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Independent Auditor’s Report... 1 - 4 Consolidated Financial Statements
Consolidated Statements of Financial Position ... 5 - 6 Consolidated Statements of Profit or Loss ………. 7
Consolidated Statements of Comprehensive Income... 8 Consolidated Statements of Changes in Equity ... 9 - 10 Consolidated Statements of Cash Flows ... 11
Independent Auditor’s Report
(English Translation of a Report Originally Issued in Korean)
To the Board of Directors and Shareholders of Samsung Engineering Co., Ltd.
Opinion
We have audited the accompanying consolidated financial statements of Samsung Engineering Co., Ltd. and its subsidiaries (collectively referred to as the "Group"), which comprise the consolidated statements of financial position as at December 31, 2019 and 2018, and the consolidated statements of profit and loss, the consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at December 31, 2019 and 2018, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards as adopted by the Republic of Korea (Korean IFRS).
Basis for Opinion
We conducted our audits in accordance with Korean Standards on Auditing. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the ethical requirements of the Republic of Korea that are relevant to our audit of the consolidated financial statements and we have fulfilled our other ethical responsibilities in accordance with the ethical requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Key Audit Matters
Reason why the matter was determined to be a key audit matter
As explained in Note 2.17(Revenue recognition) to the consolidated financial statements, when the outcome of a construction contract can be estimated reliably, the contract revenue and contract costs shall be recognized by reference to the progress of the construction contract activity at the end of the reporting period. Moreover, the Group determines the progress rate of construction contract by using the methods that can reliably measure the work performed for the related construction. Therefore, the progress rate of contract is measured by the proportion that accumulated contract cost generated to date bear to the estimated total contract costs except for the contract costs that do not reflect work performed.
As explained in Note 3(Critical Accounting Estimates and Assumptions) to the consolidated financial statements, total contract revenue is measured based on the initial amount of revenue agreed in the contract. However, the measurement of contract revenue is affected by a variety of uncertainties that depend on the outcome of future event; for example, the amount of contract revenue may increase as a result of variations in contract work, claims and inventive payments, or may decrease as a result of penalties arising from delays caused by the Group in the course of completing the contract. The construction revenue is affected by the progress rate measured based on the accumulated contract cost generated, and the total contract cost is estimated based on future estimates such as materials cost, labor cost, and construction period.
Moreover, as explained in Note 23(Engineering Contracts) to the consolidated financial statements, due to the nature of construction contract, the uncertainty of estimating total contract revenue increases and there is a possibility that changes in estimation of total contract revenue and total contract cost will affect the profit or loss for the year (or for the succeeding year); therefore, we identified revenue recognition based on the input method as a significant risk.
How our audit addressed the Key Audit Matter
In respect of the Group’s revenue recognition based on the input method, key audit procedures performed are as follows:
ㆍEvaluating the design and operation of internal control of the Group in relation to entering into new contracts and modifying the contract amount.
ㆍEvaluating the design and operation of internal control of the Group in relation to initial estimation and modification of estimated total contract cost.
ㆍIT auditing for input cost aggregation and calculation of progress rate by project. ㆍInspecting new contracts and contracts with modification of contract amount
ㆍReconciling estimated costs approved in field work with those entered in the system.
ㆍReconciling calculation data of physical process rate with the construction progress rate based on input cost, and reviewing the differences.
Auditing standards and their application in practice vary among countries. The procedures and practices used in the Republic of Korea to audit such consolidated financial statements may differ from those generally accepted and applied in other countries.
Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with Korean IFRS, 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.
In preparing the consolidated financial statements, management is responsible for assessing the Group’ s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations.
Those charged with governance are responsible for overseeing the Group’s financial reporting process. Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’ s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Korean Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Korean Standards on Auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
·
- Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.·
- Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.
·
- Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.·
- Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor’s report is Seung-Whan Lee, Certified Public Accountant.
Seoul, Korea March 11, 2020
Assets Current assets
Cash and cash equivalents 4,5,7 ￦ 589,512,194 ￦ 369,360,461 Short-term financial instruments 5,7 150,447,557 51,245,796
