As filed with the Securities and Exchange Commission on June 29, 2011April 28, 2014

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-F

 

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

OR

 

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

        For the fiscal year ended December 31, 20102013

OR

 

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

OR

 

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

        Date of event requiring this shell company report                                        

        For the transition period from                     to                    

Commission file number 1-14926

KT Corporation

(Exact name of Registrant as specified in its charter)

 

KT Corporation The Republic of Korea
(Translation of Registrant’s name into English) (Jurisdiction of incorporation or organization)

206 Jungja-dong90, Buljeong-ro

Bundang-ku, Sungnam, Gyunggi-doBundang-gu, Seongnam-si, Gyeonggi-do

463-711 Korea

(Address of principal executive offices)

Thomas Bum JoonIn Hoe Kim

206 Jungja-dong90, Buljeong-ro

Bundang-ku, Sungnam, Gyunggi-doBundang-gu, Seongnam-si, Gyeonggi-do

463-711 Korea

Telephone: +82-31-727-0150;+82-31-727-0114; E-mail: thomaskim@kt.comian.ihkim@kt.com

(Name, telephone, e-mail and/or facsimile number and address of company contact person)

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

 

Title of each class

  

Name of each exchange on which registered

American Depositary Shares, each representing  

New York Stock Exchange, Inc.

one-half of one share of common stock  
Common Stock, par value(Won)5,000 per share*  

New York Stock Exchange, Inc.*

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

None

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

None

As of December 31, 2010,2013, there were 243,215,844261,111,808 shares of common stock, par value(Won)5,000 per share, outstanding

(not (not including 17,895,96417,308,160 shares of common stock held by the company as treasury shares)

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.U.S. GAAP  ¨    IFRS  ¨x    Other  x¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.Item 17¨Item 18x¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes¨Nox

 

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

 

 

 


TABLE OF CONTENTS

 

        Page 

PART I

   1  

ITEM 1.

 

IDENTITY OF DIRECTORS, SENIOR MANAGERS AND ADVISERS

   1  
 

Item 1.A.

  

Directors and Senior Management

   1  
 

Item 1.B.

  

Advisers

   1  
 

Item 1.C.

  

Auditors

   1  

ITEM 2.

 

OFFER STATISTICS AND EXPECTED TIMETABLE

   1  
 

Item 2.A.

  

Offer Statistics

   1  
 

Item 2.B.

  

Method and Expected Timetable

   1  

ITEM 3.

 

KEY INFORMATION

   2  
 

Item 3.A.

  

Selected Financial Data

   2  
 

Item 3.B.

  

Capitalization and Indebtedness

   46  
 

Item 3.C.

  

Reasons for the Offer and Use of Proceeds

   56  
 

Item 3.D.

  

Risk Factors

   56  

ITEM 4.

 

INFORMATION ON THE COMPANY

   1621  
 

Item 4.A.

  

History and Development of the Company

   1621  
 

Item 4.B.

  

Business Overview

   1721  
 

Item 4.C.

  

Organizational Structure

   4149  
 

Item 4.D.

  

Property, Plants and Equipment

   4149  

ITEM 4A.

 

UNRESOLVED STAFF COMMENTS

   4453  

ITEM 5.

 

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

   4453  
 

Item 5.A.

  

Operating Results

   4453  
 

Item 5.B.

  

Liquidity and Capital Resources

   6378  
 

Item 5.C.

  

Research and Development, Patents and Licenses, Etc.

   7082  
 

Item 5.D.

  

Trend Information

   7183  
 

Item 5.E.

  

Off-balance Sheet Arrangements

   7183  
 

Item 5.F.

  

Tabular Disclosure of Contractual Obligations

   7183  
 

Item 5.G.

  

Safe Harbor

   7183  

ITEM 6.

 

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

   7183  
 

Item 6.A.

  

Directors and Senior Management

   7183  
 

Item 6.B.

  

Compensation

   7890  
 

Item 6.C.

  

Board Practices

   7891  
 

Item 6.D.

  

Employees

   8092  
 

Item 6.E.

  

Share Ownership

   8294  

 

i


TABLE OF CONTENTS

(continued)

 

        Page 

ITEM 7.

 

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

   8295  
 

Item 7.A.

  

Major Shareholders

   8295  
 

Item 7.B.

  

Related Party Transactions

   8295  
 

Item 7.C.

  

Interests of Experts and Counsel

   8395  

ITEM 8.

 

FINANCIAL INFORMATION

   8395  
 

Item 8.A.

  

Consolidated Statements and Other Financial Information

   8395  
 

Item 8.B.

  

Significant Changes

   8498  

ITEM 9.

 

THE OFFER AND LISTING

   8498  
 

Item 9.A.

  

Offer and Listing Details

   8498  
 

Item 9.B.

  

Plan of Distribution

   8599  
 

Item 9.C.

  

Markets

   85100  
 

Item 9.D.

  

Selling Shareholders

   89104  
 

Item 9.E.

  

Dilution

   90104  
 

Item 9.F.

  

Expenses of the Issuer

   90104  

ITEM 10.

 

ADDITIONAL INFORMATION

   90104  
 

Item 10.A.

  

Share Capital

   90104  
 

Item 10.B.

  

Memorandum and Articles of Association

   90104  
 

Item 10.C.

  

Material Contracts

   96110  
 

Item 10.D.

  

Exchange Controls

   97111  
 

Item 10.E.

  

Taxation

   101115  
 

Item 10.F.

  

Dividends and Paying Agents

   106120  
 

Item 10.G.

  

Statements by Experts

   106120  
 

Item 10.H.

  

Documents on Display

   106120  
 

Item 10.I.

  

Subsidiary Information

   106120  

ITEM 11.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   106120  

ITEM 12.

 

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

   108123  
 

Item 12.A.

  

Debt Securities

   108123  
 

Item 12.B.

  

Warrants and Rights

   108123  
 

Item 12.C.

  

Other Securities

   108123  
 

Item 12.D.

  

American Depositary Shares

   109123  

PART II

   110124  

ITEM 13.

 

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

   110124  

 

ii


TABLE OF CONTENTS

(continued)

 

         Page 

ITEM 14.

  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS   110124  

ITEM 15.

  

CONTROLS AND PROCEDURES

   110125  

ITEM 16.

  

[Reserved]RESERVED]

   111126  

ITEM 16A.

  

AUDIT COMMITTEE FINANCIAL EXPERT

   111126  

ITEM 16B.

  

CODE OF ETHICS

   112126  

ITEM 16C.

  

PRINCIPAL ACCOUNTANT FEES AND SERVICES

   112126  

ITEM 16D.

  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES   112127  

ITEM 16E.

  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS   113127  

ITEM 16F.

  

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

   113127  

ITEM 16G.

  

CORPORATE GOVERNANCE

   113128

ITEM 16H.

MINE SAFETY DISCLOSURE129  

PART III

   115130  

ITEM 17.

  

FINANCIAL STATEMENTS

   115130  

ITEM 18.

  

FINANCIAL STATEMENTS

   115130  

ITEM 19.

  

EXHIBITS

   115130  

 

iii


PRESENTATION

All references to “Korea” or the “Republic” contained in this annual report mean the Republic of Korea. All references to the “Government” are to the government of the Republic of Korea. All references to “we,” “us” or the “Company” are to KT Corporation and, as the context may require, its subsidiaries.

All references to “Won” or “(Won)” in this annual report are to the currency of the Republic and all references to “Dollars,” “$,” “US$” or “U.S. dollars” are to the currency of the United States of America. Our monetary assets and liabilities denominated in foreign currency are translated into Won at the market average exchange rate announced by Seoul Money Brokerage Services, Ltd. (the “Market Average Exchange Rate”) on the balance sheet dates, which were, for U.S. dollars,(Won)1,257.51,153.3 to US$1.00,(Won)1,167.61,071.1 to US$1.00 and(Won)1,138.91,055.3 to US$1.00 at December 31, 2008, 20092011, 2012 and 2010,2013, respectively. Our consolidated financial statements are expressed in Won and, solely for the convenience of the reader, the consolidated financial statements as of and for the year ended December 31, 20102013 have been translated into United States dollars at the rate of(Won)1,138.91,055.3 to US$1.00, the market average exchange rate announced by Seoul Money Brokerage Services, Ltd. andMarket Average Exchange Rate in effect on December 31, 2010.2013.

Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding.

All market share data contained in this annual report, unless otherwise specified, are based on the number of subscribers announced by the Korea Communications Commission (the “KCC”) or the Korea Telecommunications Operators Association.

PART I

Item 1. Identity of Directors, Senior Managers and Advisers

Item 1.A.  Directors and Senior Management

Not applicable.

Item 1.B.  Advisers

Not applicable.

Item 1.C.  Auditors

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Item 2.A.  Offer Statistics

Not applicable.

Item 2.B.  Method and Expected Timetable

Not applicable.

Item 3. Key Information

Item 3.A.  Selected Financial DaDatata

You should read the selected consolidated financial data below in conjunction with the Consolidated Financial Statements as of December 31, 20092011, 2012 and 20102013 and for each of the years in the three-year period ended December 31, 2010,2013, and the reportsreport of the independent registered public accounting firmsfirm on these statements included herein. These audited financial statements and the related notes have been prepared under International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The selected consolidated financial data for the fivethree years ended December 31, 2010 are2013 have been derived from our audited consolidated financial statements.

Our ConsolidatedIn addition to preparing financial statements in accordance with IFRS as issued by the IASB included in this annual report, we also prepare financial statements in accordance with IFRS as adopted by the Republic of Korea (“K-IFRS”), which we are required to file with the Financial StatementsServices Commission and the Korea Exchange under the Financial Investment Services and Capital Markets Act of Korea (“FSCMA”). English translations of such financial statements are furnished to the Securities and Exchange Commission under Form 6-K. During the three years ended December 31, 2013, we are required to adopt certain amendments and interpretations to K-IFRS, relating to presentation of operating profit. Additionally, under K-IFRS, revenue from the development and sale of real estate is recognized using the percentage of completion method. However, under IFRS as issued by the IASB, revenue from the development and sale of real estate is recognized when an individual unit of residential real estate is delivered to the buyer. Furthermore, due to a subsequent event in which early redemption rights were exercised for certain commercial paper guaranteed by KT ENS Corporation (“KT ENS”), our consolidated subsidiary, we recognized financial losses relating to the resulting estimation of guarantee liabilities in our consolidated statements of operations prepared in accordance with accounting principles generally acceptedIFRS as issued by the IASB, which were not reflected in Korea (“Korean GAAP”),our financial statements prepared in accordance with K-IFRS, which differwere issued on March 13, 2014. As a result, the presentation of operating results in certain significant respectsour consolidated statements of operations prepared in accordance with IFRS as issued by the IASB included in this annual report differs from accounting principles generally acceptedthe presentation of operating results in our consolidated statements of operations prepared in accordance with K-IFRS. See “Item 5.A. Operating Results—Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS” for additional information. In accordance with rule amendments adopted by the United States of America (“U.S. GAAP”). See Note 38Securities and Exchange Commission which became effective on March 4, 2008, we are not required to the Consolidated Financial Statements forprovide a descriptionreconciliation to U.S. GAAP.

The information set forth below is not necessarily indicative of the natureresults of future operations and the effectshould be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements and related notes included in this annual report.

Consolidated statement of such differences.

Income Statement Dataoperations data

 

   Year Ended December 31, 
   2006   2007   2008  2009  2010   2010 
   (In billions of Won and millions of Dollars, except per share data) 

Korean GAAP(1):

          

Operating revenues

  (Won)17,825    (Won)18,614    (Won)19,587   (Won)19,644   (Won)21,331    US$18,730  

Operating expenses

   15,442     16,859     18,144    18,673    19,156     16,820  

Operating income

   2,383     1,755     1,443    971    2,175     1,910  

Non-operating income

   565     486     1,050    808    523     459  

Non-operating expenses

   962     783     1,783    1,059    1,136     998  

Income tax expense on continuing operations

   476     357     168    108    372     326  

Income from continuing operations

   1,510     1,106     542    612    1,190     1,045  

Income (loss) from discontinued operations

        65     (29  (2  3     2  

Net Income

   1,510     1,171     513    610    1,193     1,047  

Controlling interest net income

   1,292     1,056     450    495    1,168     1,026  

Minority interest net income

   218     115     63    115    25     22  

Basic income per share from continuing operations

   6,153     4,783     2,319    2,225    4,797     4.21  

Basic net income per share(2)

   6,155     5,112     2,217    2,254    4,803     4.22  

Diluted income per share from continuing operations

   6,146     4,783     2,319    2,199    4,797     4.21  

Diluted net income per share(3)

   6,148     5,112     2,217    2,227    4,802     4.22  

Dividends per share(4)

   2,000     2,000     1,120    2,000    2,410     2.12  

U.S. GAAP(5):

          

Operating revenues

  (Won)14,088    (Won)17,953    (Won)18,599   (Won)18,891   (Won)20,088    US$17,638  

Operating income

   1,868     1,499     1,197    992    1,899     1,667  

Income taxes

   357     270     178    118    374     328  

Income from continuing operations

   1,423     1,087     577    841    1,196     1,050  

Income (loss) from discontinuing operations

        73     (4  (1         

Net Income(6)

   1,423     1,160     573    840    1,196     1,050  

Attributable to KT stockholders

   1,329     1,069     518    742    1,186     1,041  

Attributable to noncontrolling interests

   94     91     55    98    10     9  

Basic income per share from continuing operations

   6,331     4,821     2,571    3,382    4,876     4.28  

Basic income per share(2)

   6,333     5,172     2,554    3,380    4,876     4.28  

Diluted income per share from continuing operations

   6,325     4,821     2,571    3,332    4,876     4.28  

Diluted income per share(3)

   6,327     5,172     2,554    3,330    4,876     4.28  
   Year Ended December 31, 
           2010(1)                  2011(1)                  2012(1)                  2013                  2013 (2)         
   (In billions of Won and millions of Dollars, except per share data) 

Continuing Operations:

      

Operating revenue

  20,310   22,088   24,644   24,058   US$22,797  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Revenue

   19,993    21,311    23,856    23,729    22,485  

Others

   317    777    787    329    312  

Operating expenses

   18,303    20,101    22,964    23,734    22,491  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating profit

   2,007    1,987    1,680    323    306  

Finance income

   238    270    499    279    265  

Finance costs

   (596  (642  (782  (648  (614

Income from jointly controlled entities and associates

   33    (6  18    7    6  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Profit (loss) from continuing operations before income tax

   1,681    1,609    1,415    (38  (36
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income tax expense

   (396  318    278    50    47  

Profit (loss) for the year from the continuing operations

   1,285    1,291    1,137    (88  (83
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Discontinued operations:

      

Profit (loss) from discontinued operations

   29    165    (32        
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Profit (loss) for the year

  1,314   1,455   1,105   (88 US$(83
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Profit (loss) for the year attributable to:

      

Equity holders of the parent company

  1,296   1,446   1,046   (190 US$(180

Profit (loss) from continuing operations

   1,273    1,280    1,076    (190  (180

Profit (loss) from discontinued operations

   23    166    (30        

Non-controlling interest

  19   10   59   102   US$97  

Profit from continuing operations

   13    11    61    102    97  

Profit (loss) from discontinued operations

   6    (1  (2        

Earnings per share attributable to the equity holders of the Parent Company during the period (in won):

      

Basic earnings (loss) per share

  5,326   5,943   4,296   (779 US$(1

From continuing operations

   5,293    5,262    4,417    (779  (1

From discontinued operations

   33    681    (121        

Diluted earnings (loss) per share

  5,326   5,942   4,296   (782 US$(1

From continuing operations

   5,293    5,261    4,417    (782  (1

From discontinued operations

   33    681    (121        

Balance Sheet DataConsolidated statement of financial position data

 

   Year Ended December 31, 
   2006   2007   2008   2009   2010   2010 
   (In billions of Won and millions of Dollars) 

Korean GAAP(1):

            

Working capital(7)

  (Won)558    (Won)564    (Won)1,833    (Won)1,031    (Won)643    US$565  

Net property and equipment

   15,167     15,288     15,189     14,775     15,228     13,371  

Total assets

   24,243     24,127     26,139     26,620     27,713     24,334  

Long term debt, excluding current portion

   6,097     5,973     7,947     7,536     7,219     6,338  

Refundable deposits for telephone installation

   907     841     782     696     615     541  

Total equity

   10,697     11,138     11,088     10,667     11,496     10,094  

U.S. GAAP(5):

            

Working capital(7)

  (Won)333    (Won)332    (Won)1,640    (Won)845    (Won)584    US$513  

Net property and equipment

   14,729     14,671     14,460     14,041     13,682     12,013  

Total assets

   24,098     24,023     25,974     26,526     26,603     23,359  

Total equity

   10,221     10,589     10,609     10,456     11,100     9,746  

Stockholders’ equity

   8,038     8,438     8,490     10,287     10,929     9,596  

Noncontrolling interests

   2,183     2,151     2,119     169     171     150  
   As of December 31, 
Selected Statement of Financial Position Data      2010(1)           2011(1)           2012(1)           2013     
   (In billions of Won) 

Assets:

     

Current assets:

     

Cash and cash equivalents

  1,162   1,462   2,058   2,071  

Trade and other receivables, net

   4,193    6,191    5,908    5,240  

Short-term loans, net

   725    698    668    839  

Current finance lease receivables, net

   195    249    340    294  

Other financial assets

   270    259    246    480  

Current income tax assets

   0    1    1    35  

Inventories, net

   711    676    935    674  

Other current assets

   264    311    362    340  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total current assets

   7,519    9,847    10,517    9,972  
  

 

 

  

 

 

  

 

 

  

 

 

 

Non-current assets:

     

Trade and other receivables, net

   1,125    1,725    1,073    813  

Long-term loans, net

   408    491    513    510  

Non-current finance lease receivables, net

   403    488    522    416  

Other financial assets

   269    622    672    673  

Property and equipment, net

   13,398    14,090    15,806    16,387  

Investment property, net

   1,146    1,159    1,155    1,105  

Intangible assets, net

   1,419    2,645    3,214    3,827  

Investments in jointly controlled entities and associates

   638    500    379    364  

Deferred income tax assets

   565    530    611    707  

Other non-current assets

   50    86    95    76  

Total non-current assets

   19,422    22,336    24,040    24,878  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total assets

  26,942   32,183   34,558   34,850  
  

 

 

  

 

 

  

 

 

  

 

 

 

Liabilities and Equity:

     

Current liabilities:

     

Trade and other payables

  4,424   5,902   7,221   7,414  

Current finance lease liabilities, net

   33    46    14    19  

Borrowings

   2,722    2,125    3,197    3,021  

Other financial liabilities

   1    8    72    64  

Current income tax liabilities

   284    187    144    100  

Provisions

   58    123    206    115  

Deferred income

   177    168    171    144  

Other current liabilities

   185    220    242    348  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total current liabilities

   7,885    8,780    11,267    11,224  
  

 

 

  

 

 

  

 

 

  

 

 

 

Non-current liabilities:

     

Trade and other payables

   382    652    701    1,059  

Non-current finance lease liabilities, net

   61    90    28    49  

Borrowings

   6,660    8,897    8,239    8,463  

Other financial liabilities

   38    288    70    179  

Retirement benefit liabilities

   264    426    549    586  

Provisions

   110    143    150    134  

Deferred income

   157    161    157    148  

Deferred income tax liabilities

   4    126    137    169  

Other non-current liabilities

   27    32    41    2  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total non-current liabilities

   7,703    10,815    10,073    10,789  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities

  15,588   19,595   21,340   22,013  
  

 

 

  

 

 

  

 

 

  

 

 

 

Equity attributable to owners of the Parent Company

     

Paid-in capital

     

Capital stock

  1,564   1,564   1,564   1,564  

Share premium

   1,440    1,440    1,440    1,440  

Retained earnings

   9,466    10,219    10,646    10,019  

Accumulated other comprehensive income (expense)

   (79  (23  1    25  

Other components of equity

   (1,258  (1,497  (1,343  (1,321
   11,133    11,704    12,309    11,728  

Non-controlling interest

   221    884    909    1,110  

Total equity

   11,354    12,588    13,218    12,837  

Total liabilities and equity

  26,942   32,183   34,558   34,850  

Other Financial DataConsolidated statement of cash flow data

 

   Year Ended December 31, 
   2006  2007  2008  2009  2010  2010 
   (In billions of Won and millions of Dollars) 

Korean GAAP:

       

Net cash provided by operating activities

  (Won)5,714   (Won)4,265   (Won)2,920   (Won)3,399   (Won)3,245   US$2,849  

Net cash used in investing activities

   (3,061  (3,449  (3,532  (2,872  (3,436  (3,017

Net cash provided by (used in) financing activities

   (2,367  (1,368  1,051    (930  (129  (113

U.S. GAAP(5):

       

Net cash provided by operating activities

  (Won)4,667   (Won)4,260   (Won)2,889   (Won)3,338   (Won)3,022   US$2,653  

Net cash used in investing activities

   (2,432  (3,410  (3,502  (2,818  (3,277  (2,877

Net cash provided by (used in) financing activities

   (1,671  (1,271  1,147    (901  (117  (103
   Year Ended December 31, 
   2010(1)  2011(1)  2012(1)  2013  2013 (2) 
   (In billions of Won and millions of Dollars) 

Net cash generated from operating activities

  2,973   2,164   5,725   4,111   US$3,896  

Net cash (used in) investing activities

   (2,949  (2,666  (3,851  (3,783  (3,584

Net cash provided by (used in) financing activities

   (398  772    (1,278  (312  (295

Operating Data

 

  As of December 31,   As of December 31, 
  2006   2007   2008   2009   2010   2009   2010   2011   2012   2013 

Lines installed (thousands)(8)(3)

   26,838     26,671     26,008     25,907     25,524     25,907     25,524     23,925     25,242     24,264  

Lines in service (thousands)(8)(3)

   20,331     19,980     18,883     17,069     16,620     17,069     16,620     15,900     15,121     14,032  

Lines in service per 100 inhabitants(8)(3)

   42.0     41.2     38.8     35.0     34.0     35.0     34.0     30.8     30.2     27.4  

Mobile subscribers (thousands)

   12,914     13,721     14,365     15,016     16,041     15,016     16,041     16,563     16,502     16,454  

Broadband Internet subscribers (thousands)

   6,353     6,516     6,712     6,953     7,424     6,953     7,424     7,823     8,037     8,067  

 

 

(1)Through December 31, 2008,As a result of adoption of IFRS 10 in 2013, the Koreacomparative 2011 and 2012 consolidated financial data were retrospectively restated, but 2010 consolidated financial data were not restated as IFRS 10 does not require restatement of the earlier periods presented beyond the immediately preceded period. Also, the amendments to International Accounting Standards Board has issued StatementsStandard 19 were applied retrospectively and the comparative 2010, 2011, and 2012 consolidated statement of Korea Accounting Standards (“SKAS”) No. 1 through No. 25. Among these statements, SKAS No. 1 through No. 10 and SKAS No. 12 through No. 20 are required to be applied inoperations data were restated by reflecting the prior periods. Although SKAS No. 11 and SKAS No. 21 through No. 25 are required to be applied starting in 2007, the balances of 2006 have been reclassified in accordance with Statements of Korea Accounting Standards No. 16 and No. 21 for comparison purposes.adjustments resulting from this retrospective application.

