mar. 7, 2020
  
  

Dec. 16,

2013

  

Fixed-to-fixed cross currency swap (Australia dollar denominated bonds face value of USD 86,338)

   Foreign currency
risk
   Currency
swap
   Deutsche bank     
 
Dec. 16, 2013 ~
Apr. 29, 2022
  
  

 

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17. Derivative Instruments, Continued

 

  (2) As of December 31, 2014, fair values of the above derivatives recorded in assets or liabilities and details of derivative instruments are as follows:

 

(In millions of won and thousands of foreign currencies)                                       
     Fair value  
     Cash flow hedge                

Hedged item

   Accumulated
gain (loss) on
valuation of
derivatives
    Tax
effect
    Accumulated
foreign
currency
translations
(gain) loss
    Others
(*)
     Held for
trading
purpose
     Total  

Non-current assets:

              

Structured bond (face value of KRW 100,000)

   —          —          —          —           8,713         8,713   

Fixed-to-fixed cross currency swap (U.S. dollar denominated bonds face value of USD 400,000)

       (40,360     (12,886     (17,545     129,806         —           59,015   
              

 

 

 

Total assets

67,728   
              

 

 

 

Non-current liabilities:

Fixed-to-fixed cross currency swap (Swiss Franc denominated bonds face value of CHF 300,000)

(8,725   (2,786   (29,993   —        —        (41,504

Fixed-to-fixed cross currency swap (U.S. dollar denominated bonds face value of USD 700,000)

  (22,903   (7,312   6,058      —        —        (24,157

Fixed-to-fixed cross currency swap (Australia dollar denominated bonds face value of AUD 300,000)

  2,588      826      (65,496   —        —        (62,082

Floating-to-fixed cross currency interest rate swap (U.S. dollar denominated bonds face value of USD 300,000)

  (4,369   (1,395   4,668      —        —        (1,096

Fixed-to-fixed long-term borrowings (U.S. dollar denominated bonds face value of USD 86,388)

  (4,439   (1,417   3,806      —        —        (2,050
              

 

 

 

Total liabilities

    (130,889
              

 

 

 

 

(*) Cash flow hedge accounting has been applied to the relevant contract from May 12, 2010. Others represent gain on valuation of currency swap incurred prior to the application of hedge accounting and was recognized through profit or loss prior to the year ended December 31, 2013.

 

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18. Share Capital and Capital Surplus and Other Capital Adjustments

The Company’s outstanding share capital consists entirely of common stock with a par value of ₩500. The number of authorized, issued and outstanding common shares and capital surplus (deficit) and other capital adjustments as of December 31, 2014 and 2013 are as follows:

 

(In millions of won, except for share data)              
     December 31, 2014      December 31,
2013
 

Authorized shares

       220,000,000         220,000,000   

Issued shares(*)

     80,745,711         80,745,711   

Share capital

     

Common stock

   44,639         44,639   

Capital surplus and other capital adjustments:

     

Paid-in surplus

     2,915,887         2,915,887   

Treasury stock (Note 19)

     (2,139,683      (2,139,683

Loss on disposal of treasury stock

     (18,087      (18,087

Hybrid bond (Note 20)

     398,518         398,518   

Others

     (722,741      (722,741
  

 

 

    

 

 

 
433,894      433,894   
  

 

 

    

 

 

 

 

(*) During the years ended December 31, 2003, 2006 and 2009, the Company retired 7,002,235 shares, 1,083,000 shares and 448,000 shares, respectively, of treasury stock which reduced its retained earnings before appropriation in accordance with the Korean Commercial Law. As a result, the Company’s outstanding shares have decreased without change in the share capital.

There were no changes in share capital for the year ended December 31, 2014 and 2013.

Changes in number of shares outstanding for the years ended December 31, 2014 and 2013 are as follows:

 

(In shares)    2014      2013  
     Issued
shares
     Treasury
stock
     Outstanding
shares
     Issued
shares
     Treasury
stock
    Outstanding
shares
 

Beginning issued shares

     80,745,711         9,809,375         70,936,336         80,745,711         11,050,712        69,694,999   

Disposal of treasury stock

     —           —           —           —           (1,241,337     1,241,337   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Ending issued shares

  80,745,711      9,809,375      70,936,336      80,745,711      9,809,375      70,936,336   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
19. Treasury Stock

The Company acquired treasury stock to provide stock dividends, issue new stocks, merge with Shinsegi Telecom, Inc. and SK IMT Co, Ltd., increase shareholder value and to stabilize its stock prices when needed. Treasury stock as of December 31, 2014 and 2013 are as follows:

 

(In millions of won, shares)              
     December 31,
2014
     December 31,
2013
 

Number of shares

     9,809,375         9,809,375   

Amount

     2,139,683         2,139,683   

 

20. Hybrid Bonds

Hybrid bonds classified as equity as of December 31, 2014 is as follows:

 

(In millions of won)  
     Type    Issuance date    Maturity   Annual
interest rate
(%)
    Amount  

Private hybrid bonds

   Blank coupon
unguaranteed
subordinated bond
   June 7, 2013    June 7, 2073(*1)     4.21 (*2)      400,000   

Issuance costs

               (1,482
            

 

 

 
398,518   
            

 

 

 

Hybrid bonds issued by the Company are classified as equity as there is no contractual obligation for delivery of financial assets to the bond holders. These are subordinated bonds which rank before common shareholders in the event of a liquidation or reorganization of the Company.

 

(*1) The Company has a right to extend the maturity under the same issuance terms without any notice or announcement. The Company also has the right to defer interest payment at its sole discretion.
(*2) Annual interest rate is adjusted after five years from the issuance date.

 

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21. Retained Earnings

 

  (1) Retained earnings as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Appropriated:

     

Legal reserve

   22,320         22,320   

Reserve for research & manpower development

     151,534         155,767   

Reserve for business expansion

     9,476,138         9,376,138   

Reserve for technology development

     2,416,300         2,271,300   
  

 

 

    

 

 

 
  12,066,292      11,825,525   

Unappropriated

  930,498      840,174   
  

 

 

    

 

 

 
  12,996,790      12,665,699   
  

 

 

    

 

 

 

 

  (2) Legal reserve

The Korean Commercial Act requires the Company to appropriate as a legal reserve at least 10% of cash dividends paid for each accounting period until the reserve equals 50% of outstanding share capital. The legal reserve may not be utilized for cash dividends, but may only be used to offset a future deficit, if any, or may be transferred to share capital.

 

  (3) Reserve for research & manpower development

The reserve for research and manpower development was appropriated in order to recognize certain tax deductible benefits through the early recognition of future expenditures for tax purposes. These reserves will be reversed from appropriated and retained earnings in accordance with the relevant tax laws. Such reversal will be included in taxable income in the year of reversal.

 

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22. Statements of Appropriation of Retained Earnings

Details of appropriations of retained earnings for the years ended December 31, 2014 and 2013 are as follows:

Date of appropriation for 2014: March 20, 2015

Date of appropriation for 2013: March 21, 2014

 

(In millions of won)

             
     2014      2013  

Unappropriated retained earnings:

     

Unappropriated retained earnings

   3,542         3,018   

Remeasurement of defined benefit liabilities

     (13,808      5,927   

Interim dividends - ₩1,000 per share, 200% on par value

     (70,937      (70,508

Interest on hybrid bond

     (16,840      (8,420

Profit

       1,028,541         910,157   
  

 

 

    

 

 

 
  930,498      840,174   
  

 

 

    

 

 

 

Transfer from voluntary reserves:

Reserve for research and manpower development

  64,233      64,233   
  

 

 

    

 

 

 

Appropriation of retained earnings:

Reserve for research and manpower development

  —        60,000   

Reserve for business expansion

  195,000      100,000   

Reserve for technology development

  200,000      145,000   

Cash dividends – ₩8,400 per share, 1,680% on par value

  595,865      595,865   
  

 

 

    

 

 

 
  990,865      900,865   
  

 

 

    

 

 

 

Unappropriated retained earnings to be carried over to subsequent year

3,866      3,542   
  

 

 

    

 

 

 

 

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23. Reserves

 

  (1) Details of reserves, net of taxes, as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Unrealized fair value of available-for-sale financial assets

     145,106         211,209   

Unrealized fair value of derivatives

     (78,208      (40,033
  

 

 

    

 

 

 
66,898      171,176   
  

 