Trade receivables 7,8,9 1,214,759,547 1,383,112,329
Due from customers for contract work 7,9 325,844,674 595,208,836
Other receivables 7,9 45,086,252 109,903,081
Current portion of financial assets at amortized cost 7 101,850 152,345 Derivative financial instruments 6,7,33 6,413,547 2,065,909
Firm commitment assets 16,098,973 2,421,843
Advanced payments 9 249,939,014 169,031,616
Prepaid expenses 9 74,267,677 113,407,473
Prepaid construction expenses 9 11,316,233 32,165,238
Short-term loan receivable 7,9 33,012,903 20,864,656
Other current assets 7,9 142,272,794 106,436,188
Current tax assets 27 24,705,127 17,202,155
2,883,778,342 2,972,577,926 Non-current assets
Financial assets measured at fair value through other comprehensive income 6,7,10 31,195,681 31,106,861 Financial assets measured at fair value through profit or loss 6,7,10 6,989,478 6,925,147
Financial assets at amortized cost 7,11 734,490 466,720
Derivative financial instruments 6,7,33 3,332,157 694,365
Firm commitment assets 1,576,894 3,730,354
Investments in associates and joint ventures 12 77,523,305 44,046,442
Property, plant and equipment 15 428,010,738 397,918,404
Intangible assets 16 35,689,176 54,811,133
Investment properties 14 187,750,888 190,497,925
Long-term guarantee deposits provided 5,7 115,690,775 119,272,168
Long-term prepaid expenses 671,944 1,200,417
Other non-current assets 5,7,9 16,441,086 14,877,677
Deferred tax assets 27 755,862,882 790,387,612
1,661,469,494 1,655,935,225
Liabilities Current liabilities
Trade payables 7 ￦ 515,715,496 ￦ 502,477,317
Other payables 7 210,876,933 321,354,441
Borrowings and other financial liabilities 7,8,17 148,179,055 438,544,447
Current portion of bonds 7,17 - 80,000,000
Current portion of long-term borrowings 7,17 - 39,000,000 Due to customers for contract work 9 1,627,143,373 1,576,987,377 Derivative financial instruments 6,7,33 32,347,078 18,610,234
Firm commitment liabilities 673,269 750,371
Withholdings 164,181,539 128,596,145
Accrued expenses 7 104,811,562 84,323,141
Other current liabilities 7,19 117,213,610 148,926,123
Current tax liabilities 27 28,200,032 11,607,032
2,949,341,947 3,351,176,628 Non-current liabilities
Derivative financial instruments 6,7,33 9,627,383 16,323,882
Firm commitment liabilities 709 204
Net defined benefit liabilities 18 48,760,934 49,973,727
Other non-current liabilities 7,19 209,081,031 153,800,278
Deferred tax liabilities 27 25,565,011 23,468,771
293,035,068 243,566,862
Total liabilities 3,242,377,015 3,594,743,490
Equity
Share capital 20 980,000,000 980,000,000
Retained earnings 21 526,287,579 233,681,870
Other components of equity 22 (183,440,820) (158,701,125) Equity attributable to owners of the Parent Company 1,322,846,759 1,054,980,745
Non-controlling interest (19,975,938) (21,211,084)
Total equity 1,302,870,821 1,033,769,661
Sales 23 ￦ 6,367,980,187 ￦ 5,479,801,109 Cost of sales 23,24 5,605,758,715 4,931,853,067 Gross profit 762,221,472 547,948,042 Selling, general and administrative expenses 24,25 376,745,677 341,867,251 Operating profit 385,475,795 206,080,791 Other income 26 285,869,375 178,041,611 Other expenses 26 298,269,787 180,224,890 Share of profit of associates 12 32,166,858 4,956,052 Share of loss of associates 12 46 4,849 Finance income
Interest income 10,394,914 11,332,817 Gain on foreign currency transactions 25,714,416 49,282,329 Gain on foreign currency translation 22,817,004 238,700 58,926,334 60,853,846 Finance costs
Interest expenses 15,824,803 41,761,082 Loss on foreign currency transactions 25,402,570 57,223,899 Loss on foreign currency translation 22,403,091 540,922 63,630,464 99,525,903 Profit before income tax 400,538,065 170,176,658 Income tax expense 27 104,957,420 99,980,222 Profit for the year 295,580,645 70,196,436 Profit is attributable to:
Owners of the Parent Company ￦ 292,648,416 ￦ 68,684,743 Non-controlling interests 2,932,229 1,511,693 Earnings per share attributable to
owners of the Parent Company
Profit for the year ￦ 295,580,645 ￦ 70,196,435 Other comprehensive income (loss)
Items that will not be reclassified to profit or loss
Remeasurements of net defined benefit liability 18 (33,260,836) (21,479,288) 7,10 63,957 1,971,446 Income tax effect of other comprehensive income 27 7,921,863 4,770,900 Items to be subsequently reclassified to profit or loss:
Valuation of derivative financial instruments 7 6,762,126 (32,202,093) Foreign currency translation differences (1,097,857) (2,705,080) Share of other comprehensive income of associates 12 (7,198,116) 6,688,829 Income tax effect of other comprehensive income 27 351,295 7,792,907 Other comprehensive income (loss) for the year, net of tax (26,457,568) (35,162,379) Total comprehensive income for the year ￦ 269,123,077 ￦ 35,034,056 Total comprehensive income for the year is attributable to:
Owners of the Parent Company ￦ 266,343,345 ￦ 34,723,373 Non-controlling interest 2,779,732 310,683 Valuation of financial assets measured at fair value
Notes
Balance at January 1, 2018 ￦ 980,000,000 ￦ 169,590,585 ￦ (123,404,037) ￦ (21,521,767) ￦ 1,004,664,781
Changes in accounting policy - (4,593,458) (1,335,718) - (5,929,176)
Restated total equity at the beginning of the financial year 980,000,000 164,997,127 (124,739,755) (21,521,767) 998,735,605 Total comprehensive income
Profit for the year - 68,684,743 - 1,511,693 70,196,436
10 - - 1,496,359 - 1,496,359
Loss on valuation of derivative 33 - - (24,409,187) - (24,409,187)
Share of other comprehensive income of associates 12 - - 6,688,829 - 6,688,829 Loss on translation of foreign operations - - (1,504,071) (1,201,010) (2,705,081) Remeasurements of net defined benefit liabilities 18 - - (16,233,301) - (16,233,301)
Total comprehensive income - 68,684,743 (33,961,371) 310,683 35,034,055