 

(2)Basic earnings per share under Korean GAAP andFor convenience, the Won amounts are expressed in U.S. GAAP is calculated by dividing net earnings bydollars at the weighted average numberrate of shares outstanding during1,055.3 to US$1.00, the period. The weighted average number of shares of common stock outstanding duringMarket Average Exchange Rate in effect on December 31, 2013. This translation should not be construed as a representation that the period was 209,895 thousand for 2006, 206,599 thousand for 2007, 202,891 thousand for 2008, 219,513 thousand for 2009 and 243,207 thousand for 2010.Won amounts represent, have been or could be converted into U.S. dollars at that rate or any other rate.

 

(3)Diluted earnings per share are calculated based on the effect of dilutive securities that were outstanding during the period. The denominator of the diluted earnings per share computation is adjusted to include the number of additional common shares that would have been outstanding if the dilutive securities had been converted into common stock. In addition, the numerator is adjusted to include the after-tax amount of interest recognized associated with convertible notes. The weighted average number of common and common equivalent shares outstanding was 210,150 thousand for 2006, 206,599 thousand for 2007, 202,891 thousand for 2008, 224,168 thousand for 2009 and 243,225 thousand for 2010.

(4)The calculation of dividends per share represents the weighted average dividends paid per share.

(5)See Note 38 to the Consolidated Financial Statements for reconciliation to U.S. GAAP.

(6)In December 2007, the Financial Accounting Standard Board issued and amended an accounting standard that requires that the noncontrolling interest in the equity of a subsidiary be accounted for and reported as equity in consolidated financial statements. With the adoption of the amended standard, net income attributable to noncontrolling interests is included in net income. We retrospectively adopted the presentation and disclosure requirements of the standard for all of the financial statements and information included herein on January 1, 2009.

(7)“Working capital” means current assets minus current liabilities.

(8)Including public telephones.

Exchange Rate Information

The following table sets out information concerning the market average exchange rateMarket Average Exchange Rate for the periods and dates indicated.indicated:

 

Period

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

2006

   929.6     956.1     1,013.0     918.0  

2007

   938.2     929.2     950.0     902.2  

2008

   1,257.5     1,102.6     1,509.0     934.5  

2009

   1,167.6     1,276.4     1,573.6     1,152.8     1,167.6     1,276.4     1,573.6     1,152.8  

2010

   1,138.9     1,156.3     1,261.5     1,104.0     1,138.9     1,156.3     1,261.5     1,104.0  

2011

   1,153.3     1,108.1     1,199.5     1,049.5  

2012

   1,071.1     1,126.9     1,181.8     1,071.1  

2013

   1,055.3     1,095.0     1,159.1     1,051.5  

November

   1,062.1     1,062.8     1,072.9     1,055.8  

December

   1,138.9     1,147.6     1,164.9     1,133.6     1,055.3     1,056.7     1,061.9     1,051.5  

2011 (through June 28)

   1,086.7     1,102.2     1,138.9     1,066.8  

2014 (through April 28)

   1,038.9     1,063.2     1,086.1     1,036.0  

January

   1,114.3     1,120.1     1,138.9     1,112.2     1,079.2     1,064.8     1,084.1     1,050.4  

February

   1,127.9     1,118.1     1,127.9     1,104.4     1,067.7     1,071.3     1,086.1     1,060.5  

March

   1,107.2     1,122.5     1,137.6     1,107.2     1,068.8     1,070.9     1,080.3     1,062.6  

April

   1,072.3     1,086.8     1,100.1     1,072.3  

May

   1,080.6     1,083.5     1,096.3     1,066.8  

June (through June 28)

   1,086.7     1,081.4     1,088.9     1,075.0  

April (through April 28)

   1,038.9     1,045.6     1,066.1     1,036.0  

 

SourceSource:: Seoul Money Brokerage Services, Ltd.

 

(1)The average rate for each full year is calculated asRepresents the average of the market average exchange rates on the last business day of each month during the relevant year. The average rate for a full month is calculated as the average of the market average exchange ratesMarket Average Exchange Rates on each business day during the relevant monthperiod (or portion thereof).

Our monetary assets and liabilities denominated in foreign currency are translated into Won at the market average exchange rate announced by Seoul Money Brokerage Services, Ltd.Market Average Exchange Rate on the balance sheet dates, which were, for U.S. dollars,(Won)1,257.51,153.3 to US$1.00,(Won)1,167.61,071.1 to US$1.00 and(Won)1,138.91,055.3 to US$1.00 at December 31, 2008, 20092011, 2012 and 2010,2013, respectively.

Our consolidated financial statements are expressed in Won and, solely for the convenience of the reader, the consolidated financial statements as of and for the year ended December 31, 20102013 have been translated into United States dollars at the rate of(Won)1,138.91,055.3 to US$1.00, the market average exchange rate announced by Seoul Money Brokerage Services, Ltd. andMarket Average Exchange Rate in effect on December 31, 2010.2013.

We make no representation that the Won or Dollar amounts contained in this annual report could have been or could be converted into Dollar or Won, as the case may be, at any particular rate or at all.

Item 3.B.Capitalization and Indebtedness

Not applicable

applicable.

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

Not applicable.

Item 3.D.Risk Factors

You should carefully consider the following factors.

Risks Relating to Our Business

Competition in the Korean telecommunications industry is intense.

Competition in the telecommunications sector in Korea is intense. In recent years, business combinations in the telecommunications industry have significantly changed the competitive landscape of the Korean telecommunications industry. In particular, SK Telecom Co., Ltd. (or SK Telecom) acquired a controlling stake in Hanarotelecom Incorporated in 2008, which was renamed SK Broadband Co., Ltd. (or SK Broadband). The acquisition enablesenabled SK Telecom to provide fixed-line telecommunications, broadband Internet access and Internet television (or IP-TV) services together with its mobile telecommunications services. OnIn January 1, 2010, LG Dacom Corporation (or LG Dacom) and LG Powercom Co., Ltd. (or LG Powercom) merged into LG Telecom Co., Ltd., which subsequently changed its name to LG U+. The merger enablesenabled LG U+ to provide a similar range of services as SK Telecom and us. Our inability to adapt to such changes in the competitive landscape could have a material adverse effect on our business, financial condition and results of operations.

In addition to our competition with integrated telecommunications service providers, we face increasing competition from specific service providers, such as Internet phone service providers, Internet text message service providers, voice resellers and call-back service providers. In recent years, the increasing popularity of Internet phone and free text message services, such as Skype and Kakao Talk, have had a negative impact on demand for our telecommunications and text message services while creating additional data transmission usage by our Internet and mobile subscribers. Our inability to adapt to such changes in the competitive landscape could have a material adverse effect on our business, financial condition and results of operations.

Mobile Service.We provide mobile services based on Code Division Multiple Access (or CDMA) technology and Wideband Code Division Multiple Access (or W-CDMA) technology and Long-Term Evolution (or LTE) technology. Competitors in the mobile telecommunications service industry are SK Telecom and LG U+. We had a market share of 31.6%30.1% as of December 31, 2010,2013, making us the second largest mobile telecommunications service provider.provider in Korea. SK Telecom had a market share of 50.6%50.0% as of December 31, 2010.2013.

Mobile subscribers are allowed to switch their service provider while retaining the same mobile phone number. Mobile service providers also grant subsidies to subscribers who purchase new handsets and agree to a minimum subscription period. Mobile number portability and handset subsidies have intensified competition among the mobile service providers and increased their marketing expenses. If the mobile service providers adopt a strategy of expanding market share through price competition, it could lead to a decrease in our net profit margins.

In recent years,

Since 2011, SK Telecom, LG U+ and we alsohave launched third-generationfourth-generation mobile telecommunications services based on LTE technology, which we believe havehas further intensified competition betweenamong the twothree companies and resulted in an increase in marketing expenses. We expandedexpenses and capital expenditures related to implementing and providing 4G LTE services. SK Telecom and LG U+ began providing 4G LTE services in July 2011, and we commenced providing commercial 4G LTE services on January 3, 2012 utilizing our coverage areabandwidths in the 1.8 GHz spectrum that became available upon termination of High Speed Downlink Packetour 2G services based on Code Division Multiple Access (or HSDPA)-based IMT-2000CDMA) technology. In September 2013, we commenced providing wideband LTE services, nationwidewhich utilizes our adjoining 20 MHz of bandwidth in the 1.8 GHz spectrum to provide transmission speed of up to 150 Mbps, twice faster than those offered under standard LTE services. SK Telecom also began providing its wideband LTE services in September 2013 and LG U+ commenced providing its wideband LTE services in January 2014. As of March 1, 2014, our wideband LTE services covered five metropolitan cities in Korea, and we expect to expand our wideband LTE services to all of Korea by July 2014. As of December 31, 2013, the number of our LTE subscribers exceeded 7.8 million. Furthermore, in March 2007. IMT-2000 is a third-generation, high-capacity wireless communications2014, we commercialized advanced wideband LTE (“Wideband LTE-A”) services, which interconnects our 20 MHz of bandwidth in the 1.8 GHz spectrum used to offer wideband LTE services with the 10 MHz of bandwidth in the 900 MHz spectrum used to offer standard LTE services by utilizing inter-band carrier aggregation technology to support transmission speed of up to 225 Mbps.

On April 2, 2014, LG U+ launched Korea’s first unlimited mobile service package, offering mobile subscribers with unlimited voice calls, text messaging, and LTE data at fees between80,000 to85,000 per month. Commencing on April 3, 2014, SK Telecom launched three different types of unlimited LTE data plans, which allows operators to provide to their customers significantly more bandwidth capacity.mobile subscribers with unlimited amounts of LTE data, voice calls, and text massaging. On April 7, 2014, we began offering mobile subscribers with unlimited LTE data, voice calls, and text messaging packages at fees of70,000 per month. Although we expect that SK Telecom and LG U+ will face similar challenges to those that we expect to face in offering LTE services and in implementing this third-generationimprovements to LTE technology, such as increased fees and expenses and unforeseeable market responses to the new technology, we cannot assure you that we will continue to be able to successfully compete in third-generationfourth-generation mobile telecommunications services. Furthermore, we believe that the continuing intense competition among major telecommunications operators in Korea and the resulting pressure on our fees, including from offerings of unlimited usage plans, may have a material adverse impact on our results of operations.

Fixed-line Telephone ServicesServices.. Before December 1991, we were the sole provider of local, domestic long-distance and international long-distance telephone services in Korea. Since then, various competitors have entered the local, domestic long-distance and international long-distance telephone service markets in Korea, which have eroded our market shares. LG U+ and SK Broadband currently provide local, domestic long-distance and international long-distance telephone services. In addition, Onse Telecom Corporation and SK Telink, Inc. currently provide domestic long-distance and

international long-distance telephone services. Starting in 1998,We also compete with specific service providers, such as Internet phone service providers, voice resellers and call-back service providers, also began offeringthat offer international long-distance service in Korea. While we offer our own Internet phone service, the entry of these and other potential competitors into the local, domestic long-distance and international long-distance telephone service markets has had and may continue to have a material adverse effect on our revenues and profitability from these businesses. As of December 31, 2010,2013, we had a market share in local telephone service of 86.3%81.4% and a market share in domestic long distance service of 82.2%78.7%. Further increase in competition may decrease our market shares in such businesses. As part of our efforts to improve our operational efficiencies, we announced on April 8, 2014 that we will transfer any operations relating to fixed-line sales activities (including on-site sales, line activation, after service, and customer center operations) to our subsidiaries.

Internet ServicesServices..The Korean broadband Internet access service market has experienced significant growth in the past decade. SK Broadband (formerly Hanarotelecom) entered the broadband market in 1999 offering both Hybrid Fiber Coaxial (or HFC) and Asymmetric Digital Subscriber Line (or ADSL) services. We also began offering broadband Internet access service in 1999, followed by Dreamline, Onse and LG U+. In recent years, numerous cable television operators have also begun to offer HFC-based services at rates lower than ours. We had a market share of 43.1% as of December 31, 2010.2013. As a result of having to compete with a number of competitors and the maturing of the Internet access service market, we currently encounter, and we expect to encounter, pressure to increase marketing expenses in the future.

The market for other Internet-related services in Korea, including IP-TV and Internet phone services, is also very competitive. We anticipate that competition will continue to intensify as the usage and popularity of the Internet grows and as new domestic and international competitors enter the Internet industry in Korea. The substantial growth of the Internet industry in Korea has attracted many competitors and as a result may lead to increasing price competition to provide Internet-related services. Increased competition in the Internet industry could have a material adverse effect on the number of subscribers of our Internet-related service and on our results of operations.

We may fail to realize the anticipated benefits of the merger of KTF into KT Corporation.

On June 1, 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger. The success of the merger of KTF with KT Corporation will depend, in part, on our ability to realize the anticipated synergies, growth opportunities and, to a lesser extent, cost savings from combining these two companies. The realization of these anticipated benefits may be impeded, delayed or reduced as a result of numerous factors, some of which are outside our control. These factors include:

difficulties in integrating the operations of KTF with those of KT Corporation, including information systems, personnel, policies and procedures, and in reorganizing or reducing overlapping personnel, operations, marketing networks and administrative functions;

unforeseen contingent risks or latent liabilities relating to the merger that may become apparent in the future;

difficulties in managing a larger business; and

loss of key management personnel or customers.

Accordingly, we cannot assure you that we will realize the anticipated benefits of the merger or that the merger will not adversely affect our combined business, financial condition and results of operations.

The integration of the operations of KTF into KT Corporation may require significant amounts of time, financial resources and management attention. KT Corporation’s management intends to implement a business plan to effectively combine the operations of KTF with the operations of

KT Corporation. If this business plan is not effective in integrating these operations, however, we may not realize the anticipated benefits of the merger. The integration process could also result in the disruption of our ongoing business and information technology systems, or inconsistencies in standards, controls, procedures and policies and a reduction in employee morale, each of which may adversely affect our ability to maintain relationships with customers and to retain key personnel.

In addition, as conditions to the approval of the merger of KTF into KT Corporation, the Korea Communications Commission is requiring us to (i) allow competing service providers to have greater access to our cable tunnels and telephone poles, (ii) improve Public Switched Telephone Network (or PSTN) number portability and voice over Internet protocol (or VoIP) number portability, and (iii) allow competing service providers to access our wireless Internet network. Such conditions may intensify competition in the telecommunications industry, which could have a material adverse effect on the number of our subscribers and results of operations.

Failure to renew existing bandwidth spectrum, acquire adequate additional bandwidth spectrum or use our bandwidth efficiently may adversely affect our mobile telecommunications business and results of operations.

One of the principal limitations on a wireless network’s subscriber capacity is the amount of bandwidth spectrum allocated to the service provider. Our current rightWe have a license to use 40 MHz of bandwidth in the 1.82.1 GHz spectrum is scheduledthat we use to expire at the end of June 2011. We have applied to the Korea Communications Commission to allocate back to us 20 MHz of bandwidthprovide IMT-2000 services based on W-CDMA wireless network standards. Such license expires in the 1.8 GHz spectrum, for whichDecember 2016, and we expectare required to pay a usage fee if reallocatedapproximately1.3 trillion during the license period of 15 years. In April 2010, the KCC announced its decision to us. In addition, the Korea Communications Commission allocatedallocate 20 MHz of bandwidth in the 900 MHz spectrum to us, which will becomebecame effective onin July 1, 2011. We expect2011, for which we are required to pay a portion of the actual sales generated from using the bandwidth in the 900 MHz spectrum during the license period of 10 years as a usage fee for the bandwidth, as well as a portion of expected sales asthat was determined by the Korea Communications CommissionKCC at the time of allocation. In June 2011, our right to use 40 MHz of bandwidth in the Korea Communications Commission announced its plan1.8 GHz spectrum expired, and the KCC allocated back to auctionus the right to use 20 MHz of such bandwidth in the 1.8 GHz spectrum upon expiration pursuant to our application, for which we are required to pay a portion of the actual sales generated from using the bandwidth in the 1.8 GHz spectrum during the license period of 10 years as a usage fee for the bandwidth, as well as a portion of expected sales that was determined by the KCC at the time of allocation.

In August 2011, the KCC auctioned the right to use the remaining 20 MHz of bandwidth in the 1.8 GHz spectrum that we are scheduled to relinquish at the end of June 2011,relinquished, 10 MHz of additional bandwidth in the 800 MHz spectrum and 20 MHz of additional bandwidth in the 2.1 GHz spectrum. AccordingWe acquired the right to use the plan,10 MHz of bandwidth in the 800 MHz spectrum, for which we are required to pay a maximumtotal usage fee of261 billion during the license period of 10 years, SK Telecom acquired the right to use the 20 MHz of bandwidth may be soldin the 1.8 GHz spectrum and LG U+ acquired the right to a single service provider, and SK Telecom and we are prohibited from bidding foruse the 20 MHz of bandwidth in the 2.1 GHz spectrum. If we areWe began using the 20 MHz of bandwidth in the 1.8 GHz spectrum, which became available upon termination of our 2G services, to provide our 4G LTE services starting in January 2012, and also began using the 20 MHz of bandwidth in the 900 MHz spectrum to provide our 4G LTE services starting in September 2013. We expect to utilize the newly allocated the bandwidthsbandwidth in the 800 MHz orspectrum to further expand our 4G LTE services in the future, if necessary.