 

    

 

 

 

 

  (2) Changes in reserves for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)    2014  
     Net change in
unrealized fair
value of
available-for-
sale financial
assets
     Net change in
unrealized
fair value of
derivatives
     Total  

Balance at January 1, 2014

     211,209         (40,033      171,176   

Changes

     (87,207      (50,363      (137,570

Tax effect

     21,104         12,188         33,292   
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2014

  145,106      (78,208   66,898   
  

 

 

    

 

 

    

 

 

 

 

(In millions of won)    2013  
     Net change in
unrealized fair
value of
available-for-
sale financial
assets
     Net change in
unrealized
fair value of
derivatives
     Total  

Balance at January 1, 2013

     206,414         (51,826      154,588   

Changes

     6,326         15,058         21,384   

Tax effect

     (1,531      (3,265      (4,796
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2013

  211,209      (40,033   171,176   
  

 

 

    

 

 

    

 

 

 

 

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23. Reserves, Continued

 

  (3) Details of change in unrealized fair value of available-for-sale financial assets for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)    2014  
     Before taxes      Income tax
effect
     After taxes  

Balance at January 1, 2014

     278,640         (67,431      211,209   

Amount recognized as other comprehensive income during the year

     (77,367      18,723         (58,644

Amount reclassified to profit or loss

     (9,840      2,381         (7,459
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2014

191,433      (46,327   145,106   
  

 

 

    

 

 

    

 

 

 

 

(In millions of won)    2013  
     Before taxes      Income tax
effect
     After taxes  

Balance at January 1, 2013

   272,314         (65,900      206,414   

Amount recognized as other comprehensive income during the year

     6,326         (1,531      4,795   
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2013

  278,640      (67,431   211,209   
  

 

 

    

 

 

    

 

 

 

 

  (4) Details of change in unrealized fair value of derivatives for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)    2014  
     Before taxes      Income tax
effect
     After taxes  

Balance at January 1, 2014

   (52,814      12,781         (40,033

Amount recognized as other comprehensive income during the year

     (42,608      10,311         (32,297

Amount reclassified to profit or loss

     (7,755      1,877         (5,878
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2014

  (103,177   24,969      (78,208
  

 

 

    

 

 

    

 

 

 

 

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(In millions of won)    2013  
     Before taxes      Income tax
effect
     After taxes  

Balance at January 1, 2013

   (67,871      16,045         (51,826

Amount recognized as other comprehensive income during the year

     12,404         (3,002      9,402   

Amount reclassified to profit or loss

     2,654         (263      2,391   
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2013

  (52,813   12,780      (40,033
  

 

 

    

 

 

    

 

 

 

 

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24. Other Operating Expenses

Details of other operating expenses for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)    2014      2013  

Other Operating Expenses:

     

Communication expenses

   42,055         49,789   

Utilities

     182,790         168,073   

Taxes and dues

     21,500         19,184   

Repair

     202,824         191,489   

Research and development

     240,562         231,767   

Training

     31,768         27,847   

Bad debt for accounts receivables – trade

     27,313         32,051   

Other

     60,989         48,743   
  

 

 

    

 

 

 
  809,801      768,943   
  

 

 

    

 

 

 

 

25. Other Non-operating Income and Expenses

Details of other non-operating income and expenses for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)    2014      2013  

Other Non-operating Income:

     

Gain on disposal of property and equipment and intangible assets

   3,676         1,869   

Others(*1)

     33,746         45,749   
  

 

 

    

 

 

 
37,422      47,618   
  

 

 

    

 

 

 

Other Non-operating Expenses:

Loss on disposal of property and equipment and intangible assets

17,493      233,611   

Impairment loss on property and equipment, and intangible assets

  18,490      —     

Donations

  67,130      59,820   

Bad debt for accounts receivable – other

  15,873      20,784   

Others(*2)

  65,191      103,037   
  

 

 

    

 

 

 
  184,177      417,252   
  

 

 

    

 

 

 

 

(*1) Others for the year ended December 31, 2014 primarily consists of VAT refund.
(*2) Others for the year ended December 31, 2014 and 2013 primarily consists of penalties.

 

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26. Finance Income and Costs

 

  (1) Details of finance income and costs for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)    2014      2013  

Finance Income:

     

Interest income

     25,015         32,265   

Dividends

     13,048         20,640   

Gain on foreign currency transactions

     13,505         9,260   

Gain on foreign currency translations

     1,373         699   

Gain relating to financial assets at fair value through profit or loss

     2,817         5,177   

Gain on disposal of long-term investment securities

     9,807         5,439   

Gain on valuation of derivatives

     8,713         —     

Gain on settlement of derivatives

     7,998         7,716   
  

 

 

    

 

 

 
82,276      81,196   
  

 

 

    

 

 

 

 

(In millions of won)              
     2014      2013  

Finance Costs:

     

Interest expense

   265,195         274,190   

Loss on foreign currency transactions

     15,526         13,607   

Loss on foreign currency translations

     167         662   

Loss on disposal of long-term investment securities

     57         73   

Loss on settlement of derivatives

     672         —     

Loss relating to financial assets at fair value through profit or loss

     1,352         —     

Loss relating to financial liabilities at fair value through profit or loss(*)

     10,369         134,232   
  

 

 

    

 

 

 
  293,338      422,764   
  

 

 

    

 

 

 

 

(*) Loss relating to financial liability at fair value through profit or loss for the year ended December 31, 2013 represents 1) valuation loss related to exchangeable bond (issue price of USD 326,397,463) as a result of increase in stock price of the Company and increase in foreign exchange rate, and 2) loss on repayment of debentures upon the claim for exchange.

 

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26. Finance Income and Costs, Continued

 

  (2) Details of interest income included in finance income for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     2014      2013  

Interest income on cash equivalents and deposits

   12,428         18,677   

Interest income on installment receivables and others

     12,587         13,588   
  

 

 

    

 

 

 
  25,015      32,265   
  

 

 

    

 

 

 

 

  (3) Details of interest expense included in finance costs for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     2014      2013  

Interest expense on bank overdrafts and borrowings

   20,030         22,786   

Interest expense on debentures

     198,317         211,124   

Others

     46,848         40,280   
  

 

 

    

 

 

 
  265,195      274,190   
  

 

 

    

 

 

 

 

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26. Finance Income and Costs, Continued

 

  (4) Finance income and costs by categories of financial instruments for the years ended December 31, 2014 and 2013 are as follows. Bad debt expenses (reversal of allowance for doubtful accounts) for accounts receivable – trade, loans and receivables are excluded and are explained in Note 6.

 

  (i) Finance income and costs

 

(In millions of won)              
     2014      2013  
     Finance
income
     Finance
costs
     Finance
income
     Finance
costs
 

Financial Assets:

           

Financial asset at fair value through profit or loss

   11,530         1,352         5,177         —     

Available-for-sale financial assets

     23,981         57         27,061         73   

Loans and receivables

     35,377         15,682         40,502         14,219   

Derivative designated as hedging instrument

     7,998         672         7,716         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Sub-total

  78,886      17,763      80,456      14,292   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liabilities:

Financial liability at fair value through profit or loss

  —        10,369      —        134,232   

Financial liability measured as amortised cost

  3,390      265,206      740      274,240   
  

 

 

    

 

 

    

 

 

    

 

 

 

Sub-total

  3,390      275,575      740      408,472   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  82,276      293,338      81,196      422,764   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (ii) Other comprehensive income (loss)

 

(In millions of won)              
     2014      2013  

Financial Assets:

     

Available-for-sale financial assets

   (66,103      4,795   

Derivative designated as hedging instrument

     (16,374      12,810   
  

 

 

    

 

 

 

Sub-total

  (82,477   17,605   
  

 

 

    

 

 

 

Financial Liabilities:

Derivative designated as hedging instrument

  (21,801   (1,017
  

 

 

    

 

 

 

Sub-total

  (21,801   (1,017
  

 

 

    

 

 

 

Total

  (104,278   16,588   
  

 

 

    

 

 

 

 

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  (5) Details of impairment losses for financial assets for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     2014      2013  

Bad debt for accounts receivable - trade

   27,313         32,051   

Bad debt for accounts receivable - other

     15,873         20,784   
  

 

 

    

 

 

 
  43,186      52,835   
  

 

 

    

 

 

 

 

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27. Income Tax Expense

 

  (1) Income tax expenses for the years ended December 31, 2014 and 2013 consist of the following:

 

(In millions of won)              
     2014      2013  

Current tax expense

     

Current tax payable

   169,456         173,915   

Adjustments recognized in the period for current tax of prior periods

     (14,223      (24,665
  

 

 

    

 

 

 
  155,233      149,250   
  

 

 

    

 

 

 

Deferred tax expense

Changes in net deferred tax assets

  100,275      168,324   

Tax directly charged to equity

  37,701      (6,934
  

 

 

    

 

 

 
  137,976      161,390   
  

 

 

    

 

 

 

Income tax for continuing operation

  293,209      310,640   
  

 

 

    

 

 

 

 

  (2) The difference between income taxes computed using the statutory corporate income tax rates and the recorded income taxes for the years ended December 31, 2014 and 2013 is attributable to the following:

 

(In millions of won)              
     2014      2013  

Income taxes at statutory income tax rate

   319,401         294,971   

Non-taxable income

     (33,653      (34,067

Non-deductible expenses

     60,082         65,717   

Tax credit and tax reduction

     (33,581      (36,290

Changes in unrealizable deferred taxes

     21,982         52,346   

Others (income tax refund, etc.)