Balance at December 31, 2018 ￦ 980,000,000 ￦ 233,681,870 ￦ (158,701,126) ￦ (21,211,084) ￦ 1,033,769,660 Retained Components
Equity Non-controlling Total Share capital earnings of equity Interest
Notes
Balance at January 1, 2019 ￦ 980,000,000 ￦ 233,681,870 ￦ (158,701,126) ￦ (21,211,084) ￦ 1,033,769,660 Total comprehensive income
Profit for the year - 292,648,416 - 2,932,229 295,580,645
10 - (42,707) 91,187 - 48,480
Gain on valuation of derivative 33 - - 5,125,692 - 5,125,692
Share of other comprehensive income of associates 12 - - (5,563,986) - (5,563,986)
Gain on translation of foreign operations - - (591,740) (152,518) (744,258)
Remeasurements of net defined benefit liabilities 18 - - (25,323,517) 21 (25,323,496)
Total comprehensive income - 292,605,709 (26,262,364) 2,779,732 269,123,077
Transactions with owners
Transactions with owners of subsidiaries - - 1,522,670 (1,544,586) (21,916)
Total transactions with owners - - 1,522,670 (1,544,586) (21,916)
Balance at December 31, 2019 ￦ 980,000,000 ￦ 526,287,579 ￦ (183,440,820) ￦ (19,975,938) ￦ 1,302,870,821 Retained
Gain on valuation of financial assets at fair value through other comprehensive income
Cash flows from operating activities
Profit for the year ￦ 295,580,645 ￦ 70,196,436
Adjustments 30 146,260,416 247,567,753
Changes in operating assets and liabilities 30 398,243,216 233,780,847
Interest received 8,572,355 10,362,700
Interest paid (16,574,362) (44,991,264)
Dividends received 3,025,283 2,502,583
Income tax paid (50,983,304) (73,170,671)
Net cash inflow from operating activities 784,124,249 446,248,384
Cash flows from investing activities
Proceeds from disposal of property, plant and equipment 3,359,522 12,413,852
Proceeds from disposal of intangible assets 336,369
-Net decrease(increase) in financial assets (98,593,545) 21,561,127
Proceeds of financial assets at amortized cost 148,605 74,085
Decrease in short-term loan receivables 8,178,702 13,492,965
Increase in short-term loan receivables (16,285,271) (7,000,000)
Acquisition of investments in associates (8,518,958) (15,777)
595
-Decrease in other non-current assets 25,836
-Increase in other non-current assets (5,910,407) (80,826)
Acquisition of financial assets at amortized cost (365,880) (156,780)
Acquisition of property, plant and equipment (19,602,514) (14,606,916)
Acquisition of intangible assets (11,042,030) (9,321,965)
Decrease in guarantee deposits provided 11,915,977 10,828,496
Increase in guarantee deposits provided (10,857,898) (6,494,303)
Net cash inflow (outflow) from investing activities (147,210,897) 20,693,958
Cash flows from financing activities
Repayment of current portion of bonds (80,000,000) (121,000,000)
Net increase(decrease) from short-term borrowings (298,594,986) (456,142,124)
Decrease in lease liabilities (6,874,117)
-Increase in leasehold deposits - 4,570,902
Decrease in leasehold deposits (192,982)
-Repayment of current portion of long-term borrowings (39,000,000) (127,000,000)
Repayment of long-term borrowings - (149,000,000)
Proceeds from derivative related to long-term borrowings 2,424,000 (601,550)
Additional acquisition of non-controlling interests (21,917)
-Net cash outflow from financing activities (422,260,002) (849,172,772)
Effects of exchange rate changes on cash and cash equivalents 5,498,383 6,470,382
Net increase (decrease) in cash and cash equivalents 220,151,733 (375,760,048)
Cash and cash equivalents at the beginning of the year 369,360,461 745,120,509
Cash and cash equivalents at the end of the year ￦ 589,512,194 ￦ 369,360,461
1. General information
These consolidated financial statements consist of the financial statements of Samsung Engineering Co., Ltd. (“SECL” or the “The Company”), as the parent company, and its 22 subsidiaries in overseas
(collectively referred to as the “Group”), two special purposed entities and six associates and joint ventures, and have been prepared in accordance with Korean IFRS 1110 Consolidated financial statements.
SECL was established on January 20, 1970, under the Commercial Law of the Republic of Korea to engage in the engineering services for plant and other construction. The Company listed its shares on the Korea Stock Exchange on December 24, 1996. Its registered office is in Seoul, Korea. As at December 31, 2019, its share capital is ￦ 980,000,000 thousand, and the largest shareholder is Samsung SDI Co., Ltd., which has 11.69 % ownership.
As at December 31, 2019, its major shareholders are as follows:
Name of shareholders Number of shares Ownership (%)
Samsung SDI Co., Ltd. 22,918,426 11.69
National Pension Service 19,635,812 10.02
Samsung C&T 13,668,989 6.97
BlackRock Fund Advisors 5,293,553 2.70
Consolidated subsidiaries
As at December 31, 2019, details on subsidiaries are stated below:
Number of shares owned by Name of Subsidiary
SECL Subsidiary Total
Ownership (%) (*1)
Fiscal year
end Location
Samsung Saudi Arabia
Co., Ltd. 1,513,800 200 1,514,000 100 December 31 Saudi Arabia
Samsung EPC Co., Ltd. - 37,500 37,500 75.00 December 31 Saudi Arabia
Samsung Engineering Construction (Shanghai) Co., Ltd.
- - - 100 December 31 China
Samsung Ingenieria
Manzanillo S.A. De C.V. 99,900 - 99,900 99.90 December 31 Mexico
Samsung Engineering
Trinidad Co., Ltd. - - - 100 December 31
Trinidad and Tobago Samsung Engineering
India Private Limited 15,749,990 - 15,749,990 99.99 March 31 India
Samsung Engineering
America Inc. 121,500,000 - 121,500,000 100 December 31 USA
SEA Construction, LLC - - - 100 December 31 USA
SEA Louisiana
Construction L.L.C - 10,000 10,000 100 December 31 USA
Grupo Samsung Ingenieria
Mexico S.A. De C.V. 335,131 - 335,131 99.99 December 31 Mexico
Samsung Engineering
Kazakhstan LLP - - - 100 December 31 Kazakhstan
Samsung Engineering
(Malaysia) SDN. BHD 750,000 - 750,000 100 December 31 Malaysia
Samsung Ingenieria Mexico Construction Y Operacion S.A. De C.V.