In August 2013, the Ministry of Science, ICT and Future Planning further auctioned 50 MHz of bandwidth in the 1.8 GHz spectrums,spectrum, which had been used by governmental entities such as the

military, and 80 MHz of bandwidth in the 2.6 GHz spectrum, which had been used for digital multimedia broadcasting services. We acquired the right to use 15 MHz of bandwidth in the 1.8 GHz spectrum, for which we expectare required to pay a total usage fees for such bandwidths. fee of approximately900 billion during a license period of eight years. SK Telecom acquired the right to use 35 MHz of bandwidth in the 1.8 GHz spectrum and LG U+ acquired the right to use 40 MHz of bandwidth in the 2.6 GHz spectrum. Acquiring the right to use additional bandwidth in the 1.8 GHz spectrum has enabled us to provide Wideband LTE services beginning in September 2013, as 15 MHz of the newly acquired bandwidth in the 1.8 GHz spectrum was adjacent to our existing 20 Mhz of bandwidth in the 1.8 GHz spectrum.

The growth of our mobile telecommunications business and the increase in usage of wireless data transmission services have been significant factors in the increased utilization of our bandwidth, since wireless data applications are generally more bandwidth-intensive than voice services. The current trend of increasing data transmission use and the increasing sophistication of multimedia contents are likely to put additional strain on the bandwidth capacity of mobile service providers. In the event we are unable to maintain sufficient bandwidth capacity by renewing existing bandwidth spectrum, receiving additional bandwidth allocation, or cost-effectively implementing technologies that enhance bandwidth usage efficiency, our subscribers may perceive a general decrease in quality of mobile telecommunications services. No assurance can be given that bandwidth constraints will not adversely affect the growth of our mobile telecommunications business.

Termination of our second generation Personal Communications Service (or 2G PCS) services may pose risks to us.

We have been providing our 2G PCS services based on CDMA wireless network standards through our 40 MHz bandwidth in the 1.8 GHz spectrum, which allocation is expected to terminate at the end of June 2011. As part of our decision to apply for reallocation, we have applied to the Korea Communications Commission to terminate our existing 2G PCS services, which we expect to be able

to terminate in the second half of 2011. Accordingly, our existing 2G PCS subscribers must either convert to our W-CDMA services or switch to other telecommunications companies. As of December 31, 2010, there were 1,393 thousand subscribers of our 2G PCS services. We are offering benefits such as substantial discounts on W-CDMA-compatible handsets and monthly subscription fees starting in March 2011 to encourage our existing subscribers to switch to our W-CDMA services. However, there can be no assurance that we will not incur reputational damage from terminating our 2G PCS services, such termination will not lead to a material decrease in the number of our mobile subscribers, or complaints and other potential actions of our 2G PCS subscribers will not adversely affect our business, financial condition and results of operations.

Introduction of new services, including our 4G LTE services, poses challenges and risks to us.

The telecommunications industry is characterized by continual advances and improvements in telecommunications technology, and we have been continually researching and implementing technology upgrades and additional telecommunication services to maintain our competitiveness. For example, in March 2005, we acquired a license to provide wireless broadband Internet access (or WiBro) service for(Won)126 billion, and commercially launched our service in June 2006. We completed the upgrade of our 4G WiBro network and expanded our WiBro service coverage to 8284 cities nationwide and major highways as ofin March 2011, which we believe will allowallows us to provide WiBro services at speeds that are approximately three times faster than our previous 3G network at a lower cost, and had approximately 377 thousand845,000 subscribers as of December 31, 2010. In addition,2013. The number of our WiBro subscribers decreased in 2013 compared to 2012, as more WiBro subscribers chose to access the internet using our 4G LTE network rather than WiBro following the introduction and proliferation of 4G LTE services during 2012 and 2013. Furthermore, we focused our subscriber retention efforts during 2013 on our mobile subscribers rather than our WiBro subscribers. We are currentlyalso upgrading our broadband network to enable FTTH connection, which enhances downstreamdata transmission speed and connection quality. FTTH is a telecommunication architecture in which a communication path is provided over optical fiber cables extending from the telecommunications operator’s switching equipment to the boundary of home or office. FTTH uses fiber optic cable, which is able to carry a high-bandwidth signal for longer distances without degradation. FTTH also enables us to deliver enhanced products and services that require high bandwidth,digital media content, such as IP-TV, with higher stability.

In addition, we have been building more advanced mobile telecommunications networks based on LTE technology, which is generally referred to as 4G technology, and commenced providing commercial 4G LTE services in the Seoul metropolitan area on January 3, 2012. We completed the expansion of our 4G LTE service coverage nationwide in October 2012. Several wireless carriers in the United States, Europe and deliveryAsia commenced LTE services in recent years and LTE technology is currently widely accepted as the standard 4G technology. LTE technology enables data to be transmitted faster than W-CDMA, up to 150 Mbps for downloading and up to 50 Mbps for uploading. We believe that the faster data transmission speed of other digital mediathe LTE network, combined with our existing 4G nationwide WiBro network, allows us to offer significantly improved wireless data transmission services

with faster wireless access to multimedia content. No assurance can be given that our new services will gain broad market acceptance such that we will be able to derive revenues from such services to justify the license fee, capital expenditures and other investments required to provide such services.

We may not be able to successfully pursue our strategy to acquire businesses and enter into joint ventures that complement or diversify our current business, and we may need to incur additional debt to finance such expansion activities.

One key aspect of our overall business strategy calls for acquisitions of businesses and entering into joint ventures that complement or diversify our current business. In October 2011, we, through our subsidiary KT Capital Co., Ltd., acquired 1,622,520 common shares of BC Card Co., Ltd. to further diversify our business and to create synergies through utilization of our mobile telecommunications network in financial services. We acquired an additional 1,349,920 common shares of BC Card Co., Ltd. in January 2012 for approximately287 billion, and owned a 69.54% interest in BC Card Co., Ltd. as of December 31, 2013. In January 2011, we acquired 5,600,000 shares of redeemable convertible preferred stock with voting rights and convertible bonds that were convertible into 5,600,000 shares of common stock of KT Skylife Co., Ltd., a provider of satellite TV service which may also be packaged with our IP-TV services, from Dutch Savings Holdings B.V. for approximately246 billion. We exercised the conversion rights on the redeemable convertible preferred stock and the convertible bonds in March 2011, and owned a 50.1% interest in KT Skylife Co., Ltd. as of December 31, 2013.

While we plan to continue our search for other suitable acquisition and joint venture opportunities, we cannot provide assurance that we will be able to identify additional attractive opportunities or that we will successfully complete the transactions, without encountering administrative, technical, political, financial or other difficulties, or at all. Even if we were to successfully complete the transactions, success of an acquisition or a joint venture depends largely on our ability to achieve the anticipated synergies, cost savings and growth opportunities from integrating the business of the acquired company or the joint venture with our business. There can be no assurance that we will achieve the anticipated benefits of the transaction, which may adversely affect our business, financial condition and results of operations.

Pursuing acquisitions or joint venture transactions also requires significant capital, and as we pursue further growth opportunities for the future, we may need to raise additional capital through incurring loans or through issuances of bonds or other securities in the international capital markets.

Disputes with our labor union may disrupt our business operations.

In the past, we have experienced opposition from our labor union for our strategy of restructuring to improve our efficiency and profitability by disposing of non-core businesses and reducing our employee base. Although we have not experienced any significant labor disputes or unrests in recent years, there can be no assurance that we will not experience labor disputes or unrests in the future, including expanded protests and strikes, which could disrupt our business operations and have an adverse effect on our financial condition and results of operations.

We also negotiate collective bargaining agreements every two years with our labor union and annually negotiate a wage agreement. Our current collective bargaining agreement expires on May 23, 2013. 2015.Although we have been able to reach collective bargaining agreements and wage agreements with our labor union in recent years, there can be no assurance that we will not experience labor disputes and unrests resulting from disagreements with the labor union in the future.

The Korean telecommunications and Internet protocol broadcasting industries are subject to extensive Government regulations, and changes in Government policy relating to these industries could have a material adverse effect on our operations and financial conditioncondition..

The Government, primarily through the Korea Communications Commission,Ministry of Science, ICT & Future Planning (the “MSIP”) (ICT standing for Information & Communication Technology) and the KCC, has authority to regulate the telecommunications industry. Until March 2013, regulation of the telecommunications industry had mainly been the responsibility of the KCC. With the establishment of the newly created MSIP on March 23, 2013, however, such regulatory responsibility has mostly been transferred to the MSIP. The Korea Communications Commission’sMSIP’s policy is to

promote competition in the Korean telecommunications markets through measures designed to prevent the dominant service provider in any such market from exercising its market power in such a way as to prevent the emergence and development of viable competitors.

Under current Government regulations, if a network service provider has the largest market share for a specified type of service and its revenue from that service for the previous year exceeds a specific revenue amount set by the Korea Communications Commission,MSIP, it must obtain prior approval from the Korea Communications CommissionMSIP for the rates and the general terms for that service. Each year the Korea Communications CommissionMSIP designates service providers the rates and the general terms of which must be approved by the Korea Communications Commission.MSIP. In recent years, the Korea Communications Commission hasKCC had so designated us for local telephone service and SK Telecom for mobile service, and the Korea Communications Commission,MSIP, in consultation with the Ministry of Strategy and Finance, currently approves rates charged by us and SK Telecom for such services. In June 2011, SK Telecom announced tariff reduction measures, including a reduction of the monthly fee by

(Won)1,000 for every subscriber, an exemption of usage charges for short text message service, or SMS, up to 50 messages per month and the introduction of flexible service plans for smartphone users. The Korea Communications CommissionMSIP currently does not regulate our domestic long-distance, international long-distance, broadband internet access and mobile service rates, but the inability to freely set our local telephone service rates may hurt profits from such business and impede our ability to compete effectively against our competitors. See “Item 4. Information on the Company—Item 4.B. Business Overview—Regulation—Rates.” The form of our standard agreement for providing local network service and each agreement for interconnection with other service providers are also subject to approval by the MSIP. In addition, the MSIP may periodically announce public policy guidelines or suggestions that we take into consideration in setting our tariff for non-regulated services. In June 2011, upon recommendation of the KCC, SK Telecom announced tariff reduction measures, including a reduction of the monthly fee by1,000 for every subscriber, an exemption of usage charges for short text message service, or SMS, up to 50 messages per month and the introduction of flexible service plans for smartphone users. In August 2011, after discussions with the KCC, we announced the adoption of various tariff reduction measures, including a reduction of the monthly fee by1,000 for every mobile subscriber (effective October 21, 2011), an exemption of usage charges for SMS, of up to 50 messages per month (effective November 1, 2011) and the introduction of customized flat rate plans for smartphone users (effective October 24, 2011). The MSIP, which took over the KCC’s tariff regulation function in March 2013, is planning to gradually reduce and abolish activation fees by 2015. Pursuant to this policy objective, the MSIP discussed with us, LG U+, and SK Telecom gradually reducing and abolishing activation fees and as a result of the discussions, in August 2013, we, LG U+ and SK Telecom reduced activation fees by 40%. We reduced our activation fee by9,600 (from24,000 to14,400) and SK Telecom and LG U+ reduced their activation fee by15,840 (from39,600 to23,760) and12,000 (from30,000 to18,000), respectively. On January 1, 2014, the MSIP announced its plans to further reduce activation fees in the second half of 2014 so that such fees would be reduced to 50% of the current fee levels, and we expect the remaining activation fees to be abolished by 2015. There can be no assurance that we will not adopt other tariff-reducing measures in the future to comply with the Government’s public policy guidelines or suggestions.

Based on investigations conducted in December 2012 and January 2013, the KCC imposed a combined fine of approximately12 billion on SK Telecom, LG U+ and us in January 2013 (our fine being approximately2.9 billion), for providing subsidies that were higher than those allowed under

current regulations to new mobile phone purchasers and subscribers, and also imposed temporary suspensions from recruiting new subscribers ranging from 20 days to 24 days. In March 2013, the KCC again imposed a combined fine of approximately5 billion on SK Telecom, LG U+ and us (our fine being approximately1.6 billion) for continuing to offer subsidies during the suspension period. In July 2013, the KCC imposed a combined fine of approximately67 billion on SK Telecom, LG U+ and us (our fine being approximately20 billion) and also imposed a seven day suspension on us from recruiting new subscribers, also in connection with providing excessive handset subsidies to new subscribers. In December 2013, the KCC again imposed a combined fine of approximately106 billion on SK Telecom, LG U+ and us (our fine being approximately30 billion), which is the largest fine ever imposed by the KCC on local mobile operators for providing excessive subsidies to new subscribers. On March 7, 2014, the MSIP imposed a temporary suspension on us for 45 days (from March 13, 2014 to April 26, 2014), SK Telecom for 45 days (from April 5, 2014 to May 19, 2014), and LG U+ for 45 days (from March 13, 2014 to April 4, 2014 and again from April 27, 2014 to May 18, 2014) from recruiting new subscribers as a result of continuing to offer excessive handset subsidies to new subscribers, despite the order from the KCC prohibiting such subsidies. Additionally, the MSIP announced that it plans to bring criminal charges with fines of up to150 million and imprisonment of less than three years against any carrier and responsible personnel that fails to adhere to the suspension or continues to offer illegal subsidies after the suspension is completed.

President Park Geun-hye, who took office on February 25, 2013 as the 18th President of Korea, Communications Commission.announced that the new Government will work toward reducing telecommunications service charges and promoting transparency in the decision making of telecommunications service providers. Accordingly, the new Government has set detailed policy objectives to (1) gradually reduce and abolish activation fees by 2015, (2) expand mobile virtual network operator and mobile voice over Internet protocol (“m-VoIP”) service, (3) intensify regulations on handset subsidies and (4) construct a data-based tariff system. If the new Government goes forward with its new telecommunications policy, it will increase competition among wireless service providers and our business and our profitability may be adversely affected.

The Government also sets the policies regarding the use of radio frequencies and allocates the spectrum of radio frequencies used for wireless telecommunications. On April 29, 2010, the Korea Communications Commission announced its decision to allocate 20 MHz of bandwidth in the 900 MHz spectrum to us, 20 MHz of bandwidth in the 800 MHz spectrum to LG U+ (consisting of 15 MHz of bandwidth that is scheduled to be relinquished by SK Telecom by the end of June 2011 following expiration of its license period and 5 MHz of currently unused bandwidth) and 20 MHz of bandwidth in the 2.1 GHz spectrum to SK Telecom, which SK Telecom began using in June 2010. New allocations of bandwidth to us and LG U+ will become effective on July 1, 2011. We expect to payFor a portiondiscussion of the actual sales generated from using theGovernment’s recent policies and practices on bandwidth in the 900 MHz spectrum during the license period of 10 years as a usage fee for theallocation, see “Item 3. Key information—Item 3.D. Risk Factors—“Failure to renew existing bandwidth as well as a portion of expected sales as determined by the Korea Communications Commission at the time of allocation. In June 2011, the Korea Communications Commission announced its plan to auction in August 2011 the right to use 20 MHz of bandwidth in the 1.8 GHz spectrum, that we are scheduled to relinquish at the end of June 2011, 10 MHz ofacquire adequate additional bandwidth in the 800 MHz spectrum or use our bandwidth efficiently may adversely affect our mobile telecommunications business and 20 MHzresults of additional bandwidth in the 2.1 GHz spectrum. According to the plan, a maximum of 20 MHz of bandwidth may be sold to a single service provider, and SK Telecom and we are prohibited from bidding for the 20 MHz bandwidth in the 2.1 GHz spectrum. If we are allocated the bandwidths in the 800 MHz or the 1.8 GHz spectrums, we expect to pay usage fees for such bandwidths.operations.” The new allocations of bandwidth could increase competition among wireless service providers, which may have an adverse effect on our business.

We also plan to put more focus on the Internet protocol (or IP) media market, and we began offering IP-TV service onservices in November 17, 2008. IP-TV is a service which combines video-on-demand services with real-time high definition broadcasting via broadband networks. The Korea Communications Commission hasMSIP and the KCC have the authority to regulate the IP media market, including IP-TV services. Under the Internet Multimedia Broadcasting Business Act, anyone intending to engage in the IP media broadcastingIP-TV services business must first obtain a license from the Korea Communications Commission, andMSIP. Moreover, anyone intending to engage inprovide contents focused on news or contents that generally combine news, culture entertainment, and any other similar contents with IP-TV providers, must obtain approval from the broadcastingKCC. Furthermore, anyone intending to provide contents relating to the introduction of certain contentsconsumer products and other similar marketing content with IP-TV providers must obtain additional approval offrom the Korea Communications Commission.MSIP. In addition, KT Skylife Co. (formerly Korea Digital Satellite

Broadcasting Co., Ltd.), which became our consolidated subsidiary starting in January 2011, offers satellite TV services, which may also be packaged with our IP-TV services. KT Skylife is also subject to regulation by the regulation ofMSIP and the Korea Communications CommissionKCC pursuant to the Korea Broadcasting Act.

Government policies and regulations relating to the above as well as other regulations involving the Korean telecommunications and IP broadcasting industries (including as a result of the implementation of free trade agreements between Korea and other countries, including the United States and the European Union) may change, which could have a material adverse effect on our operations and financial condition. See “Item 4. Information on the Company—Item 4.B. Business Overview—Regulation.”

We are subject to various regulations under the Monopoly Regulation and Fair Trade Act.

The Monopoly Regulation and Fair Trade Act provides for various regulations and restrictions on large business groups enforced by the Korea Fair Trade Commission. The Korea Fair Trade Commission initially designated us as a large business group under the Monopoly Regulation and Fair Trade Act on April 1, 2002. Our business relationships and transactions with our subsidiaries, affiliates and other companies within the KT Groupgroup are subject to ongoing scrutiny by the Fair Trade Commission as to, among other things, whether such relationships and transactions constitute undue financial support among companies of the same business group. We are also subject to the fair trade regulations limiting cross-guarantee of debt and cross-shareholdings amongguarantees for other domestic member companies of the same group and cross-shareholdings among domestic member companies of the same group. Additionally, we are subject to a prohibition, in effect since July 25, 2014, against circular shareholding among any three or more entities within our business group. Any future determination by the Korea Fair Trade Commission that we have engaged in transactions that violate the fair trade laws and regulations may result in fines or other punitive measures and may have a material adverse effect on our reputation and our business.

The reported investigations of and any adverse publicity associated with Mr. Suk-Chae Lee, our former Chief Executive Officer, and our other former executive officers or directors could have a material adverse effect on our business, reputation and stock price.

On November 12, 2013, Mr. Suk-Chae Lee resigned from his position as the president and chief executive officer of KT Corporation following the investigation by prosecutors for alleged embezzlement and breach of fiduciary duty. A warrant for Mr. Lee’s arrest and detainment was submitted for approval to the Seoul Central District Court on January 2, 2014, but was denied on January 15, 2014, due to lack of ascertainable evidence for his arrest. On April 15, 2014, the Seoul Central District prosecutor’s office charged Mr. Lee with embezzlement and breach of fiduciary duty, and also charged Mr. Il Yung Kim, our former non-independent director and former president of the KT Corporate Center, as a co-conspirator in the breach of fiduciary duty by Mr. Lee. On April 16, 2014, the Seoul Central District prosecutor’s office also arrested Mr. Yu-Yeol Seo, our former president of Home Business Group, for his alleged participation in Mr. Lee’s embezzlement. The investigations against these former employees are still ongoing, and we cannot be certain at this time what the outcome will be. However, there can be no assurance that any further developments in these investigations will not adversely affect our business or cause our stock price to decline.

The reported investigation of and any adverse publicity associated with one of our subsidiaries could have a material adverse effect on our business, reputation and stock price.

An employee of KT ENS and several companies, some of which are KT ENS’s subcontractors, allegedly worked together to forge documents, including a forged proof of accounts receivable, to incur borrowings, of which290 billion remains unpaid, from 16 Korean banks since 2008 in over 460 transactions, which were allegedly secured by the forged accounts receivable and endorsed by KT ENS. KT ENS’s management neither had knowledge of nor approved such transactions. On February 11, 2014, police raided the offices of the subcontractors in connection with their investigation

of the loans. Upon discovery of the incident, KT ENS immediately suspended the employee in question without pay, pending the results of the investigations for any further disciplinary actions. The employee and seven other persons are currently under arrest, and authorities believe that some of these subcontractors have since fled Korea with a large portion of the borrowed money. The banks are demanding that KT ENS, and possibly KT Corporation, be held liable for the repayment of the loans. However, KT ENS and KT Corporation disclaim any responsibility for the employee’s personal misconduct and these transactions, and believe that the banks should be held responsible for failing to detect the fraud while screening the loan applications, given the lack of a board resolution in connection with such sizable loans, as well as the fact that the seal used in connection with the loans bore KT ENS’s former name, KT Networks, and is no longer legally effective.