     (41,022      (32,037
  

 

 

    

 

 

 

Income tax for continuing operation

  293,209      310,640   
  

 

 

    

 

 

 

 

  (3) Deferred taxes directly charged to (credited from) equity for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     2014      2013  

Net change in fair value of available-for-sale financial assets

   21,104         (1,531

Gain or loss on valuation of derivatives

     12,188         (3,265

Remeasurement of defined benefit liabilities

     4,409         (1,893

Loss on disposal of treasury stock

     —           (245
  

 

 

    

 

 

 
  37,701      (6,934
  

 

 

    

 

 

 

 

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27. Income Tax Expense, Continued

 

 

  (4) Details of changes in deferred tax assets (liabilities) for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)    2014  
     Beginning      Deferred tax
expense
(benefit)
     Directly added
to (deducted
from) equity
     Ending  

Deferred tax assets (liabilities) related to temporary differences

           

Allowance for doubtful accounts

   43,352         3,320         —           46,672   

Accrued interest income

     (1,375      (163      —           (1,538

Available-for-sale financial assets

     (9,725      (336      21,104         11,043   

Investments in subsidiaries and associates

     85,298         (16,246      —           69,052   

Property and equipment (depreciation)

       (308,657      (35,831      —           (344,488

Provisions

     13,049         (6,564      —           6,485   

Retirement benefit obligation

     7,906         (2,929      4,409         9,386   

Gain or loss on valuation of derivatives

     12,781         —           12,188         24,969   

Gain or loss on foreign currency translation

     19,580         (253      —           19,327   

Tax free reserve for research and manpower development

     (30,064      30,064         —           —     

Goodwill relevant to leased line

     31,025         (26,592      —           4,433   

Unearned revenue (activation fees)

     53,412         (27,435      —           25,977   

Others

     38,817         (55,011      —           (16,194
  

 

 

    

 

 

    

 

 

    

 

 

 
  (44,601   (137,976   37,701      (144,876
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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27. Income Tax Expense, Continued

 

 

  (4) Details of changes in deferred tax assets (liabilities) for the years ended December 31, 2014 and 2013 are as follows, Continued:

 

(In millions of won)    2013  
     Beginning      Deferred tax
expense
(benefit)
     Directly added
to (deducted
from) equity
     Ending  

Deferred tax assets (liabilities) related to temporary differences

           

Allowance for doubtful accounts

   36,945         6,407         —           43,352   

Accrued interest income

     (1,004      (371      —           (1,375

Available-for-sale financial assets

     12,156         (20,350      (1,531      (9,725

Investments in subsidiaries and associates

     81,416         3,882         —           85,298   

Property and equipment (depreciation)

       (235,440      (73,217      —           (308,657

Provisions

     85,519         (72,470      —           13,049   

Retirement benefit obligation

     9,573         226         (1,893      7,906   

Gain or loss on valuation of derivatives

     16,046         —           (3,265      12,781   

Gain or loss on foreign currency translation

     19,706         (126      —           19,580   

Tax free reserve for research and manpower development

     (31,089      1,025         —           (30,064

Goodwill relevant to leased line

     68,675         (37,650      —           31,025   

Unearned revenue (activation fees)

     97,110         (43,698      —           53,412   

Others

     (35,890      74,952         (245      38,817   
  

 

 

    

 

 

    

 

 

    

 

 

 
123,723      (161,390   (6,934   (44,601
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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  (5) Details of temporary differences not recognized as deferred tax assets in the statements of financial position as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Allowance for doubtful accounts

   77,405         77,405   

Investments in subsidiaries and associates

     717,455         626,620   

Other temporary differences

     51,150         51,150   
  

 

 

    

 

 

 
  846,010      755,175   
  

 

 

    

 

 

 

 

28. Earnings per Share

 

  (1) Basic earnings per share

 

  1) Basic earnings per share for the years ended December 31, 2014 and 2013 are calculated as follows:

 

(In millions of won, shares)              
     2014      2013  

Profit for the year

   1,028,541         910,157   

Interest on hybrid bond

     (16,840      (8,420
  

 

 

    

 

 

 

Profit for the year on common shares

  1,011,701      901,737   

Weighted average number of common shares outstanding

    70,936,336      70,247,592   
  

 

 

    

 

 

 

Basic earnings per share (In won)

14,262      12,837   
  

 

 

    

 

 

 

 

  2) The weighted average number of common shares outstanding for the years ended December 31, 2014 and 2013 are calculated as follows:

 

(In millions of won, shares)              
     2014      2013  

Outstanding common shares at January 1, 2014

   80,745,711         80,745,711   

Effect of treasury stock

     (9,809,375      (10,498,119
  

 

 

    

 

 

 

Weighted average number of common shares outstanding at December 31, 2014

  70,936,336      70,247,592   
  

 

 

    

 

 

 

 

  (2) Diluted earnings per share

For the year ended December 31, 2014, there were no potentially dilutive shares. The number of common shares outstanding in respect of the exchangeable common shares of exchangeable bonds is excluded from the diluted earnings per share calculation for the year ended December 31, 2013 as effect of exchangeable bond would have been anti-dilutive (diluted shares of 688,744). Therefore, diluted earnings per share for the years ended December 31, 2014 and 2013 are the same as basic earnings per share.

 

 

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29. Dividends

 

  (1) Details of dividends declared

Details of dividend declared for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won, except for face value and share data)  

Year

  

Dividend type

   Number of
shares
outstanding
     Face
value (In
won)
     Dividend
ratio
    Dividends  

2014

   Cash dividends (Interim)      70,936,336         500         200   70,937   
   Cash dividends (Year-end)      70,936,336         500         1,680     595,865   
             

 

 

 
666,802   
             

 

 

 

2013

Cash dividends (Interim)   70,508,482      500      200 70,508   
Cash dividends (Year-end)   70,936,336      500      1,680   595,865   
             

 

 

 
  666,373   
             

 

 

 

 

  (2) Dividends payout ratio

Dividends payout ratios for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)                     

Year

   Dividends calculated      Profit      Dividends payout
ratio
 

2014

   666,802         1,028,541         64.83

2013

   666,373         910,157         73.22

 

  (3) Dividends yield ratio

Dividends yield ratios for the years ended December 31, 2014 and 2013 are as follows:

 

 

(In won)                          

Year

   Dividend type    Dividend per
share
     Closing price at
settlement
     Dividend yield
ratio
 

2014

   Cash dividends      9,400         268,000         3.51

2013

   Cash dividends      9,400         230,000         4.09

 

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30. Categories of Financial Instruments

 

  (1) Financial assets by categories as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)  
     December 31, 2014  
     Financial
assets at fair
value
through
profit or loss
     Available-
for-sale
financial
assets
     Loans and
receivables
     Derivative
financial
instruments
designated as
hedged item
     Total  

Cash and cash equivalents

   —           —           248,311         —           248,311   

Financial instruments

     —           —           143,069         —           143,069   

Short-term investment securities

     —           197,161         —           —           197,161   

Long-term investment securities(*1)

     7,817         600,980         —           —           608,797   

Accounts receivable - trade

     —           —           1,559,281         —           1,559,281   

Loans and other receivables(*2)

     —           —           575,597         —           575,597   

Derivative financial assets

     8,713         —           —           59,015         67,728   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  16,530      798,141      2,526,258      59,015      3,399,944   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(In millions of won)  
     December 31, 2013  
     Financial
assets at fair
value
through
profit or loss
     Available-
for-sale
financial
assets
     Loans and
receivables
     Derivative
financial
instruments
designated as
hedged item
     Total  

Cash and cash equivalents

   —           —           448,459         —           448,459   

Financial instruments

     —           —           173,569         —           173,569   

Short-term investment securities

     —           102,042         —           —           102,042   

Long-term investment securities(*1)

     20,532         709,171         —           —           729,703   

Accounts receivable - trade

     —           —           1,513,138         —           1,513,138   

Loans and other receivables(*2)

     —           —           658,337         —           658,337   

Derivative financial assets

     —           —           —           41,712         41,712   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  20,532      811,213      2,793,503      41,712      3,666,960   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(*1) Long-term investment securities were designated as financial assets at fair value through profit of loss since the embedded derivative (conversion right option), which should be separated from the host contract, could not be separately measured.