49,950 - 49,950 99.90 December 31 Mexico
Samsung Engineering
(Thailand) Co., Ltd. (*2) 63,437 - 63,437 49.99 December 31 Thailand
Samsung Ingenieria
Energia S.A. De C.V. 9,999 - 9,999 99.99 December 31 Mexico
Muharraq Wastewater
Services Company W.L.L. 399 1 400 100 December 31 Bahrain
Samsung Engineering
Bolivia S.A 1,000,498 - 1,000,498 99.99 March 31 Bolivia
Samsung Engineering
Number of shares owned by Name of Subsidiary
SECL Subsidiary Total
Ownership (%) (*1) Fiscal year end Location Hungary Ltd.
Samsung Engineering Italy
S.R.L - - - 100 December 31 Italy
CES 1st Co., Ltd (*3) - - - - November 30 Republic of
Korea
CES 2nd Co., Ltd (*3) - - - - November 30 Republic of
Korea
(*1) The interests of the subsidiaries are considered as the interests of the Group in these subsidiaries. (*2) The Group has been delegated by the shareholders of Samsung Engineering (Thailand) Co., Ltd. and its subsidiaries (approximately 49.99 %) the full authority to make decisions to appoint or dismiss directors and management. Although the Group has less than a majority ownership, it is determined that the Group has effective control, given the fact that it has an ability to appoint or dismiss a majority of the Board of Directors.
Summarized financial information of major subsidiaries as at December 31, 2019, is as follows:
(In thousands of Korean won) 2019
Assets Liabilities Equity Sales Profit for the year
Samsung Engineering Construction
Xi' an Co., Ltd. \ 234,986,334 \ 183,634,565 \ 51,351,769 \ 379,129,172 \ 32,592,807 Samsung Saudi Arabia Co., Ltd. 200,004,898 250,525,294 (50,520,396) 208,434,696 16,879,045 SEA Louisiana Construction, L.L.C. 149,188,540 539,753 148,648,787 23,947,864 17,358,311 Samsung Engineering
Construction(Shanghai) Co., Ltd. 147,417,961 55,992,922 91,425,039 351,479,598 35,160,671 Samsung Engineering (Thailand)
Co., Ltd. 105,692,412 97,199,398 8,493,014 304,344,304 5,488,808
Samsung Engineering (Malaysia)
SDN. BHD. 90,443,137 4,948,875 85,494,262 57,658,462 8,313,862
Samsung Engineering Hungary
Ltd. 77,702,269 28,797,292 48,904,977 201,922,657 22,208,182
The summarized statements above display figures after consideration of goodwill arising from business combination, fair value adjustment, policy difference adjustment; however, the intra Group transactions have not been eliminated.
Summarized financial information of major subsidiaries as at December 31, 2018, is as follows:
(In thousands of Korean won) 2018
Assets Liabilities Equity Sales
Profit (loss) for the year
Samsung Saudi Arabia Co., Ltd. \ 211,781,123 \ 343,361,262 \ (131,580,139) \ 29,183,816 \ (4,182,389) SEA Louisiana Construction, L.L.C. 148,465,867 21,564,276 126,901,591 61,528,855 32,009,013 Samsung Engineering
Construction(Shanghai) Co., Ltd. 105,804,699 49,970,871 55,833,828 188,534,945 16,621,585 Samsung Engineering (Malaysia)
SDN., BHD. 100,734,304 27,042,263 73,692,041 250,463,211 59,109,358 Samsung Engineering Construction
Xi' an Co., Ltd. 82,774,426 63,814,097 18,960,329 311,072,578 17,630,720 Samsung Engineering (Thailand)
Co., Ltd. 74,477,326 71,950,555 2,526,771 146,477,816 (1,892,206) Samsung Engineering Hungary
Ltd. 47,418,010 16,021,025 31,396,985 98,229,676 14,737,045
2. Summary of significant accounting policies
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
2.1 Basis of Preparation
The Group maintains its accounting records in Korean won and prepares statutory financial statements in the Korean language (Hangeul) in accordance with International Financial Reporting Standards as adopted by the Republic of Korea (Korean IFRS). The accompanying consolidated financial statements have been condensed, restructured and translated into English from the Korean language financial statements.
Certain information attached to the Korean language financial statements, but not required for a fair presentation of the Group's financial position, financial performance or cash flows, is not presented in the accompanying consolidated financial statements.
The consolidated financial statements of the Group have been prepared in accordance with Korean IFRS. These are the standards, subsequent amendments and related interpretations issued by the International Accounting Standards Board (IASB) that have been adopted by the Republic of Korea.
The preparation of financial statements requires the use of critical accounting estimates. Management also needs to exercise judgement in applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 3.
2.2 Changes in Accounting Policy and Disclosures (1) New and amended standards adopted by the Group
The Group has applied the following standards and amendments for the first time for their annual reporting period commencing January 1, 2019.
(a) Enactment of Korean IFRS 1116 Leases
Korean IFRS 1116 Leases replaces Korean IFRS 1017 Leases. Under the new standard, with
With implementation of Korean IFRS 1116 Lease, the Group has changed accounting policy. The Group has adopted Korean IFRS 1116 retrospectively, as permitted under the specific transitional provisions in the standard, and recognized the cumulative impact of initially applying the standard as at January 1, 2019, the date of initial application. The Group has not restated comparatives for the 2018 reporting period. The impact of the adoption of the leasing standard and the new accounting policies are disclosed in Note 34.
(b) Amendment to Korean IFRS 1109 Financial Instruments
The narrow-scope amendments made to Korean IFRS 1109 Financial Instruments enable entities to measure certain prepayable financial assets with negative compensation at amortized cost. When a modification of a financial liability measured at amortized cost that does not result in the derecognition, a modification gain or loss shall be recognized in profit or loss. The amendment does not have a significant impact on the consolidated financial statements.
(c) Amendments to Korean IFRS 1019 Employee Benefits
The amendments require that an entity shall calculate current service cost and net interest for the remainder of the reporting period after a plan amendment, curtailment or settlement based on updated actuarial assumptions from the date of the change. The amendments also require that a reduction in a surplus must be recognized in profit or loss even if that surplus was not previously recognized because of the impact of the asset ceiling. The amendments do not have a significant impact on the consolidated financial statements.