On March 12, 2014, KT ENS filed for court receivership with the Seoul Central District Court, based on its inability to pay approximately49 billion in commercial paper that became due after early redemption rights were exercised. The commercial paper had been issued in connection with construction of a solar power plant by a contractor of the project and guaranteed by KT ENS. KT ENS faced difficulties in preventing such exercise of redemption rights following the above incident, and we declined to provide additional financial support to KT ENS to repay the redeemed commercial paper. While KT ENS’s filing for court receivership is unlikely to have a material impact on our results of operations or financial condition on a consolidated basis, as KT ENS’s revenue for 2013 was approximately 2.0% of our consolidated revenues for 2013, any future legal proceedings against KT ENS and/or us may lead to significant losses. Such losses, as well as any adverse publicity associated with the incident, could have a material adverse effect on our business, reputation and stock price.

The data breach incidents involving us in recent years have resulted in government investigations and private litigation, and if our efforts to protect the personal information of our subscribers are unsuccessful, future issues may result in further government enforcement actions and private litigation and may significantly impact our results of operation and reputation.

The nature of our business involves the receipt and storage of personal information of our subscribers. The uninterrupted operation of our information systems and confidentiality of the customer information that resides in such systems are critical to our successful operations. As such, we have a program in place to detect and respond to data security incidents. However, even though we may take all steps we believe are necessary to protect personal information, hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt to circumvent our security measures to gain access to our systems or facilities through fraud, trickery or other forms of deceiving our employees, contractors and temporary staff. In addition, because the techniques used to obtain unauthorized access or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures.

For example, in July 2012, the police arrested two individuals in connection with the alleged theft of personal account information relating to approximately 8.7 million of our mobile phone subscribers. The individuals in question stole personal information through a series of hackings starting from February 2012 into our New Service and Technology Evolution Program (“N-STEP”), our mobile customer information system. Since the incident, approximately 30,000 mobile phone subscribers filed lawsuits against us in connection with the N-STEP hackings, alleging that we failed to protect their personal information, and are seeking a total of approximately15 billion in damages. The trials are currently ongoing at various district courts.

Furthermore, in March 2014, the police arrested three individuals in connection with their alleged theft of personal information relating to approximately 9.8 million of our subscribers. The

individuals in question stole the personal information of our subscribers through a series of hackings into our main homepage starting from February 2014. On March 19, 2014, approximately 100 individuals collectively filed a lawsuit against us in Seoul Central District Court, seeking damages of approximately200,000 per person. According to news reports, several other subscribers and third party organizations have filed lawsuits against us in connection with the incident, which we are not yet able to confirm as we have not yet received any official notice from the courts regarding these additional lawsuits. As part of an ongoing public-private task force investigation into the recent hacking incidents, the MSIP announced in March 2014 that it confirmed that hackers accessed our websites more than 12 million times using automated hacking programs in the three months prior to the announcement. On March 17, 2014, the KCC announced and the MSIP further announced that we may be fined up to100 million in light of the most recent hacking incident.

We are unable to predict with any degree of certainty the outcome of these incidents at this time, including the scope of investigations or the maximum potential exposure. However, if we experience additional significant data security breaches or fail to detect and appropriately respond to significant data security breaches, we could be subject to additional government enforcement actions, regulatory sanctions and litigation in the future. In addition, our mobile phone subscribers could lose confidence in our ability to protect their information, which could cause them to discontinue using our services altogether. Furthermore, adverse final determinations, decisions or resolutions in such matters could encourage other parties to bring related claims and actions against us. Accordingly, the outcome of these incidents may materially and adversely impact our business, reputation, results of operations and financial condition.

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

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

Depreciation of the value of the Won against the Dollar and other major foreign currencies may have a material adverse effect on the results of our operations and on the prices of our securities.

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

amount of Won required by us to make interest and principal payments on our foreign-currency-denominated debt, the costs of telecommunications equipment that we purchase from overseas

sources, net settlement payments to foreign carriers and administrations and certain payments related to our derivative instruments entered into for foreign exchange risk hedging purposes. Of the(Won)7,2488,490 billion total principal amount of long-term debt (excludingborrowings (less current portion) outstanding as of December 31, 2010,2013,(Won)2,1881,726 billion was denominated in foreign currencies with an average weighted interest rate of 4.70%3.52%. The interest rates of such long-term debt (less current portion) denominated in foreign currencies ranged from 0.77%0.59% (Japanese Yen 5 billion bond issued in 2013) to 6.50% (for US$100 million notes with a floating interest rate of three month London Interbank Offered Rate plus 0.47%) to 16.50% (for Uzbekistani Som 2,259,000 (approximately US$1.4 million) fixed rate notes due 2034 issued under our medium-term note program). Upon identification and evaluation of our currency risk exposures, we, having considered various circumstances, enter into derivative financial instruments to try to manage some of such risks. Although the impact of exchange rate fluctuations has in the past been partially mitigated by East Telecom,such strategies, our subsidiary locatedresults of operations have historically been affected by exchange rate fluctuations and there can be no assurance that such strategies will be sufficient to reduce or eliminate the adverse impact of such fluctuations in Uzbekistan).the future. See “Item 3. Key Information—Item 3.A. Select Financial Data—Exchange Rate Information”, “Item 5. Operating and Financial Review and Prospects—Item 5.B. Liquidity and Capital Resources” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk.”

Fluctuations in the exchange rate between the Won and the Dollar will also affect the Dollar equivalent of the Won price of the shares of our common stock on the KRX KOSPI Market and, as a result, will likely affect the market price of the ADSs. These fluctuations will also affect the Dollar conversion by the depositary for the ADRs of cash dividends, if any, paid in Won on shares of common stock represented by the ADSs.

Risks Relating to Korea

Korea is our most important market, and our current business and future growth could be materially and adversely affected if economic conditions in Korea deteriorate.

Substantially all of our operations, customers and assets are located in Korea. Accordingly, the performance and successful fulfillment of our operational strategies are necessarily dependent on the overall Korean economy and the resulting impact on the demand for telecommunications services. The economic indicators in Korea in recent years have shown mixed signs of growth and uncertainty, and future growth of the Korean economy is subject to many factors beyond our control.

The Korean economy is closely tied to, and is affected bycontrol, including developments in the global economy. Recent difficulties affecting the U.S. and global financial sectors,

In recent years, adverse conditions and volatility in the worldwide credit and financial markets, fluctuations in oil and commodity prices and the general weakness of the U.S. and global economy have increasedcontributed to the uncertainty of global economic prospects in general and have adversely affected, and may continue to adversely affect, the Korean economy. Due to recent liquidity and credit concerns and volatility in the global financial markets, theThe value of the Won relative to major foreign currencies in general and the DollarU.S. dollar in particular has also fluctuated significantlywidely. See “Item 3.A. Selected Financial Data—Exchange Rates.” A depreciation of the Won increases the cost of imported goods and services and the Won revenue needed by Korean companies to service foreign currency denominated debt. An appreciation of the Won, on the other hand, causes export products of Korean companies to be less competitive by raising their prices in recent years.terms of the relevant foreign currency and reduces the Won value of such export sales. Furthermore, as a result of adverse global and Korean economic conditions, there has been an overall decline and continuing volatility in the stock prices of Korean companies. The Korea Composite Stock Price Index, or KOSPI, declined from 1,897.1 on December 31, 2007 to 938.8 on October 24, 2008. While the rateKOSPI has recovered since 2008, closing at 1,969.3 on April 28, 2014, there is no guarantee that the stock prices of deteriorationKorean companies will not decline again in the future. Future declines in the KOSPI and large amounts of sales of Korean securities by foreign investors and subsequent repatriation of the global economy slowedproceeds of such sales may continue to adversely affect the value of the Won, the foreign currency reserves held by financial institutions in Korea, and the second halfability of 2009, with some signs of stabilization and improvement in 2010, the overall prospects for the Korean and global economy in 2011 and beyond remain uncertain.companies to raise capital. Any future deterioration of the Korean or global economy could adversely affect our business, financial condition and results of operations.

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

 

difficulties in the housing and financial sectors in the United StatesEurope and elsewhere and increased sovereign default risks in selectselected countries and the resulting adverse effects on the global financial markets;

 

declines in consumer confidencetiming and potential economic impact of a slowdown in consumer spending;future scale-down by the U.S. Federal Reserve of its “quantitative easing” stimulus program;

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

increasing levels of household debt;

 

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

 

further decreases in the market prices of Korean real estate;

increasing delinquencies and credit defaults by retailconsumer and small- and medium-sized enterprise borrowers;

declines in consumer confidence and a slowdown in consumer spending;

 

the continued emergence of the Chinese economy, to the extent its benefits (such as increased exports to China) are outweighed by its costs (such as competition in export markets or for foreign investment and the relocation of the manufacturing base from Korea to China);

 

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

social and labor unrest;

substantial decreases in the market prices of Korean real estate;

 

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

 

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

 

loss of investor confidence arising from corporate accounting irregularities andor corporate governance issues at certain Korean conglomerates;companies;

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

 

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

 

the occurrence of severe health epidemics in Korea andor other parts of the world;

 

deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from territorial or trade disputes or disagreements in foreign policy;

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

natural disasters that have a significant adverse economic or other impact on Korea or its major trading partners;

 

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

the occurrence of severe earthquakes, tsunamis and other natural disasters in Korea and other parts of the world, particularly in trading partners (such as the March 2011 earthquake in Japan, which also resulted in the release of radioactive materials from a nuclear plant that had been damaged by the earthquake); and

 

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

Escalations in tensions with North Korea could have an adverse effect on us.

Relations between Korea and North Korea have been tense throughout Korea’s modern history. The level of tension between the two Koreas has fluctuated and may increase abruptly as a result of current and future events. In recent years,particular, since the death of Kim Jong-il in December 2011, there have been heightened security concerns stemming from North Korea’s nuclear weapons and long-range missile programs and increased uncertainty regarding North Korea’s actions and possible responses from the international community. In January 2003, North Korea renounced its obligations under the Nuclear Non-Proliferation Treaty. Since the renouncement, Korea, the United States, North Korea, China, Japan and Russia have held numerous rounds of six party multi-lateral talks in an effort to resolve issues relating to North Korea’s nuclear weapons program.

In addition to conducting test flights of long-range missiles, North Korea announced in October 2006 that it had successfully conducted a nuclear test, which increased tensions in the region and elicited strong objections worldwide. In May 2009, North Korea announced that it had successfully conducted a second nuclear test and test-fired three short-range surface-to-air missiles. In response, the United Nations Security Council unanimously passed a resolution in June 2009 that condemned North Korea for the nuclear test and decided to expand and tighten sanctions against North Korea. In March 2010, a Korean warship was destroyed by an underwater explosion, killing many of the crewmen on board. The government formally accused North Korea of causing the sinking in May 2010, and North Korea has denied responsibility for the sinking and has threatened retaliation for any attempt to punish it for the act. On November 23, 2010, North Korean forces fired more than one hundred artillery shells targeting Yeonpyeong Island located near the maritime border between Korea and North Korea on the west coast of the Korean peninsula, killing two Korean soldiers and two civilians as well as causing substantial property damage. Korea responded by firing approximately 80 artillery shells and putting the military on its highest alert level. The Government condemned North Korea for the act and vowed stern retaliation should there be further provocation.

In addition, there recently has been increased uncertainty with respect to the future of North Korea’s political leadership and concern regarding its implications for political and economic stability in the region. On September 28, 2010,Although Kim Jong-il, the North Korean ruler who reportedly suffered a stroke in August 2008, named Kim Jong-un, hisJong-il’s third son, who is reportedKim Jong-eun, has assumed power as his father’s designated successor, the long-term outcome of such leadership transition remains uncertain.

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

In April 2013, North Korea blocked access to the inter-Korean industrial complex in its border city of Gaeseong to South Koreans, while the U.S. deployed nuclear-capable stealth bombers and destroyers to Korean air and sea space;

In March 2013, North Korea stated that it had entered “a state of war” with Korea, declaring the 1953 armistice invalid, and put its artillery at the highest level of combat readiness to protest the Korea-United States allies’ military drills and additional sanctions imposed on North Korea for its missile and nuclear tests;

North Korea renounced its obligations under the Nuclear Non-Proliferation Treaty in January 2003 and conducted three rounds of nuclear tests between October 2006 to February 2013, which increased tensions in the region and elicited strong objections worldwide. In response, the United Nations Security Council unanimously passed resolutions that condemned North Korea for the nuclear tests and expanded sanctions against North Korea, most recently in March 2013;

In December 2012, North Korea launched a satellite into orbit using a long-range rocket, despite concerns in the international community that such a launch would be in his twenties, as the vice chairpersonviolation of the Central Military Commissionagreement with the United States as well as United Nations Security Council resolutions that prohibit North Korea from conducting launches that use ballistic missile technology; and the general

In March 2010, a Korean naval vessel was destroyed by an underwater explosion, killing many of the crewmen on board. The Government formally accused North Korean army. Although Kim Jong-il has designated his son to be his successor,Korea of causing the implementation of the succession plan remains uncertain. sinking, while North Korea denied responsibility. Moreover, in November 2010, North Korea fired more than one hundred artillery shells that hit Korea’s Yeonpyeong Island near

the Northern Limit Line, which acts as the de facto maritime boundary between Korea and North Korea on the west coast of the Korean peninsula, causing casualties and significant property damage. The Government condemned North Korea for the attack and vowed stern retaliation should there be further provocation.

North Korea’s economy also faces severe challenges. InFor example, in November 2009, the North Korean government redenominated its currency at a ratio of 100 to 1 as part of a currency reform undertaken in an attempt to control inflation and reduce income gaps. In tandem with the currency redenomination, the North Korean government banned the use or possession of foreign currency by its residents and closed down privately run markets, which led to severe inflation and food shortages. Such developments may further aggravate social and political tensions within North Korea.

Reunification of the two Koreas could occur in the future. Reunification may entail a significant economic commitment by Korea. In President Lee Myung Bak’s national address on August 15, 2010, he suggested the possible adoption of a reunification tax in order to prepare for long-term economic burden associated with reunification. Such discussions on reunification are very preliminary, and it has not been decided whether or when such tax would be implemented. If a reunification tax is implemented, it may lead to a decrease in domestic consumption, which in turn may have a material adverse effect on the Korean economy. In addition, thereThere can be no assurance that the level of tension on the Korean peninsula will not escalate in the future. Any further increase in tension,tensions, which may occur, for example, if North Korea experiences a leadership crisis, high-levelhigh level contacts between Korea and North Korea break down or military hostilities occur, could have a material adverse effect on our business, financial condition and results of operations.operations and financial condition.

Risks Relating to the Securities

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

Korean law currently limits foreign ownership of the ADSs and our shares. In addition, under our deposit agreement, the depositary bank cannot accept deposits of shares and deliver ADSs representing those shares unless (1) we have consented to such deposit or (2) Korean counsel has advised the depositary bank that the consent required under (1) is no longer required under Korean laws and regulations. Under current Korean laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit which exceeds the difference between (1) the aggregate number of shares deposited by us or with our consent for the issuance of ADSs (including deposits in connection with the initial and all subsequent offerings of ADSs and stock dividends or other distributions related to these ADSs) and (2) the number of shares on deposit with the depositary bank at the time of such proposed deposit. The depositary bank has informed us that, at a time it considers to be appropriate, the depositary bank plans to start accepting deposits of shares without our consent and to deliver ADSs representing those shares up to the amount allowed under current Korean laws and regulations. Until such time, however, the depositary bank will continue to obtain our consent for such deposits of shares and delivery of ADSs, which we may not provide. Consequently, if an investor surrenders his ADSs to withdraw the underlying shares, he may not be allowed to deposit the shares again to obtain ADSs. See “Item 10. Additional Information—Item 10.D. Exchange Controls.”

A foreign investor may not be able to exercise voting rights with respect to common shares exceeding the number of common shares held by our largest domestic shareholder.

Under the Telecommunications Business Act, a foreign shareholder who holds 5.0% or more of our total shares is prohibited from becoming our largest shareholder. However, any foreign shareholder who held 5.0% or more of our total shares and was our largest shareholder on or prior to May 9, 2004 is exempt from the regulations, provided that such foreign shareholder may not acquire any more of our shares. Under the Telecommunications Business Act, the Korea Communications CommissionMSIP may, if it deems it necessary to preserve substantial public interests, prohibit a foreign shareholder from being our largest shareholder. In addition, the Foreign Investment Promotion Act prohibits any foreign shareholder from being our largest shareholder if such shareholder owns 5.0% or more of our shares with voting rights.

In the event that any foreigner or foreign government acquires our shares in violation of the above provisions, such foreign shareholder may not be able to exercise voting rights with respect to common shares exceeding such threshold. The Korea Communications CommissionMSIP may also order us or the foreign shareholder to take corrective measures in respect of the excess shares within a specified period of six months or less. See “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association.”

Holders of ADSs will not be able to exercise dissenter’sappraisal rights unless they have withdrawn the underlying common stock and become our direct shareholders.

In some limited circumstances, including the transfer of the whole or any significant part of our business and our merger or consolidation with another company, dissenting shareholders have the right to require us to purchase their shares under Korean law. A holder of ADSs will not be able to exercise dissenter’sappraisal rights unless he has withdrawn the underlying common stock and become our direct shareholder. See “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association.”

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

The Commercial Code of Korea and our articles of incorporation require us, with some exceptions, to offer shareholders the right to subscribe for new shares in proportion to their existing ownership percentage whenever new shares are issued. If we offer any rights to subscribe for additional shares of our common stock or any rights of any other nature, the depositary bank, after consultation with us, may make the rights available to an ADS holder or use reasonable efforts to dispose of the rights on behalf of the ADS holder and make the net proceeds available to the ADS holder. The depositary bank, however, is not required to make available to an ADS holder any rights to purchase any additional shares unless it deems that doing so is lawful and feasible and:

 

a registration statement filed by us under the Securities Act of 1933, as amended, is in effect with respect to those shares; or

 

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

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

Korean GAAP differs in significant respects from accounting standards applicable in certain other countries, including U.S. GAAP and the International Financial Reporting Standards.

Our financial statements included in this annual report are prepared in accordance with Korean GAAP and reconciled to U.S. GAAP. Korean GAAP differs in significant respects from accounting standards applicable in certain other countries, including U.S. GAAP. See “Item 5. Operating and Financial Review and Prospects—Item 5.B. Liquidity and Capital Resources—U.S. GAAP Reconciliation” and “—Recent Accounting Pronouncements in U.S. GAAP” and Note 38 to Consolidated Financial Statements.

In March 2007, the Financial Services Commission and the Korea Accounting Institute announced a road map for the adoption of the Korean equivalent of International Financial Reporting Standards (“Korean IFRS”), pursuant to which all listed companies in Korea, including us, will be required to prepare their annual financial statements beginning in 2011 that differ in certain respects from International Financial Reporting Standards (“IFRS”) applied in other countries.

In preparation of such adoption, we began preparing our internal financial statements under both Korean GAAP and Korean IFRS starting in January 2010. Beginning in 2011, we have discontinued reporting under Korean GAAP with reconciliation to U.S. GAAP and instead have commenced reporting under Korean IFRS and we also plan to release annual financial statements prepared pursuant to IFRS as issued by the International Accounting Standards Board, or IASB. Although our accounting department is currently analyzing the effects of adopting IFRS on our annual financial statements, it is not possible to estimate with any degree of certainty the exact impact on our annual financial statements from such adoption because the IFRS accounting policies to be adopted by us for such financial statements have not been finalized. Accordingly, there can be no assurance that the adoption of IFRS will not adversely affect our reporting results of operations or financial condition.

Forward-looking statements may prove to be inaccurate.

This annual report contains “forward-looking statements” that are based on our current expectations, assumptions, estimates and projections about our company and our industry. The forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project,” “should,” and similar expressions. Those statements include, among other things, the discussions of our business strategy and expectations concerning our market position, future operations, margins, profitability, liquidity and capital resources. We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be incorrect. The uncertainties in this regard include, but are not

limited to, those identified in the risk factors discussed above. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances.