 

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30. Categories of Financial Instruments, Continued

 

  (1) Financial assets by categories as of December 31, 2014 and 2013 are as follows, Continued:

 

(*2) Details of loans and other receivables as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     2014      2013  

Short-term loans

   67,989         72,198   

Accounts receivable – other

     305,990         388,475   

Accrued income

     6,354         5,682   

Long-term loans

     38,457         39,925   

Guarantee deposits

     156,807         152,057   
  

 

 

    

 

 

 
  575,597      658,337   
  

 

 

    

 

 

 

 

  (2) Financial liabilities by categories as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)                            
     December 31, 2014  
     Financial
liabilities at
fair value
through
profit or loss
     Financial
liabilities
measured
at
amortized
cost
     Derivative
financial
instruments
designated
as hedged
item
     Total  

Derivative financial liabilities

   —           —           130,889         130,889   

Borrowings

     —           292,280         —           292,280   

Debentures (*1)

     110,365         4,744,502         —           4,854,867   

Accounts payable – other and others (*3)

     —           2,582,608         —           2,582,608   
  

 

 

    

 

 

    

 

 

    

 

 

 
  110,365      7,619,390      130,889      7,860,644   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(In millions of won)                            
     December 31, 2013  
     Financial
liabilities at
fair value
through
profit or
loss
     Financial
liabilities
measured
at
amortized
cost
     Derivative
financial
instruments
designated
as hedged
item
     Total  

Derivative financial liabilities

   —           —           121,380         121,380   

Borrowings

     —           356,688         —           356,688   

Debentures (*2)

     96,147         4,529,770         —           4,625,917   

Accounts payable – other and others (*3)

     —           3,279,604         —           3,279,604   
  

 

 

    

 

 

    

 

 

    

 

 

 
  96,147      8,166,062      121,380      8,383,589   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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30. Categories of Financial Instruments, Continued

 

  (2) Financial liabilities by categories as of December 31, 2014 and 2013 are as follows, Continued:

 

 

(*1) Bonds classified as financial liabilities at fair value through profit or loss as of December 31, 2014 are structured bonds and they were designated as financial liabilities at fair value through profit or loss in order to settle the difference of the measurement bases of accounting profit or loss between the related derivatives and bonds.
(*2) The entire amount of debentures was designated as financial liabilities at fair value through profit or loss as the fair value of the embedded derivative (conversion right option), which should be separated from the main contract, could not be separately measured.
(*3) Details of accounts payable and other payables as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     December 31,
2014
     December 31,
2013
 

Accounts payable – other

   1,086,485         1,556,201   

Withholdings

     3         3   

Accrued expenses

     615,488         653,742   

Current portion of long-term payables – other

     189,389         206,800   

Long-term payables – other

     657,001         828,721   

Other non-current liabilities

     34,242         34,137   
  

 

 

    

 

 

 
  2,582,608      3,279,604   
  

 

 

    

 

 

 

 

31. Financial Risk Management

 

  (1) Financial risk management

The Company is exposed to credit risk, liquidity risk and market risk. Market risk is the risk related to the changes in market prices, such as foreign exchange rates, interest rates and equity prices. The Company implements a risk management system to monitor and manage these specific risks.

The Company’s financial assets under financial risk management consist of cash and cash equivalents, financial instruments, available-for-sale financial assets, trade and other receivables. Financial liabilities consist of trade and other payables, borrowings, and debentures.

 

  1) Market risk

 

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  (i) Currency risk

The Company is exposed to currency risk mainly on exchange fluctuations on recognized assets and liabilities. The Company manages currency risk by currency forward, etc. if needed to hedge currency risk on business transactions. Currency risk occurs on forecasted transaction and recognized assets and liabilities which are denominated in a currency other than the functional currency of the Company.

 

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31. Financial Risk Management, Continued

 

  (1) Financial risk management, Continued

 

Monetary foreign currency assets and liabilities as of December 31, 2014 are as follows:

 

(In millions of won, thousands of U.S. dollars, thousands of Euros, thousands of Japanese Yen, thousands of other currencies)  
     Assets      Liabilities  
     Foreign
currencies
     Won
translation
     Foreign
currencies
     Won
translation
 

USD

     38,129       41,796         1,473,929       1,620,130   

EUR

     5,139         6,898         2,049         2,738   

JPY

     28,299         260         —           —     

SGD

     79         66         —           —     

AUD

     —           —           298,536         268,411   

CHF

     —           —           298,956         332,269   

Other

     77         97         636         122   
     

 

 

       

 

 

 
  49,117      2,223,670   
     

 

 

       

 

 

 

In addition, the Company has entered into cross currency swaps to hedge against currency risk related to foreign currency borrowings and debentures. (See Note 17)

As of December 31, 2014, effects on income (loss) before income tax as a result of change in exchange rate by 10% are as follows:

 

(In millions of won)              
     If increased by 10%      If decreased by 10%  

USD

   3,651         (3,651

EUR

     380         (380

JPY

     26         (26

Others

     5         (5
  

 

 

    

 

 

 
  4,062      (4,062
  

 

 

    

 

 

 

 

  (ii) Equity price risk

The Company has equity securities which include listed and non-listed securities for its liquidity and operating purpose. As of December 31, 2014, available-for-sale equity instruments measured at fair value amounts to ₩586,675 million.

 

  (iii) Interest rate risk

Since the Company’s interest bearing assets are mostly fixed-interest bearing assets, as such, the Company’s revenue and operating cash flow are not influenced by the changes in market interest rates. However, the Company still has interest rate risk arising from borrowings and debentures.

 

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Accordingly, the Company performs various analysis of interest rate risk, which includes refinancing, renewal, alternative financing and hedging instrument option, to reduce interest rate risk and to optimize its financing.

 

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31. Financial Risk Management, Continued

 

  (1) Financial risk management, Continued

 

The Company’s interest rate risk arises from floating-rate borrowings and payables. As of December 31, 2014, floating-rate debentures amount to ₩329,760 million and the Company has entered into interest rate swaps to hedge interest rate risk related to floating-rate borrowings and debentures (See Note 17). If interest rate only increases (decreases) by 1%, income before income taxes for the year ended December 31, 2014 would not have been changed due to the interest expense from floating-rate borrowings and debentures.

 

  2) Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet his/her contractual obligations. The maximum credit exposure as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     2014      2013  

Cash and cash equivalents

   248,281         448,429   

Financial instruments

     143,069         173,569   

Available-for-sale financial assets

     8,648         816   

Accounts receivable – trade

     1,559,281         1,513,138   

Loans and receivables

     575,597         658,337   

Derivative financial assets

     67,728         41,712   

Financial assets at fair value through profit or loss

     7,817         20,532   
  

 

 

    

 

 

 
  2,610,421      2,856,533   
  

 

 

    

 

 

 

To manage credit risk, the Company evaluates the credit worthiness of each customer or counterparty considering the party’s financial information, its own trading records and other factors; based on such information, the Company establishes credit limits for each customer or counterparty.

For the year ended December 31, 2014, the Company has no trade and other receivables or loans which have indications of significant impairment loss or are overdue for a prolonged period. As a result, the Company believes that the possibility of default is remote. Also, the Company’s credit risk can rise due to transactions with financial institutions related to its cash and cash equivalents, financial instruments and derivatives. To minimize such risk, the Company has a policy to deal with high credit worthy financial institutions. The amount of maximum exposure to credit risk of the Company is the carrying amount of financial assets as of December 31, 2014.