(d) Amendments to Korean IFRS 1028 Investments in Associates and Joint Ventures
The amendments clarify that an entity shall apply Korean IFRS 1109 to financial instruments in an
associate or joint venture to which the equity method is not applied. These include long-term interests that, in substance, form part of the entity’s net investment in an associate or joint venture. The amendments do not have a significant impact on the consolidated financial statements.
(e) Enactment to Interpretation of Korean IFRS 2123 Uncertainty over Income Tax Treatments
(f) Annual Improvements to Korean IFRS 2015 – 2017 Cycle: Amendments to Korean IFRS 1103 Business Combination
The amendments clarify that when a party to a joint arrangement obtains control of a business that is a joint operation, and had rights to the assets and obligations for the liabilities relating to that joint operation immediately before the acquisition date, the transaction is a business combination achieved in stages. In such cases, the acquirer shall remeasure its entire previously held interest in the joint operation. The amendments do not have a significant impact on the consolidated financial statements.
Amendments to Korean IFRS 1111 Joint Agreements
The amendments clarify that when a party that participates in, but does not have joint control of, a joint operation might obtain joint control of the joint operation in which the activity of the joint operation
constitutes a business. In such cases, previously held interests in the joint operation are not remeasured. The amendments do not have a significant impact on the consolidated financial statements.
Amendments to Paragraph 57A of Korean IFRS 1012 Income Tax
The amendment is applied to all the income tax consequences of dividends and requires an entity to recognize the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally recognized those past transactions or events. The amendments do not have a significant impact on the consolidated financial statements.
Korean IFRS 1023 Borrowing Costs
The amendments clarify that if a specific borrowing remains outstanding after the related qualifying asset is ready for its intended use (or sale), it becomes part of general borrowings. The amendment does not have a significant impact on the consolidated financial statements.
(2) New standards and interpretations not yet adopted by the Group
(a) Amendments to Korean IFRS 1001 Presentation of Financial Statements and Korean IFRS 1008 Accounting Policies, Changes in Accounting Estimates and Errors – Definition of Material
The amendments clarify the explanation of the definition of material and amended Korean IFRS 1001 and Korean IFRS 1008 in accordance with the clarified definitions. Materiality is assessed by reference to omission or misstatement of material information as well as effects of immaterial information, and to the nature of the users when determining the information to be disclosed by the Group. These amendments should be applied for annual periods beginning on or after January 1, 2020, and earlier application of permitted. The Group does not expect that these amendments have a significant impact on the consolidated financial statements.
(b) Amendments to Korean IFRS 1103 Business Combination – Definition of a Business
To consider the integration of the required activities and assets as a business, the amended definition of a business requires an acquisition to include an input and a substantive process that together significantly contribute to the ability to create outputs and excludes economic benefits from the lower costs. An entity can apply a concentration test, an optional test, where substantially all of the fair value of gross assets acquired is concentrated in a single asset or a group of similar assets, the assets acquired would not represent a business. These amendments should be applied for annual periods beginning on or after January 1, 2020, and earlier application of permitted. The Group does not expect that these amendments have a significant impact on the consolidated financial statements.
2.3 Consolidation
The Group has prepared the consolidated financial statements in accordance with Korean IFRS 1110 Consolidated Financial Statements.
(a) Subsidiaries
Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.
Intercompany transactions, balances and unrealized gains on transactions between Group companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an
impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.
(b) Associates
Associates are entities over which the Group has significant influence but not control or joint control. Investments in associates are accounted for using the equity method of accounting, after initially being recognized at cost. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. If there is an objective evidence of impairment for the investment in the associate, the Group recognizes the difference between the recoverable amount of the associate and its book amount as impairment loss.
(c) Joint Arrangements
A joint arrangement, wherein two or more parties have joint control, is classified as either a joint operation or a joint venture. A joint operator recognizes its direct right to the assets, liabilities, revenues and
expenses of joint operations and its share of any jointly held or incurred assets, liabilities, revenues and expenses. Interests in joint ventures are accounted for using the equity method, after initially being recognized at cost in the consolidated statement of financial position.
2.4 Foreign Currency Translation (a) Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which each Group operates (the “functional currency"). The consolidated financial statements are presented in Korean won, which is the Company’s functional and presentation currency.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year end exchange rates are generally recognized in profit or loss.
2.5 Financial Assets (a) Classification
The Group classifies its financial assets in the following measurement categories:
those to be measured subsequently at fair value (either through other comprehensive income, or through profit or loss), and
those to be measured at amortized cost.
The classification depends on the Group’s business model for managing the financial assets and the contractual terms of the cash flows.
For financial assets measured at fair value, gains and losses will either be recorded in profit or loss or other comprehensive income. For investments in debt instruments, this will depend on the business model in which the investment is held. The Group reclassifies debt investments when, and only when its business model for managing those assets changes.
For investments in equity instruments that are not held for trading, this will depend on whether the Group has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income. The fair value difference of investments in equity instruments that are not elected, is recognized in profit or loss.
(b) Measurement
At initial recognition, the Group measures a financial asset at its 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 acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss.
Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.
A. Debt instruments
Subsequent measurement of debt instruments depends on the Group’s business model for managing the asset and the cash flow characteristics of the asset. The Group classifies its debt instruments into one of the following three measurement categories:
Fair value through other comprehensive income: Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at fair value through other comprehensive income. Movements in the carrying amount are taken through other comprehensive income, except for the recognition of impairment loss (reversal of impairment loss), interest income and foreign exchange gains and losses which are recognized in profit or loss. When the financial asset is derecognized, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss. Interest income from these financial assets is included in ‘finance income’ using the effective interest rate method. Foreign exchange gains and losses are presented in ‘finance income or finance costs’ and impairment losses are presented in ‘other expenses’.