Item 4.  Information on the Company

Item 4.A.  History and Development of the Company

In 1981, the Government established us under the Korea Telecom Act to operate the telecommunications services business that it previously directly operated. Under the Korea Telecom Act and the Government-Invested Enterprises Management Basic Act, the Government exercised substantial control over our business and affairs. Effective October 1, 1997, the Korea Telecom Act was repealed and the Government-Invested Enterprises Management Basic Act became inapplicable to us. As a result, we became a corporation under the Commercial Code, and our corporate organization and shareholders’ rights were governed by the Privatization Law and the Commercial Code. Among other things, we began to exercise greater autonomy in setting our annual budget and making investments in the telecommunications industry, and our shareholders began electing our directors, who used to behad previously been appointed by the Government under the Korea Telecom Act.

Prior to 1993, the Government owned all of the issued shares of our common stock. From 1993 through May 2002, the Government disposed of all of its equity interest in us, and the Privatization Law ceased to apply to us in August 2002. We amended our legal name from Korea Telecom Corp. to KT Corporation in March 2002.

Before December 1991, we were the sole provider of local, domestic long-distance and international long-distance telephone services in Korea. The Government began to introduce competition in the telecommunications services market in the early 1990’s. As a result, including ourselves, there are currently three local telephone service providers, five domestic long-distance carriers and numerous international long-distance carriers (including voice resellers) in Korea. In addition, the Government awarded licenses to several service providers to promote competition in other telecommunications business areas such as mobile telephone services and data network services. OnIn June 1, 2009, KTF, a subsidiary providing mobile telephone services, merged into KT Corporation, with KT Corporation surviving the merger, with the objective of maximizing management efficiencies of our fixed-line and mobile telecommunications operations as well as more effectively responding to the convergence trends in the telecommunications industry. See “Item 4.B. Business Overview—Competition.”

Our legal and commercial name is KT Corporation. Our principal executive offices are located at 206 Jungja-dong, Bundang-ku, Sungnam, Gyunggi-do,90, Buljeong-ro, Bundang-gu, Seongnam-si, Gyeonggi-do, Korea, and our telephone number is (8231) 727-0114.727-0150.

Item 4.B.  Business Overview

We are the leading telecommunications service provider in Korea and one of the largest and most advanced in Asia. As an integrated telecommunications service provider, our principal services include:

 

mobile telecommunications services;

 

telephone services, including local, domestic long-distance and international long-distance fixed-line and VoIP telephone services and interconnection services to other telecommunications companies;

broadband Internet access service and other Internet-related services, including IP-TV services;

credit card processing and other financial services through KT Capital Co., Ltd. and BC Card Co., Ltd.;

automobile rental services through KT Rental Co., Ltd.; and

 

various other services, including leased line service and other data communication service, satellite service and information technology, real estate business, satellite TV service, media contents business and network services such as cloud computing services.

Leveraging on our dominant position in the fixed-line telephone services market and our established customer base in Korea, we have successfully pursued new growth opportunities during the past decade and obtained strong market positions in each of our principal lines of business. In particular:

 

in the mobile services market in Korea, we achieved a market share of 31.6%30.1% with approximately 16.016.5 million subscribers as of December 31, 2010;2013;

 

in the fixed-line telephone services market in Korea, we continue to be the dominant provider with approximately 25.524.3 million installed lines, of which 16.614.0 million lines were in service as of December 31, 2010.2013. As of such date, our market share of the local market was 86.3%81.6% and our market share of the domestic long-distance market was 82.2%79.1%;

 

we are Korea’s largest broadband Internet access provider with 7.48.1 million subscribers as of December 31, 2010,2013, representing a market share of 43.1%; and

 

we are also the leading provider of data communication services in Korea.

For the year ended December 31, 2010, under Korean GAAP,2013, our operating revenues were(Won)21,33124,058 billion, our net incomeloss for the period was(Won)1,19388 billion and our basic net incomeloss per share was(Won)4,803.779. As of December 31, 2010,2013, our total shareholders’assets were34,850 billion, total liabilities were22,013 billion and total equity was(Won)11,49612,837 billion.

Business Strategy

We believe the telecommunications market in Korea will continue to expandis nearing saturation, despite certain areas of growth remaining due to Korea’s growing economy, consumers’ willingness to adopt new technologies, relatively high income and a relatively large middle class. To maintain our competitiveness, we believe we need to pursue growth in other areas, while maintaining our strength in existing businesses. In order to enhance the management efficiencies of our mobile and fixed-line telecommunications operations as well as more effectively respond to the convergence trends in the telecommunications industry, KTF merged into KT Corporation onin June 1, 2009, with

KT Corporation surviving the merger. We alsoIn 2014, we restructured our organization into three sub-groups,four business groups, the HomeMarketing Group, the Customer Group, the Personal CustomerGlobal & Enterprise Group and the Enterprise CustomerFuture Convergence Strategy Group, so that we may achieve higher synergies, more effectively address differing needs of our customer segments.segments, as well as strengthen our competitiveness and discover new growth opportunities. As part of our efforts to improve our operational efficiencies, we announced on April 8, 2014 that we will transfer any operations relating to fixed-line sales activities (including on-site sales, line activation, after service, and customer center operations) to our subsidiaries.

We also established subsidiaries to oversee our media contents, satellite and real estate operations, and expanded the number of specialized employees for each business, to further strengthen such operations and to pursue strategic alliances with other global corporates. To seek further growth in a stagnant telecommunications market, we aim to become a global media distribution company, and utilizing our synergies, we intend to focus on developing the media contents, finance, security and automobile rental business and the expanding convergence market, as well as diversifying our portfolio into the advertising, education, health care and energy industries. Using our strong fixed-line/wireless and clouding technologies, we also aim to contribute to a global market environment for active distribution of media contents, applications and solutions. Consistent with our strategic objectives,overall goals, we aim to pursue growth through the following four core areas:strategy for our business groups:

 

  

Home CustomerMarketing Group. WeThrough our Marketing Group, we aim to offer a one-stop-shop that satisfies various information technologyexpand our telecommunication and convergence operations by (i) improving our fixed-line and wireless telecommunication market shares and average revenue per user, (ii) developing business strategies and plans specifically related to telecommunications needs of a household. In 2010, we launched a new brand “olleh” to promoteand convergence, (iii) strengthening our bundledcompetitiveness over products, which include broadband Internet access service, IP-TV service, Internet phonecustomer service and fixed-line telephone service. We aim to differentiate ourselves from our competitors by providing broadband Internet access service using high-speed fiber-to-the-home (or FTTH) connectionother related services and offering Internet phone service with value-added features such as video communication, short message service(iv) developing and phone banking.executing efficient marketing strategies. We also began offering real-time broadcasting service on our IP-TV service starting in November 2008.

Personal Customer Group. Our Personal Customer Group focusesfocus on expanding our wireless data communication business to meet the rising demand for broadband Internet access using advanced wireless data communications devices such as smart phones.smartphones. We are working closely with handset manufacturers to expand our offerings of smart phonessmartphones and handsets designed to promote convergence of fixed-line and mobile telecommunications services, as well as promote development of various applications for such devices. In line with this strategy, we began offering Apple’s iPhone for the first time in Korea on November 28, 2009 and have expanded our offerings of smart phones from other mobile handset manufacturers. We believe that our WiBro network, which enables two-way wireless broadband Internet access to portable computers, mobile phones and other portable devices, as well as our extensive wireless LAN networks installed nationwide, enable our subscribers to maximize effective usage of their smart phones. We plan to take advantage of our industry-leading network infrastructure to attract more customers as this market further develops. In addition, we aim to further enhance our position in the mobile telecommunications market by leveraging on our strong brand, nationwide marketing network, competitive data usage rates, call centers dedicated to smart phone users, creative marketing strategies that address our potential customers’ needs and ability to bundle various mobile and fixed-line services. We also plan to further expand our contents and applications for smart phone users and mobile data users by cooperating with application developers in Korea and abroad, in order to further solidify our position as a leader in the convergence market.

Enterprise Customer Group. We aim to provide our corporate customers, small- and medium-sized enterprises and government agencies with one-stop solution services including designing data communications and information technology infrastructure to overseeing their day-to-day operations with the objective of achieving operational efficiencies and cost savings. We provide solutions specifically tailored for individual clients, as well as Internet-based computing services, whereby shared resources, software and information are delivered from our data centers and servers. For example, we designed an urban transit infrastructure maintenance system for the Seoul Metropolitan Rapid Transit Corporation, in which workers are able to utilize their smart phones to report back their maintenance results to the headquarters remotely from the maintenance site. Leveraging our extensive customer base, we plan to further expand the range of innovative solutions for our enterprise customers.

Convergence.We believe that convergence of fixed-line and mobile communications technologies provides a competitive advantage to us because we have the technological

In line with this strategy, we began offering Apple’s iPhone for the first time in Korea in November 2009 and have expanded our offerings of smartphones from other mobile handset manufacturers. We believe that our WiBro network, which enables two-way wireless broadband Internet access to portable computers, mobile phones and other portable devices, as well as our extensive wireless LAN networks installed nationwide, enable our subscribers to maximize effective usage of their smartphones. We plan to take advantage of our industry-leading network infrastructure to attract more customers as this market further develops. In addition, we aim to further enhance our position in the mobile telecommunications market by leveraging on our strong brand, nationwide marketing network, competitive data usage rates, call centers dedicated to smartphone users, creative marketing strategies that address our potential customers’ needs and ability to bundle various mobile and fixed-line services. We also plan to further expand our contents and applications for smartphone users and mobile data users by cooperating with application developers in Korea and abroad, in order to further solidify our position as a leader in the convergence market.

In 2010, we launched a new brand “olleh” to promote our bundled products, which include broadband Internet access service, IP-TV service, Internet phone service and fixed-line telephone service. We aim to differentiate ourselves from our competitors by providing broadband Internet access service using high-speed fiber-to-the-home (or FTTH) connection and offering Internet phone service with value-added features such as video communication, short message service and phone banking. We also began offering real-time broadcasting service on our IP-TV service starting in November 2008.

We believe that convergence of fixed-line and mobile communications technologies provides a competitive advantage to us because we have the technological know-how and experience to design and construct a unified delivery platform for a new generation of value-added services. We plan to make such platform more readily available to others so

know-how and experience to design and construct a unified delivery platform for a new generation of value-added services. We plan to make such platform more readily available to others so that they may create additional contents and convenience solutions such as electronic commerce and digital transaction applications that can be utilized anywhere using various media and communications devices.

Customer Group. Through our Customer Group, we aim to improve our marketing and customer service efforts for all of our products and services by (i) planning and executing strategy for each product that we offer and our marketing efforts, (ii) contributing to expanding our market share by strengthening our marketing and customer service efforts, and (iii) maximizing customer satisfaction by providing high quality customer service.

Global & Enterprise Group. Through our Global & Enterprise Group, we aim to provide our corporate, small- and medium-sized enterprise and government agency customers with one-stop solution services, including designing data communications and information technology infrastructure and overseeing their day-to-day operations with the objective of achieving operational efficiencies and cost savings, as well as establishing and executing business plans for our global operations by (i) establishing active marketing strategy for expanding into the global market and (ii) entering into alliances and joint ventures with international corporates and agencies.

To that end, we provide solutions specifically tailored for individual clients, as well as Internet-based computing services, whereby shared resources, software and information are delivered from our data centers and servers. For example, we designed an urban transit infrastructure maintenance system for the Seoul Metropolitan Rapid Transit Corporation, in which workers are able to utilize their smartphones to report back their maintenance results to the headquarters remotely from the maintenance site. Leveraging our extensive customer base, we plan to further expand the range of innovative solutions for our enterprise customers.

Future Convergence Strategy Group. Due to the saturation within the Korean telecommunication market and limitations on growth in the traditional telecommunications services market, through our Future Convergence Strategy Group, we aim to concentrate our existing business capabilities in discovering new growth opportunities and expand our telecommunication capabilities.

The Telecommunications Industry in Korea

The Korean telecommunications industry is one of the most developed in Asia. According to the Korea Communications Commission,MSIP, the number of mobile subscribers in Korea was 50.854.7 million and the number of broadband Internet access subscribers in Korea was 17.218.7 million as of December 31, 2010.2013. As of December 31, 2010,2013, the mobile penetration rate, which is calculated by dividing the number of mobile subscribers (including multiple counting of those who subscribe to more than one mobile service) by the population of Korea, was 103.9%106.9%, and the broadband Internet penetration rate, which is calculated by dividing the number of broadband Internet access service subscribers (including multiple counting of those who subscribe to more than one broadband Internet access service) by the number of households in Korea, was 100.4%102.9%.

Mobile Telecommunications Service Market

The Korean cellular market was formally established in 1984 when SK Telecom, formerly Korea Mobile Telecom, became the first mobile telephone operator in Korea. SK Telecom remained the only cellular operator in Korea until Shinsegi Telecom began service in 1994. In order to encourage

further market growth and competition, the Ministry of Information and CommunicationGovernment awarded three PCS2G licenses in June 1996. KTF was awarded a license alongside LG U+ and Hansol M.com, and commercial PCS2G service was launched in October 1997.

Since the introduction of three new operators in 1997, the Korean mobile market has undergone consolidation and significant growth. Following SK Telecom’s purchase of a controlling stake in Shinsegi, we acquired a 47.9% interest in Hansol M.com in 2000 and renamed the company KT M.com. KT M.com merged into KTF in May 2001 and Shinsegi merged into SK Telecom in January 2002. OnIn June 1, 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger. KT Corporation SK Telecom and LG U+ have invested in networks compatible with Evolution-Data Optimized (or EV-DO) handsets that allow subscribers to enjoy 2.5 generation high speed wireless data services. KT Corporation and SK Telecom also offer third-generation, high-capacity HSDPA-based IMT-2000 wireless Internet and video multimedia communications services that use significantly greater bandwidth capacity. In July 2011, SK Telecom and LG U+ began offering fourth-generation communications services based on LTE technology, which enables data transmission at a speed faster than W-CDMA or WiBro networks, and we began our 4G LTE services in January 2012. Additionally, in September 2013, we commenced providing wideband LTE services, which utilizes our adjoining 20 MHz of bandwidths in the 1.8 GHz spectrum to provide transmission speed of up to 150 Mbps, twice faster than those offered under standard LTE services. SK Telecom also began providing its wideband LTE services in September 2013 and LG U+ commenced providing its wideband LTE services in January 2014. As of March 1, 2014, our wideband LTE services covered five metropolitan cities in Korea, and we expect to expand our wideband LTE services to all of Korea by July 2014. As of December 31, 2013, the number of our LTE subscribers exceeded 7.8 million. Furthermore, in March 2014, we commercialized Wideband LTE-A services, which interconnects our 20 MHz of bandwidth in the 1.8 GHz spectrum used to offer wideband LTE services with the 10 MHz of bandwidth in the 900 MHz spectrum used to offer standard LTE services by utilizing inter-band carrier aggregation technology to support transmission speed of up to 225 Mbps.

On April 2, 2014, LG U+ launched Korea’s first unlimited mobile service package, offering mobile subscribers with unlimited voice calls, text messaging, and LTE data at fees between80,000 to85,000 per month. Commencing on April 3, 2014, SK Telecom launched three different types of unlimited LTE data plans, which provide mobile subscribers with unlimited amounts of LTE data, voice calls, and text massaging. On April 7, 2014, we began offering mobile subscribers with unlimited LTE data, voice calls, and text messaging packages at fees of70,000 per month. We believe that the continuing intense competition among major telecommunications operators in Korea and the resulting pressure on our fees, including from offerings of unlimited usage plans, may have a material adverse impact on our results of operations.

The table below gives the subscription and penetration information of the mobile telecommunications industry for the periods indicated:

 

  As of December 31,   As of December 31, 
  2006 2007 2008 2009 2010   2009 2010 2011 2012 2013 

Total Korean Population(1)

   48,378    48,457    48,607    48,747    48,875     49,773    50,516    50,734    50,948    51,141  

Mobile Subscribers(2)

   40,197    43,498    45,607    47,944    50,767     47,944    50,767    52,507    53,624    54,681  

Mobile Subscriber Growth Rate

   4.8  8.2  4.9  5.1  5.9   5.1  5.9  3.4  2.1  2.0

Mobile Penetration(3)

   83.1  89.8  93.8  98.4  103.9   96.3  100.5  103.5  105.3  106.9

 

 

(1)In thousands, based on population trend estimatesthe number of registered residents as published by the National Statistical OfficeMinistry of Security and Public Administration of Korea.

 

(2)In thousands, based on information announced by the Korea Communications Commission.KCC.

 

(3)Penetration is determined by dividing mobile subscribers by total Korean population.

Broadband Internet Access Market

With the advancement of broadband technology, the Korean broadband Internet access market has experienced significant growth. The principal technologies used in providing high speed Internet access services are xDSL, HFC and fiber optic LAN. xDSL refers to various types of digital subscriber lines, including ADSL and VDSL. xDSL offers an access solution over existing telephone lines using a specialized modem while HFC service involves the use of two-way cable networks. Fiber optic LAN is a technology that combines fiber optic cables and Unshielded Twisted Pair (or UTP) cables. Fiber optic cables are connected to residential and commercial buildings with UTP cable-based LAN capabilities. While xDSL and HFC are more widely used technologies because of their relative reliability, ease of provisioning and cost effectiveness, fiber optic LAN usage in Korea has been steadily increasing in recent years.

Since the subscribers of two-way cable networks share a limited bandwidth, the downstream speed tends to slow down as the number of subscribers increases, thereby decreasing the quality of HFC-based service. While xDSL technology was commercially introduced after HFC technology, it has surpassed HFC to become the prevalent broadband access platform in Korea. VDSL, ADSL-based technology with enhanced downstream speed, became commercialized in 2002. Some of the service providers have upgraded their broadband network to provide fiber optic LAN-based service to their subscribers, which further enhances data transmission speed up to 100 Mbps as well as improves connection quality, and enables such service providers to offer video-on-demand services with real-time high definition broadcasting.

In recent years, broadband Internet access service providers and mobile telecommunications service providers have focused their attention to provideon providing wireless Internet connection capabilities. They have introduced wireless LAN service with speedsspeed of up to 155300 Mbps, which is designed to integrate fixed-line and wireless services by offering high speed wireless Internet access to laptops, PDAs and smart phonessmartphones in hot-spot zones and at home. Some service providers have also developed wireless Internet networks to provide WiBro service, which enables two-way wireless broadband Internet access to portable computers, mobile phones and other portable devices at a speed averaging 3 Mbps.

Our Services

Mobile Service

We provide mobile services based on CDMAW-CDMA technology and W-CDMALTE technology. Prior to the merger of KTF into KT Corporation, we provided such services through KTF, which was formerly a consolidated subsidiary. OnKTF obtained one of the three licenses to provide nationwide 2G service in June 1,1996 and began offering 2G service in October 1997. In June 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger, with the objective of maximizing management efficiencies of our fixed-line and mobile telecommunications operations as well as more effectively responding to the convergence trends in the telecommunications industry. KTF obtained one of the three licenses to provide nationwide PCS service in June 1996 and began offering PCS service in October 1997. PCS service is a digital wireless telephone and data transmission system based on CDMA wireless network standards that uses portable handsets with long battery life to communicate via low-power antennae. KTF also began offeringWe currently offer HSDPA-based IMT-2000 services, which are third-generation, high-capacity wireless Internet and video multimedia communications services based on W-CDMA wireless network standards that allow an operator to provide to its subscribers significantly more bandwidth capacity.

We have been providing our 2G PCSstandards. In January 2012, we also began offering 4G LTE services based on CDMA wireless network standards through our 40 MHz bandwidth infollowing the 1.8 GHz spectrum, which allocation is scheduled to terminate at the end of June 2011. As part of our decision to apply for reallocation, we have applied to the Korea

Communications Commission to terminate our existing 2G PCS services, which we expect to be able to terminate in the second half of 2011. Accordingly, our existing 2G PCS subscribers must either convert to our W-CDMA services or switch to other telecommunications companies. As of December 31, 2010, there were 1,393 thousand subscriberstermination of our 2G PCS services. We are offering benefits suchcompleted the expansion of our 4G LTE service coverage nationwide in October 2012 and commenced providing wideband LTE services in September 2013, and commercialized Wideband LTE-A services in March 2014, as substantial discounts on W-CDMA-compatible handsets and monthly subscription fees to encourage our existing subscribers to switch to our W-CDMA services.discussed above.