In addition, the aging of trade and other receivables that are overdue at the end of the reporting period but not impaired is stated in Note 6 and the analysis of financial assets that are individually determined to be impaired at the end of the reporting period is stated in Note 26.

 

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31. Financial Risk Management, Continued

 

  (1) Financial risk management, Continued

 

  3) Liquidity risk

The Company’s approach to managing liquidity is to ensure that it will always maintain sufficient cash equivalents balance and have enough liquidity through various committed credit lines. The Company maintains flexibly enough liquidity under credit lines through active operating activities.

Contractual maturities of financial liabilities as of December 31, 2014 are as follows:

 

(In millions of won)                                   
     Carrying
amount
     Contractual
cash
flows
     Less than
1 year
     1 - 5 years      More than
5 years
 

Borrowings(*1)

   292,280         310,143         215,189         55,408         39,546   

Debentures (*1)

     4,854,867         6,016,374         363,383         2,989,699         2,663,292   

Accounts payable - other and others (*2)

     2,582,608         2,636,293         1,823,097         567,673         245,523   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  7,729,755      8,962,810      2,401,669      3,612,780      2,948,361   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company does not expect that the cash flows included in the maturity analysis could occur significantly earlier or at different amounts.

 

(*1) Includes estimated interest to be paid and excludes discounts on bonds.
(*2) Excludes discounts on accounts payable-other and others.

As of December 31, 2014, periods which cash flows from cash flow hedge derivatives is expected to be incurred are as follows:

 

(In millions of won)                               
     Carrying
amount
    Contractual
cash
flows
    Less than
1 year
    1 - 5 years     More than
5 years
 

Assets

   59,015        61,243        8,324        37,215        15,704   

Liabilities

       (130,889     (137,344     (15,145     (121,463     (736
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(71,874   (76,101   (6,821   (84,248   14,968   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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  (2) Capital management

The Company manages its capital to ensure that it will be able to continue as a business while maximizing the return to shareholders through the optimization of its debt and equity balance. The overall strategy of the Company is the same as that of the Company as of and for the year ended December 31, 2013.

The Company monitors its debt-equity ratio as a capital management indicator. This ratio is calculated as total liabilities divided by total equity; the total liabilities and equity is extracted from the financial statements.

 

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31. Financial Risk Management, Continued

 

  (2) Capital management, Continued

 

Debt-equity ratio as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)             
     2014     2013  

Liability

   9,170,241        9,512,011   

Equity

       13,542,221        13,315,408   
  

 

 

   

 

 

 

Debt-equity ratio

  67.72   71.44
  

 

 

   

 

 

 

 

  (3) Fair value

 

  1) Fair value and carrying amount of financial assets and liabilities including fair value hierarchy as of December 31, 2014 are as follows:

 

(In millions of won)    2014  
     Carrying
amount
     Level 1      Level 2      Level 3      Total  

Financial assets that can be measured at fair value

              

Financial assets at fair value through profit or loss

   16,530         —           8,713         7,817         16,530   

Derivative financial assets

     59,015         —           59,015         —           59,015   

Available-for-sale financial assets

     586,675         490,741         47,002         48,932         586,675   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
662,220      490,741      114,730      56,749      662,220   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial assets that cannot be measured at fair value

Cash and cash equivalents(*1)

248,311      —        —        —        —     

Available-for-sale financial assets(*1,2)

  211,466      —        —        —        —     

Accounts receivable – trade and others(*1)

  2,134,878      —        —        —        —     

Financial instruments(*1)

  143,069      —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  2,737,724      —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities that can be measured at fair value

Financial liabilities at fair value through profit or loss

110,365      —        110,365      —        110,365   

Derivative financial liabilities

  130,889      —        130,889      —        130,889   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
241,254      —        241,254      —        241,254   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities that cannot be measured at fair value

Borrowings

292,280      —        300,048      —        300,048   

Debentures

  4,744,502      —        5,103,527      —        5,103,527   

Accounts payable - other and others(*1)

  2,582,608      —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
7,619,390      —        5,403,575      —        5,403,575   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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31. Financial Risk Management, Continued

 

  (3) Fair value, Continued

 

  2) Fair value and carrying amount of financial assets and liabilities including fair value hierarchy as of December 31, 2013 are as follows:

 

(In millions of won)    2013  
     Carrying
amount
     Level 1      Level 2      Level 3      Total  

Financial assets that can be measured at fair value

              

Financial assets at fair value through profit or loss

   20,532         —           20,532         —           20,532   

Derivative financial assets

     41,712         —           41,712         —           41,712   

Available-for-sale financial assets

     715,053         574,321         46,414         94,318         715,053   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
777,297      574,321      108,658      94,318      777,297   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial assets that cannot be measured at fair value

Cash and cash equivalents(*1)

448,459      —        —        —        —     

Available-for-sale financial assets(*1,2)

  96,160      —        —        —        —     

Accounts receivable – trade and others(*1)

  2,171,475      —        —        —        —     

Financial instruments(*1)

  173,569      —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
2,889,663      —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities that can be measured at fair value

Financial liabilities at fair value through profit or loss

96,147      96,147      —        —        96,147   

Derivative financial liabilities

  121,380      —        121,380      —        121,380   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
217,527      96,147      121,380      —        217,527   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities that cannot be measured at fair value

Borrowings

356,688      —        369,810      —        369,810   

Debentures

  4,529,770      —        4,621,010      —        4,621,010   

Accounts payable - other and others(*1)

  3,279,604      —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  8,166,062      —        4,990,820      —        4,990,820   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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(*1) Does not include fair values of financial assets and liabilities of which fair values have not been measured as carrying amounts are closed to the reasonable approximate fair values.
(*2) Equity instruments which do not have quoted price in an active market for the identical instruments (inputs for Level 1) are measured at cost in accordance with K-IFRS 1039 as such equity instruments cannot be reliably measured using other methods.

 

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31. Financial Risk Management, Continued

 

  (3) Fair value, Continued

 

Fair value of the financial instruments that are traded in an active market (available-for-sale financial assets, financial liabilities at fair value through profit or loss, etc.) is measured based on the bid price at the end of the reporting date.

The Company uses various valuation methods for valuation of fair value of financial instruments that are not traded in an active market. Fair value of available-for-sale securities is determined using the market approach methods and financial assets through profit or loss are measured using the option pricing model. In addition, derivative financial contracts and long-term liabilities are measured using the present value methods. Inputs used to such valuation methods include swap rate, interest rate, and risk premium, and the Company performs valuation using the inputs which are consistent with natures of assets, liabilities being evaluated.

Interest rates used by the Company for the fair value measurement as of December 31, 2014 are as follows:

 

     Interest rate

Derivative instruments

   1.90 ~ 2.40%

Borrowings and Debentures

   2.55 ~ 2.68%

3) There have been no transfers from Level 2 to Level 1 in 2014 and changes of financial assets classified as Level 3 for the year ended December 31, 2014 are as follows:

 

(In millions of won)                                        
     Balance at
beginning
     Acquisition      Gain for the
period
     Other
comprehensive
loss
    Disposal     Balance at
ending
 

Financial assets at fair value through profit or loss

   —           5,000         2,817         —          —          7,817   

Available-for-sale financial assets

       94,318         —           —           (2,430     (42,956     48,932   

 

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31. Financial Risk Management, Continued

 

  (4) Enforceable master netting agreement or similar agreement

Carrying amount of financial instruments recognized of which offset agreements are applicable as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)    Gross financial
instruments
recognized
     Gross offset
financial
instruments
recognized
    Net financial
instruments
presented on the
statements of
financial position
     Relevant amount not offset on
the statements of financial
position
     Net amount  
             Financial
instruments
    Cash
collaterals
received
    

Financial assets:

               

Derivatives(*)

   48,057         —          48,057         (45,892     —           2,165   

Accounts receivable – trade and others

     128,794         (117,568     11,226         —          —           11,226   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
176,851      (117,568   59,283      (45,892   —        13,391   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Financial liabilities:

Derivatives(*)

45,892      —        45,892      (45,892   —        —     

Accounts payable – other and others

  117,568      (117,568   —        —        —        —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
  163,460      (117,568   45,892      (45,892   —        —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(In millions of won)       
     Gross financial
instruments
recognized
     Gross offset
financial
instruments
recognized
    Net financial
instruments
presented on the
statements of
financial position
     Relevant amount not offset on
the statements of financial
position
     Net amount  
             Financial
instruments
    Cash
collaterals
received
    

Financial assets:

               

Derivatives(*)

   28,870         —          28,870         (28,870     —           —     

Accounts receivable – trade and others

     138,897         (127,055     11,842         —          —           11,842   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
167,767      (127,055   40,712      (28,870   —        11,842   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Financial liabilities:

Derivatives(*)

43,536      —        43,536      (28,870   —        14,666   

Accounts payable – other and others

  127,055      (127,055   —        —        —        —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
  170,591      (127,055   43,536      (28,870   —        14,666   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(*) The amount applicable by enforceable master netting agreement according to ISDA (International Swap and Derivatives Association).