Fair value through profit or loss: Assets that do not meet the criteria for amortized cost or fair value through other comprehensive income are measured at fair value through profit or loss. A gain or loss on a debt investment that is subsequently measured at fair value through profit or loss and is not part of a hedging relationship is recognized in profit or loss and presented net in the statement of profit or loss within ‘other income or expenses’ in the year in which it arises. B. Equity instruments
The Group subsequently measures all equity investments at fair value. Where the Group’s management has elected to present fair value gains and losses on equity investments in other comprehensive income, there is no subsequent reclassification of fair value gains and losses to profit or loss following the
derecognition of the investment. Dividend income from such investments continue to be recognized in profit or loss as ‘finance income’ when the right to receive payments is established.
Changes in the fair value of financial assets at fair value through profit or loss are recognized in ‘other income and expenses’ in the statement of profit or loss as applicable. Impairment loss (reversal of impairment loss) on equity investments measured at fair value through other comprehensive income are not reported separately from other changes in fair value.
(c) Impairment
The Group assesses on a forward looking basis the expected credit losses associated with its debt
(d) Recognition and Derecognition
Regular way purchases and sales of financial assets are recognized or derecognized on trade-date, the date on which the Group commits to purchase or sell the asset. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership.
If a transfer does not result in derecognition because the Group has retained substantially all the risks and rewards of ownership of the transferred asset, the Group continues to recognize the transferred asset in its entirety and recognizes a financial liability for the consideration received. The Group classifies the financial liability as “borrowings” in the statement of financial position.
(e) Offsetting of financial instruments
Financial assets and liabilities are offset and the net amount reported in the statement of financial position where there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the assets and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the Group or the counterparty.
2.6 Derivative Instruments
Derivatives are initially recognized at fair value on the date when a derivative contract is entered into and are subsequently remeasured at their fair value at the end of each reporting period. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognized immediately in profit or loss within ‘other income or expense’ based on the nature of transactions.
2.7 Property, Plant and Equipment
Land is measured at its fair value based on valuations by external independent valuers. Revaluations shall be made to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. Other property, plant and equipment including
machinery and equipment are stated at its cost less accumulated depreciation and accumulated
If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be recognized in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss. If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognized in profit or loss. However, the decrease shall be recognized in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset. The amount of the surplus between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset’s original cost is
transferred to retained earnings.
Depreciation of all property, plant and equipment, except for land, is calculated using the straight-line method to allocate their cost or revalued amounts, net of their residual values, over their estimated useful lives as follows:
Useful lives
Buildings and Structures 20 - 40 years
Construction heavy equipment 10
Machinery 6 - 10
Motor vehicles 4
Leasehold improvements 6
Other equipment 4 – 20
2.8 Borrowing Costs
Borrowing costs that are directly attributable to the acquisition or construction of a qualifying asset are capitalized during the period of time that is required to complete and prepare the asset for its intended use. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. Other borrowing costs are expensed in the period in which they are incurred.
2.9 Government Grants
2.10 Intangible Assets
Intangible assets, except for goodwill, are initially recognized at its historical cost, and carried at cost less accumulated amortization and accumulated impairment losses.
Software which meet the definition of an intangible asset, are amortized using the straight-line method over 4 years which is their estimated useful lives when the asset is available for use. Other intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the carrying amount exceeds its recoverable amount.
2.11 Investment Property
Investment property is property held to earn rentals or for capital appreciation or both. An investment property is measured initially at its cost. An investment property is measured after initial measurement at depreciated cost (less any accumulated impairment losses). After recognition as an asset, investment property is carried at cost less accumulated depreciation and impairment losses. The Group depreciates investment properties, except for land, using the straight-line method over their useful lives of 40 years. 2.12 Impairment of Non-financial Assets
Goodwill and intangible assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. Non-financial assets other than goodwill that suffered an impairment are
reviewed for possible reversal of the impairment at the end of each reporting period. 2.13 Financial Guarantee Contracts
Financial guarantee contracts are recognized as a financial liability at the time the guarantee is issued. Financial guarantee contracts are recognized as a financial liability at the time the guarantee is issued. The liability is initially measured at fair value, subsequently at the higher of following and recognized in the statement of financial position within ‘other financial liabilities’.
the amount determined in accordance with the expected credit loss model under Korean IFRS 1109 Financial Instruments, and
2.14 Provisions
Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period, and the increase in the provision due to the passage of time is recognized as interest expense.
2.15 Current and Deferred Tax
The tax expense for the period consists of current and deferred tax. Current and deferred tax is recognized in profit or loss, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively.
The current tax expense is measured at the amount expected to be paid to the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period
Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. The Group recognizes current income tax on the basis of amounts expected to be paid to the tax authorities.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting profit nor taxable profit or loss.
Deferred tax assets are recognized only if it is probable that future taxable amounts will be available to utilize those temporary differences and losses.
The Group recognizes a deferred tax liability all taxable temporary differences associated with investments in subsidiaries, associates, and interests in joint arrangements, 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. In addition, The Group recognizes a deferred tax asset for all deductible temporary differences arising from such investments to the extent that it is probable the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.
2.16 Employee Benefits (a) Post-employment benefits
The Group operates both defined contribution and defined benefit pension plans.
For defined contribution plans, the Group pays contribution to publicly or privately administered pension insurance plans on mandatory, contractual or voluntary basis. The Group has no further payment obligation once the contribution has been paid. The contribution is recognized as employee benefit expense when they are due.