Revenues related to mobile service accounted for 33.2%27.9% of our operating revenues in 2010.In2013. In addition, our goods sold, which are primarily from mobile handset sales, accounted for 20.6%16.9% of our

operating revenues in 2010.2013. The following table shows selected information concerning the usage of our network during the periods indicated and the number of our subscribers as of the end of such periods:

 

  As of or��for the Year Ended December 31,   As of or for the Year Ended December 31, 
      2008           2009           2010               2011                   2012                   2013         

Outgoing Minutes (in millions) (1)

   28,960     30,714     34,570     36,102     34,520     34,164  

Average Monthly Outgoing Minutes per Subscriber(1) (2)

   168     173     184  

Average Monthly Revenue per Subscriber(1) (3)

  (Won)39,487    (Won)36,241    (Won)36,801  

Average Monthly Outgoing Minutes per Subscriber (1)

   183     174     182  

Average Monthly Revenue per Subscriber(2)

  34,379    33,519    35,236  

Number of Subscribers (in thousands)

   14,365     15,016     16,041     16,563     16,502     16,454  

 

 

(1)Prior to the merger of KTF into KT Corporation on June 1, 2009, we maintained an air-time reselling arrangement with KTF where we billed directly to our resale subscribers for their usage of KTF’s mobile networks and collected all fees and charges relating to such usage. Such amounts related to resale subscribers are not included in our calculation of outgoing minutes and average monthly outgoing minutes and revenue per subscriber in 2008. In 2009 and 2010, we have included such amounts related to resale subscribers in these calculations.

(2)The average monthly outgoing minutes per subscriber is computed by dividing the total minutes of usage for the period by the weighted average number of subscribers for the period and dividing the quotient by the number of months in the period. The weighted average number of subscribers is the sum of the total number of subscribers at the end of each month divided by the number of months in the period.

 

(3)(2)The average monthly revenue per subscriber is computed by dividing initial activation fees, total monthly fees, usage charges, interconnection fees and value-added service fees for the period by the weighted average number of subscribers and dividing the quotient by the number of months in the period.

We compete with SK Telecom, a mobile service provider that has a longer operating history than us, and LG U+ that began its service at around the same time as KTF. As of December 31, 2010,2013, we had approximately 16.016.5 million subscribers, or a market share of 30.1%, which was second largest among the three mobile service providers. As of December 31, 2010, we had a market share of 31.6% of the mobile service market.

We market our mobile services primarily through independent exclusive dealers located throughout Korea. As of December 31, 2010,2013, there were approximately 2,2002,300 shops managed by our independent exclusive dealers. In addition to assisting new subscribers to activate mobile service and purchase handsets, authorized dealers are connected to our database and are able to assist customers with account information. Although most of these dealers sell exclusively our products and services, sub-dealers hired by exclusive dealers may sell products and services offered by other mobile telecommunications service providers. Authorized dealers are entitled to a commission for each new subscriber registered, as well as ongoing commissions for the first five years based primarily on the subscriber’s monthly fee, usage charges and length of subscription. The handsets sold by us to the dealers cannot be returned to us unless they are defective. If a handset is defective, it may be exchanged for a new one within 14 days from the date of purchase.

In response to the diversification of our customers’ demands and their increasing sophistication, we have also selectively engaged in opportunities to expand our internal sales channels in recent years. In 2007, we established a wholly-owned subsidiary, KT M&S Co., Ltd., that operates

approximately 140194 customer plazas that engage in mobile service sales activities as well as provide a one-stop shop for a wide range of other services and products that we offer. We also operate a website to promote and advertise our products and services to the general public and in particular to younger customers who are more familiar with the Internet.

We conduct the screening process for new subscribers with great caution. A potential subscriber must meet all minimum credit criteria before receiving mobile service. The procedure includes checking the history of non-payment and credit information from banks and credit agencies such as the National Information and Credit Evaluation Corporation. Applicants who do not meet the minimum criteria can only subscribe to the mobile service by using a pre-paid card.

Telephone Services

Fixed-line Telephone Services.We utilize our extensive nationwide telephone network to provide fixed-line telephone services, which consist of local, domestic long-distance, international long-distance services and land-to-mobile interconnection services. These fixed-line telephone services

accounted for 20.1%12.4% of our operating revenues in 2010.2013. Our telephone network includes exchanges, long-distance transmission equipment and fiber optic and copper cables. The following table gives some basic measures of the development of our telephone system:system. In recent years, the proliferation of mobile phones, as well as the availability of increasingly lower wireless pricing plans, some of which include unlimited voice minutes, have led to significant decreases in our domestic long-distance call minutes and local call pulses.

 

  As of or for the Year Ended December 31,   As of or for the Year Ended December 31, 
  2006   2007   2008   2009   2010   2009   2010   2011   2012   2013 

Total Korean population (thousands)(1)

   48,378     48,457     48,607     48,747     48,875     49,773     50,516     50,734     50,948     51,141  

Lines installed (thousands)(2)

   26,838     26,671     26,008     25,907     25,524     25,907     25,524     23,925     25,242     24,264  

Lines in service (thousands)(2)

   20,331     19,980     18,883     17,069     16,620     17,069     16,620     15,900     15,121     14,032  

Lines in service per 100 inhabitants(3)

   42.0     41.2     38.8     35.0     34.0     34.3     32.9     31.3     29.7     27.4  

Fiber optic cable (kilometers)

   212,715     267,421     312,232     405,528     448,328     405,528     448,328     527,188     584,932     636,347  

Number of public telephones installed (thousands)

   218     185     161     144     123     144     123     111     101     94  

Domestic long-distance call minutes (millions)(4) (5)

   14,769     13,375     11,591     9,526     7,318     9,526     7,318     6,574     6,067     4,842  

Local call pulses (millions)(4)

   16,182     14,676     12,449     8,406     7,973     8,406     7,973     6,697     6,071     4,895  

 

 

(1)Based on population trend estimatesthe number of registered residents as published by the National Statistical OfficeMinistry of Security and Public Administration of Korea.

 

(2)Including lines used for public telephones but excluding lines dedicated to centralized extension system services for corporate subscribers.

 

(3)Determined based on lines in service and total Korean population.

 

(4)Excluding calls placed from public telephones.

 

(5)Estimated by KT Corporation.

Our domestic long-distance cable network is entirely made up of fiber optic cable and can carry both voice and data transmissions. Compared to conventional materials such as coaxial cable, fiber optic cable provides significantly greater transmission capacity with less signal fading, thus requiring less frequent amplification. In recent years, we have also increased the proportionAll of our lines that are connected to exchanges capable of handling digital signal technology. A principal limitation of the older analog technology is that applications other than voice communications, such as the transmission of text and computer data, require either separate networks or conversion equipment. Digital systems permit a range of voice, text and data applications to be transmitted simultaneously on the same network. We completed connection of all installed lines to digital exchanges in June 2003.

The following table shows the number of minutes of international long-distance calls recorded by us and specific service providers utilizing our international long-distance network in each specified category for each year in the five-year period ended December 31, 2010:2013:

 

  Year Ended December 31,   Year Ended December 31, 
  2006   2007   2008   2009   2010   2009   2010   2011   2012   2013 
  (In millions of billed minutes)   (In millions of billed minutes) 

Incoming international long-distance calls

   519.4     627.4     603.7     442.2     523.5     442.2     523.5     541.6     520.3     628.4  

Outgoing international long-distance calls

   400.9     431.4     398.1     325.9     325.1     325.9     325.1     332.1     289.7     244.2  
                      

 

   

 

   

 

   

 

   

 

 

Total

   920.3     1,058.8     1,001.8     768.1     848.7     768.1     848.6     873.7     810.0     872.6  
                      

 

   

 

   

 

   

 

   

 

 

Japan (23.2%), China (18.5%(15.3%), and the United States (17.0%) and Japan (16.8%(11.5%) accounted for the greatest percentage of our international long-distance call traffic measured in minutes in 2010.2013. In recent years, the volume of our incoming calls has exceeded the volume of our outgoing calls. The agreed settlement rate is applied to the call minutes to determine the applicable net settlement payment.

Interconnection. Under the Telecommunications Business Act, we are required to permit other service providers to interconnect to our fixed-line network. Currently, the principal users of this interconnection capacity include SK Broadband and LG U+ (offering local, domestic long-distance and

international long-distance services), Onse and SK Telink (offering international and domestic long-distance services), and SK Telecom and LG U+ (transmitting calls to and from their mobile networks). We expect that interconnection revenues and payments will remain important for our results of operations. In recent years, revenuesRevenues from a landline user for a call initiated by a landline user to a mobile service subscriber (land-to-mobile interconnection) have become a significant portion of our results of operations, accountingaccounted for 4.5%2.3% of our operating revenues in 2010.We2013. We recognize as land-to-mobile interconnection revenue the entire amount of the usage charge collected from the landline user and recognize as an expense the amount of interconnection charge paid to the mobile service provider.

Internet phone services. The volume of calls made through Internet phone services has significantly increased since Internet phone service was first introduced in Korea in 1998. We provide Internet phone services that enable VoIP phone devices with broadband connection to make domestic and international calls. In order to differentiate our Internet phone services from our competitors’ services, we provide value-added services such as video communication, short message service, phone banking and a variety of traffic and local news information. As of December 31, 2010,2013, we had approximately 2.73.5 million subscribers.

Internet Services

Broadband Internet Access Service. Leveraging on our nationwide network of 448,328636,347 kilometers of fiber optic cable network, we have achieved a leading market position in the broadband Internet access market in Korea. We believe we have a competitive advantage over other broadband Internet access service providers because, unlike our competitors, we can utilize our existing networks nationwide to provide broadband Internet access service. Our broadband Internet access service accounted for 9.1%8.4% of our operating revenues in 2010.Our2013. Our principal Internet access services include:

 

ADSL, VDSL, Ethernet and FTTH services under the “olleh Internet” brand name;

 

wireless LAN service (or WiFi) under the “ollehWiFi” brand name, which is designed to integrate fixed-line and wireless services by offering high speed wireless Internet access to laptops, PDAs and smart phonessmartphones in hot-spot zones and olleh Internet service in fixed-line environments. OllehWiFi enables subscribers to access the Internet at a speed of up to 155150 Mbps. We sponsored approximately 42,000114,000 hot-spot zones nationwide for wireless connection as of December 31, 2010;2013; and

olleh 4G WiBro Internet access service, which enables two-way wireless broadband Internet access to portable computers, mobile phones and other portable devices at a speed averaging 35 Mbps per user.

We had 7.4approximately 8.1 million fixed-line olleh Internet subscribers and approximately 266 thousand142,000 ollehWiFi service subscribers as of December 31, 2010.We2013.We commercially launched our WiBro service in June 2006, and we had approximately 377 thousand846,000 subscribers as of December 31, 2010.2013. We also bundle our WiBro service with olleh Internet and ollehWiFi services at a discount in order to attract additional subscribers.

Our olleh Internet service utilizes ADSL technology, which is a technology that converts existing copper twisted-pair telephone lines into access paths for multimedia and high-speed data communications. ADSL transforms the existing public telephone network from one limited to voice, text and low-resolution graphics to a system capable of bringing multimedia to subscriber premises without new cabling. The asymmetric design optimizes the bandwidth by maximizing the downstream speed for downloading information from the Internet. While ADSL technology was commercially introduced after HFC-based technology, it has surpassed HFC to become the prevalent access platform in Korea. VDSL, ADSL-based technology with enhanced downstream speed, became commercialized in July

2002. We are currently upgrading our broadband network to enable FTTH connection, which further enhances downstreamdata transmission speed of up to 100 Mbps and connection quality. FTTH is a telecommunication architecture in which a communication path is provided over optical fiber cables extending from the telecommunications operator’s switching equipment to the boundary of home or office. FTTH uses fiber optic cable, which is able to carry a high-bandwidth signal for longer distances without degradation. FTTH enables us to deliver enhanced products and services that require high bandwidth, such as IP-TV, service and delivery of other digital media content.content with higher stability.

The high-speed downstream rates can reach up to 8 Mbps for ADSL and 100 Mbps for VDSL and FTTH. Downstream rates depend on a number of factors. For a constant wire gauge, the data rate decreases as the length of the copper wire increases. Generally, if the separation between the telephone office and the subscriber is greater than four kilometers, line attenuation is so severe that broadband speeds can no longer be achieved. Approximately 95% of the households subscribing to our basic local telephone service are located within a four kilometer radius of our telephone offices, making our olleh Internet service available to most of the Korean population. Fiber-optic cable used by FTTH, on the other hand, uses laser light to carry signals that travel long distances inside fiber optic cable without degradation.

Other Internet-related Services.Our other Internet-related services focus primarily on providing infrastructure and solutions for business enterprises, as well as IP-TV and network portal services. Our other Internet-related services accounted for 2.9%4.1% of our operating revenues in 2010.2013.

We operate seven Internet data centers located throughout Korea and provide a wide range of computing services to companies which need servers, storagesstorage and leased lines. Internet data centers are facilities used to house, protect and maintain network server computers that store and deliver Internet and other network content, such as web pages, applications and data. Our Internet data centers are designed to meet international standards, and are equipped with temperature control systems, regulated and reliable power supplies, fire detection and suppression equipment, security monitoring and wide-bandwidth connections to the Internet. Internet data centers allow corporations or Internet service providers to outsource their application and server hardware management.

Our Internet data centers offer network outsourcing services, server operation services and system support services. Our network outsourcing services include co-location, which is the installation of our customers’ network equipment at our Internet data centers. Co-location is designed to increase

customers’ Internet connection speed and reduce connection time and costs by directly connecting the customers’ server to the Internet backbone switch at our Internet data centers. Our server operation services include optimal server management service and technical support service we provide with respect to the leased servers that are linked directly to our Internet backbone switch. We also lease servers and network equipment for a fixed monthly fee. Our system support services include providing system resources for a wide range of Internet computing services, such as application transfer, network storage, video streaming and application download, as well as sending short text messages and messages containing multimedia objects, such as images, audio and video.

We also offer a service called Bizmeka to develop and commercialize business-to-business solutions targeting small- and medium-sized business enterprises in Korea. Bizmeka is an applied application service provider which provides industry-specificindustry standard and specialized business solutions, including customer database managementintegrated business administration solutions and electronic data interchange.intranet collaboration solutions.

We also offer high definition video-on-demand and real-time broadcasting IP-TV services under the brand name “olleh TV.” Our IP-TV service offers access to an array of digital media contents, including movies, sports, news, educational programs and TV replay, for a fixed monthly fee.fee or on a pay-per-view basis. Through a digital set-top box that we rent to our customers, our customers are able

to browse the catalogcatalogue of digital media contents and view selected media streams on their television. A set-top box provides two-way communications on an IP network and decodes video streaming data. We expanded our IP-TV service to include real-time broadcasting onin November 17, 2008. We had 2.44.97 million olleh TV subscribers as of MarchDecember 31, 2011.2013.

Data CommunicationCommunications Service

Our data communicationcommunications service involves offering exclusive lines that allow point-to-point connection for voice and data traffic between two or more geographically separate points. As of December 31, 2008, 20092011, 2012 and 2010,2013, we leased 374,570286,302 lines, 366,191246,951 lines and 303,009235,147 lines to domestic and international businesses. The data communication service accounted for 6.1%5.0% of our operating revenues in 2010.2013.

We provide dedicated and secure broadband Internet connection service to institutional customers under the “Kornet” brand name. We provide high-speed connection up to 4.210.0 Gbps connected to our internet backbone network with capacity of 6.6 Tbps, as well as rent to our customers and install necessary routers to ensure reliable Internet connection and enhanced security. We provide discount rates to qualified customers, including small- and medium-sized enterprises, businesses engaging in Internet access services and government agencies.

Financial Services

To further diversify our business and to create synergies through utilization of our mobile telecommunications network in financial services, we, through our subsidiary KT Capital Co., Ltd., acquired 1,622,520 additional shares of common stock of BC Card Co., Ltd. from Woori Bank for approximately252 billion in October 2011. As we were deemed to have control over BC Card Co., Ltd., it became our consolidated subsidiary starting in October 2011. We acquired an additional 1,349,920 common shares of BC Card Co., Ltd. in January 2012 for approximately287 billion, and owned a 69.54% interest in BC Card Co., Ltd. as of December 31, 2013. BC Card Co., Ltd. offers various credit card and related financial services. KT Capital had consolidated operating revenues of3,317 billion and net income of129 billion for the year ended December 31, 2013 and consolidated assets of5,462 billion and liabilities of4,759 billion as of December 31, 2013. In March 2014, the investment business division of KT Capital Co., Ltd., including 3,059,560 common shares of BC Card Co., Ltd. that KT Capital Co., Ltd. held, was spun off and merged into KT Corporation, to further strengthen the synergy between telecommunication and finance operations within the KT group and increase shareholder value. Financial Services accounted for 13.6% of our operating revenues in 2013.

Automobile Rental Services

We also operate KT Rental, a subsidiary that provides rental cars and equipment. In March 2010, MBK Partners, a private equity firm, and we jointly acquired Kumho Rent-A-Car Co., Ltd. from Korea Express Inc. for263 billion, with each taking a 50% stake. Kumho Rent-A-Car was subsequently merged with the car rental business unit of KT Rental in June 2010. KT Rental became a consolidated subsidiary starting in 2012, as the restriction on our controlling power over KT Rental pursuant to a shareholders’ agreement was resolved as a result of the acquisition of KT Rental’s common stock by Hana Daetoo Securities Co., Ltd. and other investors from the then-second largest shareholder in July 2012. KT Rental operated approximately 91,700 vehicles as of December 31, 2013 and has a market share of 24.7% of the domestic car rental market in 2013. See Note 37 to the Consolidated Financial Statements. Automobile rental services accounted for 2.5% of our operating revenues in 2013.

Miscellaneous Businesses

We also engage in various business activities that extend beyond telephone services and data communications services, including satellite services, information technology and network services, real estate development, satellite TV services, with the consolidation of KT Skylife Co. starting in January 2011, and media contents business with the establishment of KT Media Hub Co., Ltd. in December 2012. As of December 31, 2013, KT Media Hub Co., Ltd. had revenues of305 billion. Our miscellaneous businesses accounted for 9.2% of our operating revenues for 2013.

We provide transponder leasing, broadcasting, video distribution and data communications services through our satellites. We currently operate threetwo satellites, Koreasat 3, Koreasat 5 and Koreasat 6. We6 (also known as olleh 1), and own interests in two additional satellites, Koreasat 7 (also known as ABS-1) and Koreasat 8 (also known as ABS-2). In August 2006, we launched Koreasat 35 to replace Koreasat 2 (also known as Mugunghwa 2, launched in September 1999. The1996 with a design life of Koreasat 3 is twelve years, and it will be used to back up the broadcasting services of Koreasat 6 until the end of its fuel life.

We launched Koreasat 5 in August 2006, which replaced Koreasat 2.ten years). Koreasat 5, a combined civil and governmental communications satellite, is the first Korean satellite to provide commercial satellite services to neighboring countries, and the service coverage area includes Korea, Japan, Taiwan, the Philippines, the eastern part of China and the far-eastern part of Russia. The design life of Koreasat 5 is fifteen years.15 years, and it currently remains in operation.

We launched Koreasat 6 in December 2010, with a design life of 15 years, to replace Koreasat 3 (also known as olleh 1)Mugunghwa 3, launched in December 2010 to replace Koreasat 3. The1999 with a design life of Koreasat 6 is fifteen years.12 years). Koreasat 6 began its commercial operation in February 2011 and carries transponders that are mainly used for direct-to-home satellite broadcasting, video distributions and data communications services. Most of the direct-to-home satellite broadcasting transponders are utilized by KT Skylife Co. We also lease satellite capacity from other satellite operators to offer commercial satellite services to both domestic and international customers.

In August 2010, we procured from Asia Broadcast Satellite (“ABS”), a Hong Kong-based satellite operator, four transponders on the ABS-1 satellite and an additional eight transponders on the ABS-2 satellite in order to provide global satellite services. ABS-1 began its operations in September 2010 and ABS-2 launched its operations in February 2014. We sold to ABS the Mugunghwa 2 satellite in May 2010 and the Mugunghwa 3 satellite in September 2011 for a combined price of approximatelyMiscellaneous Services5 billion, as the satellites had reached the end of their design lives.

In December 2012, we spun-off our satellite service business by establishing KT Sat Co., Ltd., in an effort to enhance operational specialization and to foster management efficiency, enabling us to respond more promptly to the changing market environments and increasing competitiveness.