 

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32. Transactions with Related Parties

 

  (1) List of related parties

 

Relationship

  

Interest rate

Ultimate Controlling Entity    SK Holding Co., Ltd.
Subsidiaries    SK Planet Co., Ltd. and 39 others(*)
Joint venture    Dogus Planet, Inc. and 4 others
Associates    SK hynix Inc. and 59 others
Affiliates    The Ultimate Controlling Entity’s investor using the equity method and the Ultimate Controlling Entity’s subsidiaries and associates, etc.

 

(*) As of December 31, 2014, subsidiaries of the Company are as follows:

 

Company

   Ownership
percentage (%)
    

Types of business

SK Telink Co., Ltd.

     83.5      

Telecommunication and MVNO service

M&Service Co., Ltd.

     100.0      

Data base and internet website service

SK Communications Co., Ltd.

     64.6      

Internet website services

Stonebridge Cinema Fund

     56.0      

Investment association

Commerce Planet Co., Ltd.

     100.0      

Online shopping mall operation agency

SK Broadband Co., Ltd.

     50.6      

Telecommunication services

K-net Culture and Contents Venture Fund

     59.0      

Investment association

Fitech Focus Limited Partnership II

     66.7      

Investment association

Open Innovation Fund

     98.9      

Investment association

PS&Marketing Corporation

     100.0      

Communications device retail business

Service Ace Co., Ltd.

     100.0      

Customer center management service

Service Top Co., Ltd.

     100.0      

Customer center management service

Network O&S Co., Ltd.

     100.0      

Base station maintenance service

BNCP Co., Ltd.

     100.0      

Internet website services

Icon Cube Holdings Co., Ltd.

     100.0      

Investment association

Icon Cube Co., Ltd.

     100.0      

Internet website services

SK Planet Co., Ltd.

     100.0      

Telecommunication service

Neosnetworks Co., Ltd.

     66.7      

Guarding of facilities

IRIVER LIMITED

     49.0      

Manufacturing of media and sound equipment

iriver CS Co., Ltd.

     100.0      

After Service and logistics agency business

iriver Enterprise Ltd.

     100.0      

Management of Chinese subsidiary

iriver America Inc.

     100.0      

Sales and marketing in North America

iriver Inc.

     100.0      

Sales and marketing in North America

iriver China Co., Ltd.

     100.0      

Manufacturing of MP3,4 and domestic sales in China

Dongguan iriver Electronics Co., Ltd.

     100.0      

Manufacturing of e-book and domestic sales in China

SK Telecom China Holdings Co., Ltd.

     100.0      

Investment association

Shenzhen E-eye High Tech Co., Ltd.

     65.5      

Manufacturing

SK Global Healthcare Business Group., Ltd.

     100.0      

Investment association

SK Planet Japan

     100.0      

Digital contents sourcing service

SKT Vietnam PTE. Ltd.

     73.3      

Telecommunication service

SK Planet Global PTE. Ltd.

     100.0      

Digital contents sourcing service

SKP GLOBAL HOLDINGS PTE. LTD.

     100.0      

Investment association

SKT Americas, Inc.

     100.0      

Information gathering and consulting

SKP America LLC.

     100.0      

Digital contents sourcing service

YTK Investment Ltd.

     100.0      

Investment association

Atlas Investment

     100.0      

Investment association

Technology Innovation Partners, L.P.

     100.0      

Investment association

SK Telecom China Fund I L.P.

     100.0      

Investment association

shopkick Management Company, Inc.

     95.2      

Investment association

shopkick, Inc.

     100.0      

Mileage-based online transaction App Development

 

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32. Transactions with Related Parties, Continued

 

  (2) Compensation for the key management

The Company considers registered directors who have substantial role and responsibility in planning, operating, and controlling of the business as key management. The considerations given to such key management for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     2014      2013  

Salaries

   2,600         2,263   

Provision for retirement benefits

     907         1,012   
  

 

 

    

 

 

 
  3,507      3,275   
  

 

 

    

 

 

 

Compensation for the key management includes salaries, non-monetary salaries and contributions made in relation to the pension plan.

 

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32. Transactions with Related Parties, Continued

 

(3) Transactions with related parties for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)         2014  

Scope

  

Company

   Operating
revenue and
others
     Operating
expense and
others
     Acquisition of
property and
equipment
     Loans      Loans
collection
 

Ultimate Controlling Entity

  

SK Holding Co.,Ltd.(*1)

   491         218,169         —           —           —     

Subsidiaries

  

SK Broadband Co., Ltd.

     141,640         561,418         27,564         —           —     
  

PS&Marketing Corporation

     13,683         833,013         2,309         —           —     
  

Network O&S Co., Ltd.

     4,830         170,737         581         —           —     
  

SK Planet Co., Ltd.

     60,502         524,311         16,301         —           —     
  

SK Telink Co., Ltd.

     52,811         36,196         227         —           —     
  

Service Ace Co., Ltd.

     7,252         143,706         —           —           —     
  

Service Top Co., Ltd.

     6,617         153,307         —           —           —     
  

Others

     12,851         33,220         1,238         —           —     
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  300,186      2,455,908      48,220      —        —     
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Associates

F&U Credit information Co., Ltd.

  1,808      42,078      —        —        —     

HappyNarae Co., Ltd.

  14      3,614      9,646      —        —     

SK hynix Inc.

  9,628      3,391      —        —        —     

SK USA, Inc.

  —        2,153      —        —        —     

SK Wyverns Baseball Club Co., Ltd.

  18      22,122      —        —        204   

KEB HanaCard Co., Ltd.(*2)

  25,295      3,902      —        —        —     

Others

  1,409      6,140      —        45      —     
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  38,172      83,400      9,646      45      204   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

SK Engineering & Construction Co., Ltd.

  2,382      39,412      304,489      —        —     

SK C&C Co., Ltd.

  5,134      259,168      112,158      —        —     

SK Networks Co., Ltd.

  12,442      182,104      4,029      —        —     

SK Networks service Co., Ltd.

  10,321      28,293      1,600      —        —     

SK Telesys Co., Ltd.

  272      8,564      121,488      —        —     

Others

  13,977      20,628      8,905      —        —     
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  44,528      538,169      552,669      —        —     
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  383,377      3,295,646      610,535      45      204   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(*1) Operating expense and others include ₩191,416 million of dividends paid by the Company.
(*2) For the year ended December 31, 2014, due to merger between Hana SK Card Co., Ltd., the Company’s associate, and KEB Card Co., Ltd., the Company exchanged 57,647,058 shares of Hana SK Card Co., Ltd. with 67,627,587 shares of the merged company, KEB HanaCard Co., Ltd. (See Note 9.(3)).

 

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32. Transactions with Related Parties, Continued

 

(In millions of won)         2013  

Scope

  

Company

   Operating
revenue and
others
     Operating
expense and
others
     Acquisition of
property and
equipment
     Loans      Loans
collection
 

Ultimate Controlling Entity

  

SK Holding Co.,Ltd.(*)

   934         217,707         —           —           —     

Subsidiaries

  

SK Broadband Co., Ltd.

     105,166         524,278         46,148         —           —     
  

PS&Marketing Corporation

     7,404         441,309         —           —           —     
  

Network O&S Co., Ltd.

     9,005         156,123         —           —           —     
  

SK Planet Co., Ltd.

     48,840         580,910         3,039         —           —     
  

SK Telink Co., Ltd.

     38,460         39,781         23         —           —     
  

Service Ace Co., Ltd.