A defined benefit plan is a pension plan that is not a defined contribution plan. Generally, post-employment benefits are payable after the completion of employment, and the benefit amount depended on the
employee’s age, periods of service or salary levels. The liability recognized in the statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is
calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms approximating to the terms of the related obligation. Remeasurement gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized in the period in which they occur, directly in other comprehensive income.
Changes in the present value of the defined benefit obligation resulting from plan amendments or curtailments are recognized immediately in profit or loss as past service costs.
(b) Share-based payments
Equity-settled share-based payment is recognized at fair value of equity instruments granted, and employee benefit expense is recognized over the vesting period. At the end of each period, the Group revises its estimates of the number of options that are expected to vest based on the non-market vesting and service conditions. It recognizes the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity.
2.17 Revenue Recognition (a) General Revenue Recognition
When the outcome of a construction contract can be estimated reliably, the contract revenue and contract costs shall be recognized by reference to the progress of the construction contract activity at the end of the reporting period. The Group determines the progress rate of construction contract by using the methods that can reliably measure the work performed for the related construction, and the progress rate of contract is measured by the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs except for the contract costs that do not reflect work performed.
If loss is expected in a construction contract, the expected loss is immediately recognized as an expense. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognized only to the extent of contract costs incurred that are likely to be recoverable, and the contract costs are recognized as expenses when incurred.
As at the end of the reporting period, the Group compares the total contract revenue multiplied by the cumulative progress rate and the cumulative amount charged by the end of the reporting period and discloses the difference as a due from customers or due to customers for contract work. The unconditional right to consideration is divided into trade receivables.
(b) Combination of Contracts
The Group combines two or more contracts entered into at or near the same time with the same customer (or related parties of the customer) and accounts for the contracts as a single contract if one or more of the following criteria are met:
a. the contracts are negotiated as a package with a single commercial objective;
b. the amount of consideration to be paid in one contract depends on the price or performance of the other contract; or
c. the goods or services promised in the contracts are a single performance obligation. (c) Identifying performance obligations
The major business of the Group is engineering which includes plant construction. In accordance with the Korean IFRS 1115, in EPC business, design, procurement and construction are closely related and not considered separate performance obligation. Therefore, the Group identifies the construction contract as one performance obligation.
(d) Performance obligation satisfied over time.
(e) Measurement of progress rate using input method
The EPC business of the Group enters into plant construction contracts which include procurement and installation of special equipment, and performs construction in the long term of over two years. The supply of the special equipment and the provision of construction services are one performance obligation that are not distinguishable. In accordance with the Korean IFRS 1115, it is faithful representation of the Group’s performance that to recognize revenue at the same amount of the costs of goods used to satisfy a performance obligation if all of the following conditions would be met; (a) goods are not distinguishable at contract inception; (b) it is expected that customers will have significant control over the goods before they are provided with services related to the goods; (c) The cost of goods transferred is significant compared to the total expected costs to completely satisfy the performance obligation; and (d) the Group procures the good from a third party and is not significantly involved in designing and manufacturing the goods. However, the Group’s performance obligation does not meet the above conditions, the costs of special equipment are included in the progress calculation.
(f) Variable Consideration
In measuring the consideration to which the Group will be entitled, the Group recognizes revenue through including in the transaction price an amount of variable consideration only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur. (g) Incremental costs of obtaining a contract
The incremental costs of obtaining a contract are those costs that the Group incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. It shall be recognized as an expense unless those costs are explicitly chargeable to the customer. The company considers the incremental costs of obtaining a contract by occurrence item. The incremental costs of obtaining a contract that are recognized as an asset are amortized as contract costs according to the progress.
(h) Costs to fulfill a contract.
Costs to fulfill a contract are the costs incurred in fulfilling a contract with a customer. Those costs shall be recognized as an asset and are amortized as contract costs according to the progress if all of the following conditions would be met; (a) the costs relate directly to a contract or to an anticipated contract that the entity can specifically identify (for example, costs relating to services to be provided under renewal of an existing contract or costs of designing an asset to be transferred under a specific contract that has not yet been approved); (b) the costs generate or enhance resources of the entity that will be used in satisfying (or in continuing to satisfy) performance obligations in the future; and (c) the costs are expected to be
(i) Contract asset and contract liability
A contract asset is the Group's right to consideration in exchange for goods or services that the Group has transferred to a customer, and a contract liability is the Group’s obligation to transfer goods or services to a customer for which the Group has received consideration (or an amount of consideration is due) from the customer. The contract assets and contract liabilities that incurred from one contract are offset and the net amount reported in the statement of financial position. The Group shall present any unconditional rights to consideration separately as a receivable.
2.18 Leases
As explained in Note 2.2 above, the Group has changed its accounting policy for leases.
As at December 31, 2018, leases in which a significant portion of the risks and rewards of ownership were not transferred to the Group as lessee were classified as operating leases. Payments made under
operating leases (net of any incentives received from the lessor) were charged to profit or loss on a straight-line basis over the period of the lease.
Lease income from operating leases where the Group is a lessor is recognized in income on a straight-line basis over the lease term. Initial direct costs incurred in obtaining an operating lease are added to the carrying amount of the underlying asset and recognized as expense over the lease term on the same basis as lease income. The respective leased assets are included in the statement of financial position based on their nature. The Group did not need to make any adjustments to the accounting for assets held as lessor as a result of adopting the new leasing standard.
The Group leases various offices, cars, and other equipment. Lease contracts are typically made for fixed periods of less than 1 year to average 1.7 years, but may have extension options as described below. Contracts may contain both lease and non-lease components. The Group allocates the consideration in the contract to the lease and non-lease components based on their relative stand-alone prices. However, for leases of real estate for which the Group is lessee, the Group applies the practical expedient which has elected not to separate lease and non-lease components and instead accounts for these as a single lease component.
Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes.
Until the 2018 financial year, leases of property, plant and equipment were classified as either finance or operating leases. Payments made under operating leases (net of any incentives received from the lessor) were charged to profit or loss on a straight-line basis over the period of the lease.