In December 2013, the MSIP declared that the contract over our sale of Mugunghwa 3 was null and void, on the grounds that the satellite was sold without obtaining proper government approval, and ordered us to take corrective measures. We also engageare currently involved in various business activities that extend beyond telephone servicesarbitration proceedings against ABS at the International Court of Arbitration of the International Chamber of Commerce and data communications services, including information technologythe American Arbitration Association over the Mugunghwa 3 satellite ownership rights and network services, real estate development and car rental business. Our miscellaneous services accounted for 8.0% of our operating revenues for 2010.contract violation claims.

We offer a broad array of integrated information technology and network services to our business customers. Our range of services include consulting, designing, building and maintaining systems and communication networks that satisfy the individual needs of our customers in the public and private sectors.

We own land and real estate in various locations nationwide. Technological developments have enhanced the coverage area of individual telecommunications facilities, which enable us to better utilize our existing land and other real estate holdings. In recent years, we have engaged in the planning and development of commercial and office buildings and condominiums on our unused sites,

as well as in the leasing of buildings we own. We established KT Estate Inc. in August 2010 to oversee the planning, development and operation of our real estate assets.

We also operateassets, and established KT Rental,AMC, an asset management company, in September 2011 as a subsidiary of KT Estate Inc. to create additional synergies with our real estate assets. We made a contribution in-kind of1,254 billion to KT Estate Inc. in December 2012 to further strengthen KT Estate’s competitiveness and to better utilize our assets.

To respond to the trend of convergence in the telecommunications and broadcasting industries, and to seek additional synergies with our existing operations, we acquired 5,600,000 shares of redeemable convertible preferred stock with voting rights and convertible bonds that provides rental cars and equipment. In March 2010, MBK Partners, a private equity firm, and we jointly acquired Kumho Rent-A-Carwere convertible into 5,600,000 shares of common stock of KT Skylife Co., Ltd. from Korea Express Inc.Dutch Savings Holdings B.V. in January 2011 for approximately(Won)245 billion, with each taking246 billion. We exercised the conversion rights on the redeemable convertible preferred stock and the convertible bonds in March 2011, and owned a 50% stake. Kumho Rent-A-Car was subsequently merged with the car rental business unit of50.1% interest in KT Rental on June 1, 2010. KT Rental operated approximately 58,800 vehiclesSkylife Co., Ltd. as of December 31, 20102013. KT Skylife offers satellite TV services, which may also be packaged with our IP-TV services as further described below, and hashad consolidated operating revenues of630 billion and net income of73 billion for the year ended December 31, 2013 and consolidated assets of685 billion and liabilities of283 billion as of December 31, 2013.

In December 2012, we also established KT Media Hub Co., Ltd., a subsidiary that specializes in the development of media contents, with a cash capital contribution of80 billion. We believe that the media contents business will be a future growth opportunity for us, and this subsidiary further enhances our specialization in the media contents business. It also allows us to better adapt to the rapidly changing market share of 22.8% ofenvironment in the domestic car rental market in 2010.field.

Revenues and Rates

The table below shows the percentage of our revenues derived from each category of services for each of the years from 2008 through 2010:2011 to 2013:

 

  Year Ended December 31,   Year Ended December 31, 
      2008         2009         2010       2011 2012 2013 

Mobile services

   32.8  33.8  33.2   30.7  26.7  27.9

Fixed-line telephone services:

        

Local service

   14.1    13.6    12.0     10.3    8.2    7.7  

Non-refundable service initiation fees

   0.1    0.1    0.1     0.2    0.1    0.1  

Domestic long-distance service

   3.0    2.4    1.8     1.4    1.1    0.9  

International long-distance service

   2.3    2.0    1.7     1.8    1.6    1.4  

Land-to-mobile interconnection

   7.1    5.8    4.5     3.5    2.7    2.3  
            

 

  

 

  

 

 

Sub-total

   26.6    23.9    20.1     17.2    13.7    12.4  
            

 

  

 

  

 

 

Internet services:

        

Broadband Internet access service

   10.4    9.9    9.1     8.4    8.3    8.4  

Other Internet-related services(1)

   2.2    2.6    2.9     3.9    3.5    4.1  
            

 

  

 

  

 

 

Sub-total

   12.6    12.5    12.0     12.3    11.8    12.5  
            

 

  

 

  

 

 

Goods sold(2)

   15.7    17.3    20.6     19.8    18.6    16.9  

Data communications service(3)

   6.8    6.7    6.1     5.7    5.3    5.0  

Miscellaneous services(4)

   5.5    5.8    8.0  

Financial services

   4.5    13.5    13.6  

Automobile rental services (4)

   0.0    1.0    2.5  

Miscellaneous businesses (5)

   9.4    9.4    9.2  
            

 

  

 

  

 

 

Operating revenues

   100.0  100.0  100.0   100.0  100.0  100.0
            

 

  

 

  

 

 

 

 

(1)Includes revenues from services provided by our Internet data centers, Bizmeka and olleh TV.

 

(2)Includes mobile handset sales.

 

(3)Includes revenues from Kornet Internet connection service and satellite services.

(4)KT Rental Co., Ltd. became our consolidated subsidiary starting in 2011. See Note 37 to the Consolidated Financial Statements.

 

(4)(5)Includes revenues from satellite services, information technology and network services and real estate development and car rental business.

Mobile Services

We derive revenues from mobile services principally from:

 

initial subscriptionactivation fees;

 

monthly fees;

 

usage charges for outgoing calls;

 

usage charges for wireless data transmission;

 

contents download fees; and

 

value-added monthly service fees.

We offer various rate plans, including those that offer a specified number of free airtime minutes per month in return for a higher monthly fee and those that are geared toward business customers. In September 2009, we reduced our initial subscriptionactivation fee for new subscribers by 20% from(Won)30,000 to(Won)24,000. ForIn August 2013, we, SK Telecom, and LG U+ reduced the activation fee for new subscribers by approximately 40%. Our activation fee was reduced from24,000 to14,400, SK Telecom’s activation fee was reduced from39,600 to23,760, and LG U+’s activation fee was reduced from30,000 to18,000. On January 1, 2014, the MSIP announced its plans to further reduce activation fees in the second half of 2014 so that such fees would be reduced to 50% of the current fee levels, and we expect our remaining activation fees to be abolished by 2015. In August 2011, we announced the adoption of various tariff reduction measures, including a reduction of the monthly fee by1,000 for every mobile subscriber (effective October 21, 2011), an exemption of usage charges for SMS of up to 50 messages per month (effective November 1, 2011) and the introduction of customized flat rate plans for smartphone users (effective October 24, 2011). We currently only offer our standard rate plan for our HSDPA-based service, we also charge monthly fees, voice calling usage charges and video calling usage charges.service. Under our standard rate plan for HSDPA-based service, we charge a monthly fee of(Won)12,000,11,000, voice calling usage charges of(Won)1.8 per second and video calling usage charges of(Won)3 per second. The following table summarizes charges for our representative HSDPA-based service plans:second, without any free voice or video call airtime minutes.

   Free Voice Call
Airtime Minutes
  Free Video Call
Airtime Minutes
   Monthly Fee 

Standard Plan

   0    0    (Won)12,000  

SHOW KING Sponsor Gold—Free 150 (1)

   150    15     28,500  

SHOW KING Sponsor Gold—Free 250 (1)

   250    0     35,000  

SHOW KING Sponsor Gold—Complete Freedom 150 (1) (2)

   150    15     37,000  

SHOW KING Sponsor Gold—Free 350 (1)

   350    0     45,000  

SHOW KING Sponsor Gold—Free 450 (1)

   450    0     55,000  

SHOW KING Sponsor Gold—Free 650 (1)

   650    0     67,000  

SHOW KING Sponsor Gold—Free 850 (1)

   850    0     75,000  

SHOW KING Sponsor Gold—Free 2000 (1)

   2,000 (3)   0     97,000  

(1)Requires mandatory subscription period of 24 months.

(2)Includes free unlimited data usage service.

(3)Unlimited voice call airtime minutes for calls made to our subscribers.

A subscriber may also subscribe to an individually designed calling rate plan by mixing free voice calling airtime minutes and free text messages at a set monthly fee.

For our PCS service, we charge monthly fees and usage charges. Under our standard rate plan for PCS service, we charge a monthly fee of(Won)12,500 and usage charges of(Won)1.8 per second, and the subscriber is provided with five free minutes. The following table summarizes charges for our representative PCS service plans:

   Free Airtime
Minutes
   Free Text
Messages
   Monthly Fee 

Standard

   5     0    (Won)12,500  

New Double Designated Numbers(1)

   0     50     15,500  

Roll Over (Free 200 Minutes) (2)

   200     0     31,500  

Roll Over (Free 550 Minutes) (2)

   550     0     61,000  

Roll Over (Free 800 Minutes) (2)

   800     0     71,000  

(1)Discounts of 40% when a subscriber makes calls to up to six pre-designated numbers.

(2)Unused free airtime may be transferred to the following month.

We also provide plans specially designed for elderly and pre-teen subscribers as well as special discounts to our subscribers with physical disabilities.

In September 2009, we alsoWe introduced new rate plans specifically for smart phone users.smartphone users starting in September 2009. In June 2013, we introduced the Everyone olleh rate plan, which permits users to make unlimited voice calls within our wireless network, and the Fixed-Line & Wireless Unlimited rate plan, which permits

users to make unlimited voice calls within both our fixed-line and wireless networks. The following table summarizes the charges forassociated with our representative smart phonesmartphone service plans:

 

   Free Airtime
Minutes
   Free Data
Transmission (1)
   Monthly Fee 

SHOW Smart Sponsor Free 150(2)

   150     0 megabytes    (Won)28,500  

SHOW Smart Sponsor Free 250(2)

   250     0     35,000  

SHOW Smart Sponsor Free 350(2)

   350     0     45,000  

SHOW Smart Sponsor Free 450(2)

   450     0     55,000  

SHOW Smart Sponsor Free 650(2)

   650     0     67,000  

SHOW Smart Sponsor Free 850(2)

   850     0     75,000  

SHOW KING Sponsor i—Slim(3)

   150     100     35,000  

SHOW KING Sponsor i—Lite(3)

   200     500     45,000  

SHOW KING Sponsor i—Talk(3)

   250     100     45,000  

SHOW KING Sponsor i—Value(3)

   300     Unlimited     55,000  

SHOW KING Sponsor i—Medium(3)

   400     Unlimited     65,000  

SHOW KING Sponsor i—Special(3)

   600     Unlimited     79,000  

SHOW KING Sponsor i—Premium(3)

   800     Unlimited     95,000  
   Free Airtime Minutes (1)   Free Data
Transmission (2)
   Monthly Fee 
   Voice or video calls to
anyone
      Voice or video calls to
our mobile subscribers
   (in megabytes)     

i-teen(3)

    193        34,000  

i-Slim(3)

    150       100     34,000  

i-Lite(3)

    200       500     44,000  

i-Talk(3)

    250       100     44,000  

i-Value(3)

    300       Unlimited     54,000  

i-Medium(3)

    400       Unlimited     64,000  

i-Special(3)

    600       Unlimited     78,000  

i-Premium(3)

   800      Unlimited     Unlimited     94,000  

Everyone olleh 35(3G)

   130      Unlimited     750     35,000  

Everyone olleh 45(3G)

   185      Unlimited     1,536     45,000  

Everyone olleh 55(3G)

   250      Unlimited     2,560     55,000  

Fixed-Line & Wireless Unlimited 67(3G) (4)

   Unlimited(50)     Unlimited     5,120     67,000  

Fixed-Line & Wireless Unlimited 77(3G) (4)

   Unlimited(50)     Unlimited     9,216     77,000  

Fixed-Line & Wireless Unlimited 97(3G) (4)

   Unlimited(50)     Unlimited     17,408     97,000  

Fixed-Line & Wireless Unlimited 129(3G) (4) (5)

   Unlimited(50)     Unlimited     25,600     129,000  

 

 

(1)Starting in May 2012, each second of video call counts as 1.66 second of voice call.

(2)We do not charge for any data transmission in wireless LAN zones. Wezones and charge W0.0250.01 per 0.5 kilobyte for any additional data transmission exceeding the free monthly quota.

(2)Available only to smart phone users who do not use Apple iPhones. We provide discounts ofquota, up to 36.7% for mandatory subscription periods ranging from one to three years.a maximum of150,000.

 

(3)We provide discounts of up to 38.2% for mandatory subscription periods ranging from one to threetwo years.

(4)Includes free voice calls from KT to KT and other carriers, free fixed-line voice calls, and 50 minutes of free video calls.

(5)Provides an additional daily quota of 1GB after the free monthly quota of 25GB has been exhausted and also provides unlimited use of data at transmission speed of up to 2Mbps after the daily quota of 1GB has been exhausted.

In connection with the rollout of our 4G LTE services in January 2012, we also introduced new rate plans specifically for LTE phone users. For a limited time between February and April 2013, we also offered LTE rate plans with unlimited data usage. The following table summarizes charges for our representative LTE service plans:

   Free Airtime Minutes (1)   Free Data
Transmission (2)
   Monthly Fee 
   Voice or video calls to
anyone
      Voice or video calls to
our mobile subscribers
   (in megabytes)     

LTE-340

    160       750    34,000  

LTE-420

    200       1,536     42,000  

LTE-520

    250       2,560     52,000  

LTE-620

    350       6,144     62,000  

LTE-720

    450       10,240     72,000  

LTE-G550

   250      3,000     2,560     55,000  

LTE-G650

   350      3,000     6,144     65,000  

LTE-G750

   450      3,000     10,240     75,000  

LTE-850

   650      3,000     14,336     85,000  

LTE-1000

   1,050      3,000     20,480     100,000  

LTE-1250

   1,250      Unlimited     25,600     125,000  

LTE -35 (3)

   130      Unlimited     750     35,000  

LTE-45 (3)

   185      Unlimited     1,536     45,000  

LTE-55 (3)

   250      Unlimited     2,560     55,000  

LTE-67 (3)

   Unlimited(200)     Unlimited     5,120     67,000  

LTE-77 (3)

   Unlimited(200)     Unlimited     9,216     77,000  

LTE-79 (3) (4)

   Unlimited(200)     Unlimited     10,240     79,000  

   Free Airtime Minutes (1)   Free Data
Transmission (2)
   Monthly Fee 
   Voice or video calls to
anyone
     Voice or video calls to
our mobile subscribers
   (in megabytes)     

LTE-97 (3)

   Unlimited(200)     Unlimited     17,408    97,000  

LTE-129 (3) (4)

   Unlimited(200)     Unlimited     25,600     129,000  

Wideband Safe Unlimited 67 (5)

   100        15,360     67,000  

Wideband Safe Unlimited 77 (5)

   300        15,360     77,000  

(1)Starting in May 2012, each second of video call counts as 1.66 second of voice call.

(2)We do not charge for data transmission in wireless LAN zones. We charge0.01 per 0.5 kilobyte for any additional data transmission exceeding the free monthly quota, up to a maximum of150,000.

(3)Rates applicable to both wideband LTE and LTE-A.

(4)Provides an additional daily quota of 2GB after the free monthly quota of 10 GB (for LTE-79) or 25GB (for LTE-129) has been exhausted, and also provides unlimited use of data with speed of up to 3Mbps after the daily quota of 2GB has been exhausted.

(5)Provides unlimited use of data at transmission speed of up to 400Kbps after the monthly quota of 15GB has been exhausted, and also provides unlimited voice calls with one designated number within our network.

We have entered into arrangements with various partners including a leading discount store, a leading online shopping mall, a cosmetics company, oil refinery companies,several leading banks, an operator of cinema complexes, a leading motorautomobile manufacturing company and Korea Railroad Corporation, and we offer subscribers of our mobile service monthly discount coupons, membership points or movie tickets from such partners as promotional gifts.

In December 2010, we also introduced 3G data-only plans targeting tablet PC users, smart-phonesmartphone users and other special phone users, offering subscription plans for data transmission amounts ranging from 100MB1 GB to 4GB at monthly fees ranging from(Won)5,00025,000 to(Won)35,000.49,000.

In June 2012, we introduced LTE data-only plans, in both basic and various discounted packages, which provides 1.5 GB to 6 GB of data at monthly fees ranging from25,000 to49,000. The following table summarizes charges for our representative data-only plans:

olleh Lifetime Data-Only Pricing Plan

   Monthly Data Quota
(3G Network)
   Monthly Fee   Discount (1) 

olleh Lifetime Data 1G(2) (3)

   1GB    22,500    10,000  

olleh Lifetime Data 2G(2) (3)

   2GB     27,500     11,500  

olleh Lifetime Data 4G(2) (3)

   2GB     42,500     18,000  

(1)Discounts are only plans are only available with a two year contract. Early termination will result in a cancellation fee.

(2)We charge0.025 per 0.5 kilobyte for any additional data transmission in excess of the monthly quota.

(3)We provide olleh WiFi services.

Pricing Plan for LTE Pad users

   Monthly Data Quota
(3G and LTE  Networks)
   Monthly Fee   Discount 

LTE Lifetime Data Basic 1.5G(1) (2) (5)

   1.5GB    25,000    7,000  

LTE Lifetime Data Basic 3G(1) (2) (5)

   3GB     35,000     12,500  

LTE Lifetime Data Basic 6G(1) (2) (5)

   6GB     49,000     19,000  

LTE Lifetime Data Safe Blocking 1.5G(3) (4) (5)

   1.5GB     25,000     7,000  

LTE Lifetime Data Safe Blocking 3G(3) (4) (5)

   3GB     35,000     12,500  

LTE Lifetime Data Safe Blocking 6G(3) (4) (5)

   6GB     49,000     19,000  

(1)We provide free additional data in the form of Safe Zone data which amounts to 20% of the monthly data quota.

(2)We charge0.01 per 0.5 kilobyte for any additional data transmission in excess of the monthly data quota and Safe Zone data, regardless of network.

(3)Data is automatically blocked after the monthly data quota is exhausted.

(4)We provide additional data recharge in units of 500MB, 1GB and 2GB, at a fee of8,000,13,000 and18,000, respectively. Additional data recharge is available a maximum of 10 times per month.

(5)Unused data is not carried over to the next month (applies to both monthly quota and additional recharge data). Customers may not subscribe to our m-VoIP services and data add-on services, such as Data Plus, Data Sharing, Genie Pack and OTN Pack.

Fixed-line Telephone Services

Local Telephone Service.Our revenues from local telephone service consist primarily of:

 

Serviceservice initiation fees for new lines;

 

Monthlymonthly basic charges; and

 

Monthlymonthly usage charges based on the number of call pulses.

The rates we charge for local calls are currently subject to approval by the MSIP after consultation with the Ministry of Strategy and Finance. The rates are identical for residential and commercial customers. All calls are currently measured by call pulses. Each pulse is determined by the duration of the call and the time of the day at which the call is made. For instance, duringOur current local usage rates, which have been in effect since May 2002, are39 per pulse for regular service hours,and70 per pulse for public telephones. For local calls, a call pulse is triggered at the beginning of each local telephone call and every three minutes thereafter.

The rates we charge for local calls are currently subjectthereafter from 8:00 a.m. to approval by the Korea Communications Commission after consultation with the Ministry of Strategy9:00 p.m. on weekdays and Finance. The rates are identical for residentialevery 258 seconds thereafter on holidays and commercial customers. The following table summarizes our local usage rates as of each datefrom 9:00 p.m. to 8:00 a.m. on which rates were revised:weekdays.

   Dec 1, 1996   Sept 1, 1997   April 15, 2001   May 1, 2002 

Local Usage Charges (per pulse)(1)

        

Regular service

  (Won)41.6    (Won)45    (Won)39    (Won)39  

Public telephone

   40     50     50     70  

(1)Since January 1, 1990, usage charges for local service in those metropolitan areas subject to measured service have been based on the number of pulses, which are a function of the duration and number of calls, and per pulse rates. Before January 1, 1993, in areas not subject to measured service, a pulse was triggered once for each local telephone call, regardless of the length of the call. Commencing January 1, 1993, measured service applies to all lines in service. A pulse is triggered at the beginning of each local call and every three minutes thereafter from 8:00 a.m. to 9:00 p.m. on weekdays and every 258 seconds thereafter on holidays and from 9:00 p.m. to 8:00 a.m. on weekdays.