     9,461         135,919         —           —           —     
  

Service Top Co., Ltd.

     8,736         119,604         —           —           —     
  

Others

     13,709         62,231         1,006         —           —     
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  240,781      2,060,155      50,216      —        —     
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Associates

F&U Credit information Co., Ltd.

  1,536      40,867      —        —        —     

HappyNarae Co., Ltd.

  15      3,304      9,167      —        —     

SK hynix Inc.

  3,113      1,120      —        —        —     

SK USA, Inc.

  —        3,300      —        —        —     

SK Wyverns Baseball Club Co., Ltd.

  —        15,110      —        —        204   

HanaSK Card Co., Ltd.

  1,959      2,055      —        —        —     

Others

  364      —        —        1,200      —     
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  6,987      65,756      9,167      1,200      204   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

SK Engineering & Construction Co., Ltd.

  4,908      36,758      315,609      —        —     

SK C&C Co., Ltd.

  3,185      269,829      126,539      —        —     

SK Networks Co., Ltd.

  46,387      552,394      4,507      —        —     

SK Networks Services Co., Ltd.

  5,677      30,816      1,845      —        —     

SK Telesys Co., Ltd.

  394      13,039      101,433      —        —     

Others

  14,122      13,532      5,873      —        —     
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  74,673      916,368      555,806      —        —     
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  323,375      3,259,986      615,189      1,200      204   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(*) Operating expense and others include ₩191,416 million of dividends paid by the Company.

 

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32. Transactions with Related Parties, Continued

 

  (4) Account balances as of December 31, 2014 and 2013 are as follows:

 

(In millions of won)         2014  
          Accounts receivable      Accounts payable  

Scope

  

Company

   Loans      Accounts receivable-
trade, and others
     Accounts payable –
trade, and others
 

Ultimate Controlling Entity

  

SK Holding Co., Ltd.

   —           89         —     

Subsidiaries

  

SK Broadband Co., Ltd.

     —           3,236         38,432   
  

PS&Marketing Corporation

     —           566         101,431   
  

Network O&S Co., Ltd.

     —           1,201         12,981   
  

SK Planet Co., Ltd.

     —           9,711         51,991   
  

SK Telink Co., Ltd.

     —           10,306         5,665   
  

Service Ace Co., Ltd.

     —           436         19,972   
  

Service Top Co., Ltd.

     —           887         21,386   
  

Others

     —           8,890         15,042   
     

 

 

    

 

 

    

 

 

 
  —        35,233      266,900   
     

 

 

    

 

 

    

 

 

 

Associates

HappyNarae Co., Ltd.

  —        —        1,780   

SK hynix Inc.

  —        2,561      2,763   

SK Wyverns Baseball Club., Ltd.

  1,221      —        —     

Wave City Development Co., Ltd.

  1,200      38,412      —     

Daehan Kanggun BcN Co., Ltd.

  22,147      —        —     

Hana Card Co., Ltd.

  —        1,867      38   

Others

  —        226      840   
     

 

 

    

 

 

    

 

 

 
  24,568      43,066      5,421   
     

 

 

    

 

 

    

 

 

 

Other

SK Engineering and Construction Co., Ltd.

  —        359      3,754   

SK C&C Co., Ltd.

  —        718      76,777   

SK Networks Co., Ltd.

  —        2,027      4,766   

SK Networks Services Co., Ltd.

  —        12      2,004   

SK Telesys Co., Ltd.

  —        282      1,559   

SK Innovation Co., Ltd.

  —        1,510      247   

Others

  —        2,592      6,108   
     

 

 

    

 

 

    

 

 

 
  —        7,500      95,215   
     

 

 

    

 

 

    

 

 

 

Total

  24,568      85,888      367,536   
     

 

 

    

 

 

    

 

 

 

 

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32. Transactions with Related Parties, Continued

 

(In millions of won)         2013  
          Accounts receivable      Accounts payable  

Scope

  

Company

   Loans      Accounts receivable-
trade, and others
     Accounts payable
and others
 

Ultimate Controlling Entity

  

SK Holding Co., Ltd.

   —           193         —     

Subsidiaries

  

SK Broadband Co., Ltd.

     —           4,779         81,243   
  

PS&Marketing Corporation

     —           464         32,573   
  

Network O&S Co., Ltd.

     —           1,271         12,450   
  

SK Planet Co., Ltd.

     —           10,882         116,927   
  

SK Telink Co., Ltd.

     —           232         5,346   
  

Service Ace Co., Ltd.

     —           269         18,019   
  

Service Top Co., Ltd.

     —           1,258         15,375   
  

Others

     —           3,975         21,713   
     

 

 

    

 

 

    

 

 

 
  —        23,130      303,646   
     

 

 

    

 

 

    

 

 

 

Associates

HappyNarae Co., Ltd.

  —        —        2,238   

SK hynix Inc.

  —        392      —     

SK Wyverns Baseball Club., Ltd.

  1,425      —        —     

Wave City Development Co., Ltd.

  1,200      38,412      —     

SK USA, Inc

  —        —        436   

Daehan Kanggun BcN Co., Ltd.

  22,102      —        —     

HanaSK Card Co., Ltd.

  —        284      380   

Others

  —        266      —     
     

 

 

    

 

 

    

 

 

 
  24,727      39,354      3,054   
     

 

 

    

 

 

    

 

 

 

Other

SK Engineering and Construction Co., Ltd.

  —        767      11,374   

SK C&C Co., Ltd.

  —        140      64,071   

SK Networks Co., Ltd.

  —        5,920      53,807   

SK Networks Services Co., Ltd.

  —        —        2,290   

SK Telesys Co., Ltd.

  —        372      6,438   

SK Innovation Co., Ltd.

  —        1,368      —     

Others

  —        2,367      8,189   
     

 

 

    

 

 

    

 

 

 
  —        10,934      146,169   
     

 

 

    

 

 

    

 

 

 

Total

  24,727      73,611      452,869   
     

 

 

    

 

 

    

 

 

 

 

(5) As of December 31, 2014, there are no collateral or guarantee provided by related parties to the Company, nor by the Company to related parties.

 

(6) There were additional investments on the related parties during the year ended December 31, 2014. (See Note 9)

 

(7) For the year ended December 31, 2014, the company acquired convertible bonds with a face value of ₩5,000 million and ₩6,000 million, respectively, from IRIVER LIMITED and Health Connect Co., Ltd. at the face value. The convertible bonds are included in long-term investment securities.

 

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33. Sale and Leaseback

For the year ended December 31, 2012, the Company disposed a portion of its property and equipment and investment property, and entered into lease agreements with respect to those assets. This sale and leaseback transaction is accounted for as an operating lease and the gain on disposal of the property and equipment is recognized as profit or loss.

In addition, the Company subleased portion of the leased assets. The Company recognized lease payment of ₩14,075 million and ₩13,703 million, respectively, in relation to the above operating lease agreement and lease revenue of ₩7,993 million and ₩8,462 million, respectively, in relation to the sublease agreement for the year December 31, 2014 and 2013. Future lease payments and lease revenue from the above operating lease agreement and sublease agreement as of December 31, 2014 are as follows:

 

(In millions of won)              
     2014  
     Lease payments      Lease revenue  

Less than 1 year

   14,539         9,540   

1~5 years

     55,616         32,575   

More than 5 years

     40,733         20,244   
  

 

 

    

 

 

 
  110,888      62,359   
  

 

 

    

 

 

 

 

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34. Statements of Cash Flows

 

  (1) Adjustments for income and expenses from operating activities for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     2014      2013  

Gain on foreign currency translation

   (1,373      (699

Interest income

     (25,015      (32,265

Dividends

     (13,048      (20,640

Gain relating to financial assets at fair value through profit or loss

     (2,817      (5,177

Gain on disposal of long-term investments securities

     (9,807      (5,439

Gain on disposal of property and equipment and intangible assets

     (3,676      (1,869

Gain on valuation of derivatives

     (8,713      —     

Gain on settlement of derivatives

     (7,998      (7,716

Other income

     —           (3,626

Loss on foreign currency translation

     167         662   

Bad debt for accounts receivable - trade

     27,313         32,051   

Bad debt for accounts receivable - other

     15,873         20,784   

Loss on disposal of long-term investments securities

     57         73   

Loss relating to financial assets at fair value through profit or loss

     1,352         —     

Depreciation and amortization

     2,208,719         2,115,520   

Loss on disposal of property and equipment and intangible assets

     17,493         233,611   

Impairment loss on property and equipment and intangible assets

     18,490         —     

Interest expenses

     265,195         274,190   

Loss relating to financial liabilities at fair value through profit or loss

     10,369         134,232   

Loss on settlement of derivatives

     672         —     

Loss relating to investments in subsidiaries and associates

     57,593         37,685   

Provision for retirement benefits

     34,570         35,362   

Income tax expense

     293,209         310,640   

Other expenses

     7,764         3,048   
  

 