Fixed payments (including in-substance fixed payments), less any lease incentives receivable Variable lease payment that are based on an index or a rate, initially measured using the index or
rate as at the commencement date
Amounts expected to be payable by the Group (the lessee) under residual value guarantees The exercise price of a purchase option if the Group (the lessee) is reasonably certain to exercise
that option, and
Payments of penalties for terminating the lease, if the lease term reflects the Group (the lessee) exercising that option
Lease liability measurement also includes payments to be made in optional periods if the lessee is reasonably certain to exercise an option to extend the lease.
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee’s incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions.
The Group is exposed to potential future increases in variable lease payments based on an index or rate, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed and adjusted against the right-of-use asset.
Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
Right-of-use assets are measured at cost comprising the following: the amount of the initial measurement of lease liability
any lease payments made at or before the commencement date less any lease incentives received
The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. If the Group is reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying asset’s useful life.
Payments associated with short-term leases of equipment and vehicles and leases of low-value assets are recognized on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT-equipment and small items of office furniture.
Extension options are included in a number of property and others across the Group. These terms are used to maximize operational flexibility in terms of managing contracts. The majority of extension options held are exercisable only by the Group and not by the respective lessor.
2.19 Approval of financial statement
The financial statements 2019 were approved by the Board of Directors on January 31, 2020, and are subject to change with approval of shareholders at their Annual General Meeting.
3. Critical Accounting Estimates and Assumptions
The Group makes estimates and assumptions concerning the future. Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. These estimates and
assumptions may differ from the related actual results. (a) Revenue recognition
- Uncertainty in estimating total contract revenue and cost
- Uncertainty in estimating the total contract revenue due to construction delays
The measurement of the construction revenue is affected by the uncertainty of the occurrence of future events. The damage claims for the delay are estimated based on historical experience in case the completion date is expected to be delayed due to the Group’s fault. As at December 31, 2019, the maximum amount of damage claims from the delay as the Group was not able to meet the contracted completion date is expected to be ￦ 35,721 million. Of this amount, the best estimate of damage claims from the delay as the Group is likely to bear due to the Group's fault as at December 31, 2019 is
￦ 35,721 million, which was deducted from the contract revenue. The amount will be continuously
revalued until the completion date. The Group is constantly putting an effort to minimize damage claims for the delay by making a claim to the client for the extension of the construction completion deadline and by proofing that the Group has no failure to comply with the construction completion deadline.
(b) Income tax
The Group’s taxable income generated from these operations are subject to income taxes based on tax laws and interpretations of tax authorities in numerous jurisdictions. There are many transactions and calculations for which the ultimate tax determination is uncertain.
If certain portion of the taxable income is not used for investments or increase in wages in accordance with the Tax System for Recirculation of Corporate Income, the Group is liable to pay additional income tax calculated based on the tax laws. Accordingly, the measurement of current and deferred income tax is affected by the tax effects from the new tax system. As the Group’s income tax is dependent on the investments, increase in wages, there is an uncertainty measuring the final tax effects.
Meanwhile, the Group recognized deferred tax assets for unused tax losses and tax credit carried forward to the extent that determined to be realizable in the future. As at December 31, 2019, the Group
determined that the unused tax credit carried forward was not realizable, so didn’t recognize deferred tax assets of ￦ 142,055 million.
(c) Fair value of financial instruments
The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Group uses its judgment to select a variety of methods and make assumptions that are mainly based on market conditions existing at the end of each reporting period.
(d) Net defined benefit liabilities
4. Cash and Cash Equivalents
Cash and cash equivalents in the consolidated statements of cash flows, consist of:
(In thousands of Korean won) 2019 2018
Cash \ 137,377 \ 396,381
Ordinary deposit and current deposits 344,242,469 254,759,263
Time Deposits 245,132,348 114,204,817
\ 589,512,194 \ 369,360,461
5. Financial Instruments Subject to Withdrawal Restrictions
Short- and long-term financial instruments subject to withdrawal restrictions as at December 31, 2019 and 2018, consist of the following:
(In thousands of Korean won) 2019 2018
Short-term financial instruments
Government grant \ 1,314,150 \ 1,313,042 Guarantees of indebtedness 29,298,457 11,173,134 Long-term financial instruments(*1)
Cash and bank deposits 15,500 15,500
Pledged assets 210,000 210,000
Guarantee deposits(*2)
Customs guarantee deposits 2,081,809 327,823 \ 32,919,916 \ 13,039,499 (*1) Long-term financial instruments are included in the consolidated statements of financial position as ‘other non-current assets’.
6. Fair Values
There were no material changes in business environment and economic circumstances that affect fair values of the Group’s financial assets and financial liabilities during the reporting period.
(1) Management has determined the carrying amounts of financial assets and financial liabilities measured at amortized cost in the consolidated financial statements are reasonable approximations of fair values. (2) Financial Instruments Measured at Cost
Details of financial instruments that are measured at cost because their fair value cannot be reliably assessed as at December 31, 2019 and 2018, are as follows:
(In thousands of Korean
won) 2019 2018
Financial assets measured at fair value through profit or loss
Non-listed equities
and others \ 26,951 \ 26,951 Equity investments
and others 20,000 20,000 Financial assets measured
at fair value through other comprehensive income
Non-listed equities
237,387 211,930
\ 284,338 \ 258,881
(3) Fair Value Hierarchy
Items that are measured at fair value or for which the fair value is disclosed are categorized by the fair value hierarchy levels, and the defined levels are as follows:
Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1).
All inputs other than quoted prices included in level 1 that are observable (either directly that is, prices, or indirectly that is, derived from prices) for the asset or liability (Level 2).
Unobservable inputs for the asset or liability (Level 3).