 

    

 

 

 
  2,886,389      3,120,427   
  

 

 

    

 

 

 

 

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34. Statements of Cash Flows, Continued

 

  (2) Changes in assets and liabilities from operating activities for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     2014      2013  

Accounts receivable – trade

   (73,295      (138,033

Accounts receivable – other

     67,681         (27,722

Advance payments

     (56,834      (20,073

Prepaid expenses

     (3,233      (6,821

Inventories

     265         (8,601

Long-term prepaid expenses

     (5,544      (1,425

Guarantee deposits

     (1,798      (2,653

Accounts payable – other

     (247,067      5,584   

Advanced receipts

     (4,451      (3,095

Withholdings

     226,952         21,786   

Deposits received

     (2,944      (66,828

Accrued expenses

     (48,641      57,014   

Unearned revenue

     (117,136      (183,655

Provisions

     (38,491      (226,644

Long-term provisions

     29,959         (72,228

Plan assets

     (41,185      (28,314

Retirement benefit payment

     (21,887      (15,566

Others

     2,751         2,412   
  

 

 

    

 

 

 
  (334,898   (714,862
  

 

 

    

 

 

 

 

  (3) Significant non-cash transactions for the years ended December 31, 2014 and 2013 are as follows:

 

(In millions of won)              
     2014      2013  

Transfer of other property and equipment and others to construction in progress

     1,082,767         1,187,295   

Transfer of construction in progress to property and equipment and intangible assets

     1,891,236         1,966,553   

Increase(decrease) of accounts payable - other related to acquisition of property and equipment and intangible assets

     (222,345      349,793   

Acquisition of new frequency use rights by returning the existing 1.8GHz frequency use rights

     —           614,600   

 

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Independent Accountants’ Review Report on Internal Accounting Control System

English translation of a Report Originally Issued in Korean

To the Representative Director of

SK Telecom Co., Ltd.

We have reviewed the accompanying Report on the Operations of Internal Accounting Control System (“IACS”) of SK Telecom Co., Ltd. (the “Company”) as of December 31, 2014. The Company’s management is responsible for designing and maintaining effective IACS and for its assessment of the effectiveness of IACS. Our responsibility is to review management’s assessment and issue a report based on our review. In the accompanying report of management’s assessment of IACS, the Company’s management stated: “Based on the assessment on the operations of the IACS, the Company’s IACS has been effectively designed and is operating as of December 31, 2014, in all material respects, in accordance with the IACS Framework issued by the Internal Accounting Control System Operation Committee.”

We conducted our review in accordance with IACS Review Standards, issued by the Korean Institute of Certified Public Accountants. Those Standards require that we plan and perform the review to obtain assurance of a level less than that of an audit as to whether Report on the Operations of Internal Accounting Control System is free of material misstatement. Our review consists principally of obtaining an understanding of the Company’s IACS, inquiries of company personnel about the details of the report, and tracing to related documents we considered necessary in the circumstances. We have not performed an audit and, accordingly, we do not express an audit opinion.

A company’s IACS is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, however, IACS may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on our review, nothing has come to our attention that Report on the Operations of Internal Accounting Control System as of December 31, 2014 is not prepared in all material respects, in accordance with IACS Framework issued by the Internal Accounting Control System Operation Committee.

This report applies to the Company’s IACS in existence as of December 31, 2014. We did not review the Company’s IACS subsequent to December 31, 2014. This report has been prepared for Korean regulatory purposes, pursuant to the External Audit Law, and may not be appropriate for other purposes or for other users.

February 23, 2015

 

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Report on the Assessment of Internal Accounting Control System (“IACS”)

English translation of a Report Originally Issued in Korean

To the Board of Directors and Audit Committee of

SK Telecom Co., Ltd.

I, as the Internal Accounting Control Officer (“IACO”) of SK Telecom Co., Ltd. (“the Company”), assessed the status of the design and operation of the Company’s IACS as of December 31, 2014.

The Company’s management including IACO is responsible for designing and operating IACS. I, as the IACO, assessed whether the IACS has been appropriately designed and is effectively operating to prevent and detect any error or fraud which may cause any misstatement of the financial statements, for the purpose of preparing and disclosing reliable financial statements reporting. I, as the IACO, applied the IACS Framework established by the Korea Listed Companies Association for the assessment of design and operation of the IACS.

Based on the assessment of the IACS, the Company’s IACS has been appropriately designed and is operating effectively as of December 31, 2014, in all material respects, in accordance with the IACS Framework issued by the Internal Accounting Control System Operation Committee.

February 4, 2015

 

/s/ Internal Accounting Control Officer
/s/ Chief Executive Officer

 

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2. Approval of Amendments to the Articles of Incorporation

The proposed amendments are as follows:

 

Current

 

Proposed Amendment

 

Remarks

 

Article 2. Objectives

 

 (Text omitted)

 

In order to achieve the above objectives, the Company carries on the following businesses:

 

1.~18. (Text omitted)

 

19. Any other incidental businesses relating to the foregoing activities (amended on March 22, 2013).

 

ƒ (Text omitted)

 

Article 2. Objectives

 

 (Same as the present text)

 

(Same as the present text)

 

1.~18. (Same as the present text)

 

19. Import/export business, import/export brokerage and/or agency business (newly established on March 20, 2015); and

 

20. Any other incidental businesses relating to the foregoing activities (amended on March 20, 2015).

 

ƒ (Same as the present text)

  Addition of related businesses due to the promotion of new business opportunities
 

Addendum No. 24 (as of March 20, 2015)

 

Article 1. Date of Effectiveness

These Articles of Incorporation shall take effect as of March 20, 2015.

 

 

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3. Approval of the Appointment of an Executive Director

 

  (1) Executive Director

 

Name

  

Term

  

Profile

  

Remarks

Jang,

Dong-Hyun

   3 Years   

¨ Education

 

•    Master in Industrial Engineering, Seoul National University

 

•    Bachelor in Industrial Engineering, Seoul National University

 

¨ Career

 

•    CEO of SK Telecom (Current)

 

•    COO of SK Planet (2013 – 2014)

 

•    CMO of SK Telecom (2011 – 2013)

 

•    CFO and Executive Vice President of the Strategy and Planning Division of SK Telecom (2010 – 2011)

   New Appointment

 

4. Approval of the Appointment of a Member of the Audit Committee

 

  (1) Audit Committee Member

 

Name

  

Term

  

Profile

  

Remarks

Lee,

Jae-Hoon

   3 Years   

¨ Education

 

•    Ph.D. in Public Administration, Sung Kyun Kwan University

 

•    Master in Applied Economics, University of Michigan at Ann Arbor

 

•    Bachelor in Economics, Seoul National University

 

¨ Career

 

•  President, Korea Polytechnic University (Current)

 

•  Vice Minister, Ministry of Knowledge Economy (2008 – 2009)

 

•  Vice Minister, Ministry of Commerce, Industry and Energy (2007 – 2008)

 

•  Assistant Minister, Ministry of Commerce, Industry and Energy (2006 – 2007)

 

•  Head of the Trade-Investment Department, Ministry of Commerce, Industry and Energy (2005 – 2006)

  

Current

Director

 

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5. Approval of Ceiling Amount of the Remuneration of Directors

The number of directors and total amount and maximum authorized amount of compensation of directors are as follows:

 

Classification

  

Fiscal year 2014

  

Fiscal year 2015

Number of directors (Number of independent non-executive directors)    8 persons (5 persons)    6 persons (4 persons)
Total amount and maximum authorized amount of compensation of directors    Won 12 billion    Won 12 billion

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

SK TELECOM CO., LTD.

(Registrant)

By: /s/ Soo Cheol Hwang

 

(Signature)
Name: Soo Cheol Hwang
Title: Senior Vice President

Date: March 23, 2015

 

105