We also charge a monthly basic charge ranging from(Won)3,000 to(Won)5,200, depending on location, and a non-refundable service initiation fee of(Won)60,000 to new subscribers. The non-refundable service initiation fee is waived for the new subscribers who subscribe to our local service through our online application process. Until April 2001, we charged refundable service initiation deposits, which were refunded upon termination of service. As of December 31, 2010,2013, we had(Won)616467 billion ofin refundable service initiation deposits outstanding and 2,7382,162 thousand subscribers who are enrolled under the mandatory deposit plan and are eligible to switch to the no deposit plan and receive their service initiation deposit back (less the non-refundable service initial fees).

Domestic Long-distance Telephone Service.Our revenues from domestic long-distance service consist of charges for calls placed, charged for the duration, time of day and day of the week a call is placed, and the distance covered by the call. We are able to set our own rates for domestic long-distance service without approval from the Korea Communications Commission.MSIP.

The following table summarizes ourOur current basic domestic long-distance rates, aswhich have been in effect since November 2001, are39 per three minutes for distances of up to 30 kilometers and14.5 per ten seconds (equivalent to261 per three minutes) for distances in excess of 30 kilometers. For domestic long-distance calls for distances of up to 30 kilometers, a pulse is triggered at the beginning of each datecall and every three minutes thereafter. For domestic long-distance calls for distances in excess of 30 kilometers, a pulse is triggered at the beginning of each call and every 10 seconds thereafter. Rates for domestic long-distance calls for distances up to 30 kilometers are currently discounted by an adjustment in the period between pulses, by approximately 11% (utilizing a pulse rate of 200 seconds) from 6:00 a.m. to midnight on which rates were revised. These charges do not reflect discounts applicableholidays and from 6:00 a.m. to 8:00 a.m. on weekdays, and by approximately 43% (utilizing a pulse rate of 258 seconds) from midnight to 6:00 a.m. every day. Rates for domestic long-distance calls made during off-peak hours or holidays.for distances in excess of 30 kilometers are currently discounted by

approximately 10% (utilizing a rate of13.1 per ten seconds) from 6:00 a.m. to midnight on holidays and from 6:00 a.m. to 8:00 a.m. on weekdays, and by approximately 30% (utilizing a rate of10.2 per ten seconds) from midnight to 6:00 a.m. every day.

   Date of Rate Change(1) 
   Dec. 1, 1996   Sept. 1, 1997   Dec. 1, 2000   April 15, 2001   Nov. 1, 2001 

Domestic Long-Distance Charges (per three minutes)(1) (2)

          

Up to 30 km

  (Won)41.6    (Won)45    (Won)45    (Won)39    (Won)39  

Up to 100 km

   182     172     192     192     261  

100 km or longer

   277     245     252     252     261  

(1)Domestic long-distance calls of up to 30 kilometers are billed on the same basis as local calls. Before April 15, 2001, for domestic long-distance calls in excess of 30 kilometers, a pulse was triggered at the beginning of each call and every 47 seconds for calls up to 100 kilometers or every 33 seconds for calls in excess of 100 kilometers. Commencing April 15, 2001, a pulse was triggered at the beginning of each call and every 30 seconds thereafter. Commencing November 1, 2001, a pulse is triggered at the beginning of each call and every 10 seconds thereafter.

(2)Rates for domestic long-distance calls in excess of 30 kilometers are currently discounted (by an adjustment in the period between pulses) by 10% on holidays and from 6:00 a.m. to 8:00 a.m. on weekdays, and by 30% from midnight to 6:00 a.m. every day.

In recent years, we have begun to offer optional flat rate plans, discount plans and bundled product plans in order to mitigate the impact from lower usage of local and domestic long-distance calls and stabilize our revenues from fixed-line telephone services. For a discussion of our bundled products, see “—Bundled Products.” Some of our flat rate and discount plans that we currently offer include the following:

 

starting in June 2008, a subscriber who elects to pay a monthly flat rate of(Won)12,500 is able to make free local and domestic long-distance calls after 9 p.m. on weekdays or at any time on weekends. Each month, the subscriber also receives a free movie ticket and free 60 minutes of land-to-mobile calls. The subscriber is also eligible to receive a discount of up to 20%, subject to the length of the mandatory subscription period;

 

starting in October 2009, a subscriber who elects to subscribe to our fixed-line phone service for a three year mandatory subscription period is able to make local and domestic long-distance calls at a flat rate of(Won)39 per three minutes; and

 

starting in October 2009, a subscriber who elects to subscribe to our broadband Internet access service or HSDPA-based mobile service for a three year mandatory subscription period is able to make local, domestic long-distance and land-to-mobile calls of up to(Won)150,000 with a flat rate payment of(Won)50,000 or such calls up to(Won)50,000 with a flat rate payment of(Won)10,000. Standard rates apply to calls that exceed the capped amounts.

International Long-distance Service.Our revenues from international long-distance service consist of:

 

amounts we bill to customers for outgoing calls made to foreign countries (including customers who make calls to Korea from foreign countries under our home country direct-dial service);

 

amounts we bill to foreign telecommunications carriers and administrations for connection to the Korean telephone network in respect of incoming calls (including calls placed in Korea by customers of the foreign carriers for home country direct-dial service); and

 

other revenues, including revenues from international calls placed from public telephones.

We bill outgoing calls made by customers in Korea (and calls made to Korea from foreign countries under our home country direct-dial service) in accordance with our international long-distance rate schedule for the country called. These rates vary depending on the time of day at which a call is placed. We bill outgoing international calls on the basis of one-second increments. We are able to set our own rates for international long-distance service without approval from the Korea Communications Commission.MSIP.

For incoming calls (including calls placed in Korea by customers of the foreign carriers for home country direct-dial service), we receive settlement payments from the relevant foreign carrier or administration at the applicable settlement rate specified under the agreement with the foreign entity.carrier. We have entered into numerous bilateral agreements with foreign carriers and administrations.carriers. We negotiate the settlement rates under these agreements with each foreign carrier, subject to Korea Communications Commissionthe MSIP’s approval. It is the practice among international carriers for the carrier in the country in which the call is billed to collect payments due in respect of the use of overseas networks. Although we record the gross amounts due to and from us in our financial statements, we make settlements with most carriers monthly or quarterly on a net basis.

Interconnection.We provide other telecommunications service providers, including mobile operators and other fixed-line operators, interconnection to our fixed-line network.

Land-to-mobile Interconnection. For a call initiated by a landline user to a mobile service subscriber, we collect from the landline user the land-to-mobile usage charge and remit to the mobile service provider a land-to-mobile interconnection charge. The Korea Communications CommissionMSIP periodically issues orders setting the interconnection charge calculation method applicable to interconnections with mobile service providers. The Korea Communications CommissionMSIP determines the land to mobile interconnection charge by calculating the long run incremental cost of mobile service providers, taking into consideration technology development and future expected costs.

The following table shows the interconnection charges we paid per minute (exclusive of value-added taxes) to mobile operators for landline to mobile calls.calls:

 

  Effective Starting   Effective Starting 
  January 1, 2008   January 1, 2009   January 1, 2010   January 1, 2011   January 1, 2012   January 1, 2013 

SK Telecom

  (Won)33.4    (Won)32.9    (Won)31.4    30.5    27.1    26.3  

LG U+

   39.1     38.5     33.6     31.9     28.2     27.0  

The following table showsSince September 2004, the usage chargecharges per minute collected from a landline user for a call initiated by a landline user to a mobile service subscriber.

Effective Starting September 1, 2004

Weekday

(Won)87.0

Weekend

82.0

Evening(1)

77.2

(1)Evening rates are applicable from 12:00 a.m. to 6:00 a.m. everyday.

subscriber are87.0 during weekdays,82.0 during weekends and77.2 during evenings (defined as 12:00 a.m. to 6:00 a.m. every day). We recognize as land-to-mobile interconnection revenue the entire amount of the usage charge collected from the landline user and recognize as expense the amount of interconnection charge paid to the mobile service provider.

Land-to-land and Mobile-to-land Interconnection. For a call initiated by a landline subscriber of our competitor to our fixed-line user, the landline service provider collects from its subscriber its normal rate and remits to us a land-to-land interconnection charge. In addition, for a call initiated by a mobile service subscriber to our landline user, the mobile service provider collects from its subscriber its normal rate and remits to us a mobile-to-land interconnection charge.

The following table shows such interconnection charge per minute collected for a call depending on the type of call, as determined by the Korea Communications Commission.KCC:

 

  Effective Starting   Effective Starting 
  January 1, 2008   January 1, 2009   January 1, 2010   January 1, 2011   January 1, 2012   January 1, 2013 

Local access(1)

  (Won)18.3    (Won)18.1    (Won)17.1    16.4    15.5    14.6  

Single toll access(2)

   19.5     19.3     19.1     18.6     17.4     16.7  

Double toll access(3)

   20.6     20.4     22.5     22.2     20.3     19.9  

 

Source: The Korea Communications Commission.

Source:The KCC.

 

(1)Interconnection between local switching center and local access line.

 

(2)Interconnection involving access to single long-distance switching center.

 

(3)Interconnection involving access to two long-distance switching centers.

Mobile-to-mobile Interconnection. For a call initiated by a mobile subscriber of our competitor to our mobile subscriber, the mobile service provider collects from its subscriber its normal rate and remits to us a mobile-to-mobile interconnection charge. In addition, for a call initiated by our mobile subscriber to a mobile subscriber of our competitor, we collect from our subscriber our normal rate and remit to the mobile service provider a mobile-to-mobile interconnection charge.

The following table shows the interconnection charges we paid per minute (exclusive of value-added taxes) to mobile operators, and the charges received per minute (exclusive of value-added taxes) from mobile operators for mobile to mobile calls:

   Effective Starting 
   January 1, 2011   January 1, 2012   January 1, 2013 

SK Telecom

  30.5    27.1    26.3  

LG U+

   31.9     28.2     27.0  

KT

   31.7     28.0     27.0  

We recognize as mobile-to-mobile interconnection revenue the entire amount of the usage charge collected from the mobile user and recognize as expense the amount of interconnection charge paid to the mobile service provider.

Internet Services

Broadband Internet Access Service.We offer broadband Internet access service that primarily uses existing telephone lines to provide both voice and data transmission. We charge monthly fixed fees to customers of broadband Internet service. In addition, we charge customers a one timeone-time installation fee per site of(Won)30,000 and modem rental fee of up to(Won)8,000 on a monthly basis. The rates we charge for broadband Internet access service are subject to approval by the Korea Communications Commission.

The following table summarizes our charges for our representative broadband Internet service plans:

 

   Maximum Speed   Monthly Fee 

olleh Internet Special(1)

   100 Mbps    (Won)28,800  

olleh Internet Lite(1)

   50                25,500  

WiBro 1G(2) (6)

   3                10,000  

WiBro 30G(3) (6)

   3                19,800  

WiBro 50G(4) (6)

   3                27,000  

WiBro Unlimited(5) (6)

   3                40,000  

Maximum Service Speed

Monthly Fee

olleh Internet Special (1) (6)

100 Mbps36,000

olleh Internet Lite (1) (6)

50 Mbps30,000

WiBro 10G(2) (6)

40 Mbps (for downloading) / 12 Mbps (for uploading)10,000

WiBro 20G(3) (6)

40 Mbps (for downloading) / 12 Mbps (for uploading)20,000

WiBro 30G(4) (6)

40 Mbps (for downloading) / 12 Mbps (for uploading)30,000

WiBro 50G(5) (6)

40 Mbps (for downloading) / 12 Mbps (for uploading)40,000

 

 

(1)We waive the installation fee of(Won)30,000 for mandatory subscription periods of one to four years.

 

(2)We charge a monthly fee of(Won)10,000 for up to 1,00010,000 megabytes of data transmission and(Won)2510 per megabyte for any additional data transmission in excess of 1,00010,000 megabytes per month.

 

(3)We charge a monthly fee of(Won)19,80020,000 for up to 20,000 megabytes of data transmission and10 per megabyte for any additional data transmission in excess of 20,000 megabytes per month.

(4)We charge a monthly fee of30,000 for up to 30,000 megabytes of data transmission and(Won)10 per megabyte for any additional data transmission in excess of 30,000 megabytes per month.

 

(4)(5)We charge a monthly fee of(Won)27,00040,000 for up to 50,000 megabytes of data transmission and(Won)10 per megabyte for any additional data transmission in excess of 50,000 megabytes per month.

 

(5)We may limit the service for certain usages, such as CCTV or other large size file transfers, if the monthly data transmission exceeds 100,000 megabytes.

(6)PromotionalVarious discounts and promotional rates are available until June 30, 2011.depending on the time of subscription and the minimum subscription contract, which may reduce the actual monthly fee paid.

olleh TV Services.We charge our subscribers an installation fee per site of(Won)24,000, which is waived with a three-year contract, a set-top box rental fee ranging from(Won)2,000 to(Won)7,0008,000 on a monthly basis and a monthly subscription fee. The rates we charge for olleh TV services are subject to approval by the Korea Communications Commission.MSIP.

The following table summarizes charges for our representative olleh TV service plans:

 

   Real-time
Broadcasting Channels
   Monthly Fee (1) 

olleh TV Video-on-Demand

   0    (Won)10,000  

olleh TV Choice(2)

   75-77     10,000-16,000  

olleh TV Education(3)

   48     10,000-14,000  

olleh TV Thrift(4)

   99     12,000  

olleh TV Standard(4)

   125     16,000  

olleh TV Deluxe(4)

   130     23,000  

olleh TV SkyLife Economy(5)

   99     20,000  

olleh TV SkyLife Standard(5)

   133     25,000  

olleh TV SkyLife Premium(5)

   171     30,000  
   Real-time
Broadcasting Channels
   Monthly Fee (1) 

olleh TV Live Choice(2)

   91    8,000  

olleh TV Live Education(3)

   68     8,000  

   Real-time
Broadcasting Channels
   Monthly Fee (1) 

olleh TV Live Thrift(4)

   170     12,000  

olleh TV Live Standard(4)

   201     16,000  

olleh TV Live Deluxe(4)

   205     23,000  

olleh TV SkyLife Economy(5)

   187     22,000  

olleh TV SkyLife Standard(5)

   194     27,500  

olleh TV SkyLife Premium(5)

   198     33,000  

olleh TV Mobile (6)

   70     5,000  

Olleh TV Live All-right(7)

   177     14,000  

Olleh TV Skylife All-right (7)

   177     14,000  

 

 

(1)We typically provide discounts of 5% to 20% for a mandatory subscription periods ranging from one to three years. For olleh TV SkyLife subscribers, we provide discounts of 20% for mandatory subscription period of three years.

 

(2)Assuming selection of one package. Subscribers must choose at least one channel package, each of which charges a monthly fee of(Won)2,000. The packages include entertainment, media, leisure and education and multi-room.

(3)Assuming selection of one package. Subscribers must choose at least one channelVideo-On-Demand package, each of which charges a monthly fee of(Won)2,000. The packages include elementary school, middle/high school and English education.

 

(4)We charge additional monthly fees for value-added services such as short messaging service, video conferencing and high-definition channels from KT Skylife Co., our subsidiary satellite broadcasting operator.

 

(5)For subscription to olleh TV SkyLife service, installation fee is waived for a mandatory subscription period of three years.

(6)Product for N-Screen (a service which allows purchased content to be displayed on multiple devices) launched in October 2011. The service is offered free of charge if bundled with our Internet, olleh TV and mobile services.

(7)olleh TV all-right products are basic IPTV packages with more than 55 TV broadcasting channels, 25 data broadcasting channels, 30 radio broadcasting channels, and more than 40,000 video-on-demand channels.

Data Communication Service

We charge customers of domestic leased-lines on a monthly fixed-cost basis based on the distance of the leased line, the capacity of the line measured in bits per second (“bps”), the type of line provided and whether the service site is local or long-distance. In addition, we charge customers a one-time installation fee per line ranging from(Won)56,000 to(Won)1,940,000 depending on the capacity of the line.

Bundled Products

We utilize our extensive customer relationships and market knowledge to expand our revenue base by cross-selling our telecommunications products and services. In order to attract additional subscribers to our new services, we bundle our services, such as our broadband Internet access service with WiBro, IP-TV, Internet phone, fixed-line telephone service, WiBro, and mobile services, at a discount.

The following table summarizes our various basic bundled packages that we currently offer. The packages require subscribers to agree to a subscription period of three years.years:

 

   Monthly Rates  Mobile usage
Charge Discounts
 
   Flat Rate (1)
   Mobile Monthly Fee  Between
Family
Members (2)
  Calls to
Designated
Numbers (3)
 

Internet / Fixed-Line Phone / Mobile

  (Won)27,000    Discounts of between
10% to 50%, subject
to the number of
subscribers who
participate (up to 5
mobile numbers)
   50%    20%  

Internet / IP-TV / Mobile(4)

   31,000       50  20

Internet / Fixed-Line Phone / IP-TV / Mobile(4)

   32,000       50%    50%  
Monthly Rates
Flat Rate

Mobile Monthly Fee

Internet / Internet Phone / Mobile

24,000Discounts are between1,500 and10,000, depending on the mobile fee plan (up to 5 mobile numbers) (2)

Internet / Fixed-Line Phone / Mobile

27,000

Internet / IP-TV / Mobile(1)

34,000

Internet / Fixed-Line Phone / IP-TV / Mobile(1)

35,000

 

 

(1)Assuming selection of olleh Internet Lite service. If olleh Internet Special is selected, additional monthly charge of(Won)3,000.

(2)Applies to both voice call and video call airtime minutes.

(3)Applies to voice call airtime minutes only. Limited to one designated mobile number and one designated fixed-line number.

(4)Assuming selection of olleh TV SkyLife EconomyStandard Plan. If olleh TV Live Video-on-Demand, olleh TV Live Choice, or olleh TV Live Education is selected, deduction of(Won)2,0005,000 from the monthly flat rate. If olleh TV SkyLife StandardEconomy Plan is selected, deduction of3,000 from the monthly flat rate. If olleh TV SkyLife Premium Plan is selected, additional monthly charge of(Won)3,000.5,000.

We have also entered into partnerships with a leading online shopping mall, an operator of cinema complexes, a satellite broadcasting service operator, a life insurance company, a car insurance company and a security company, and our subscribers may elect to receive monthly gift certificates, music downloads, online game money, movie tickets or other benefits from such partnership companies with value of up to(Won)50,000 per month in lieu of monthly rate discounts.

(2)Bundled rate plans are available only for olleh LTE subscribers.

We believe that subscribers who sign up for bundled products are less likely to cancel our services than subscribers who subscribe to individual services. Subscription fees paid for our bundled products are allocated to each service in proportion to their fair value and the allocated amount is recognized as revenue according to the revenue recognition policy for each service.

Competition

Competition in the telecommunications sector in Korea is intense. In recent years, business combinations in the telecommunications industry have significantly changed the competitive landscape of the Korean telecommunications industry. In particular, SK Telecom acquired a controlling stake in Hanarotelecom Incorporated in 2008, which was renamed SK Broadband. The acquisition enablesenabled SK Telecom to provide fixed-line telecommunications, broadband Internet access and IP-TV services together with its mobile telecommunications services. OnIn January 1, 2010, LG Dacom and LG Powercom merged into LG Telecom Co., Ltd., which subsequently changed its name to LG U+. The merger enablesenabled LG U+ provide a similar range of services as SK Telecom and us.

Under the Framework Act of Telecommunications Basic Law and the Telecommunications Business Law,Act, telecommunications service providers in Korea are currently classified into network service providers, value-added service providers and specific service providers. See “—Regulation.”

Network Service Providers

All network service providers in Korea are permitted to set the rates for international or domestic long-distance services on their own without Korea Communications Commissionthe MSIP’s approval. Many of our competitors have set their rates lower than ours. Currently, we can compete freely with other providers on the basis of rates in all services except for rates we charge for local calls, and broadband Internet access service, which require advance approval from the Korea Communications Commission.MSIP. In all service areas, we compete by endeavoring to provide superior customer service and superior technical quality, taking advantage of our broad customer base and our ability to provide various telecommunication services.

We and SK Telecom have been designated as market-dominating business entities in the respectivelocal telephone service and cellular service markets, respectively, under the Telecommunications Business Act. Under this Act, a market-dominating business entity may not engage in any act of abuse, such as unreasonably interfering with business activities of other business entities, hindering unfairly the entry of newcomers or substantially restricting competition to the detriment of the interests of consumers. The Korea Communications CommissionKCC has also issued guidelines on fair competition of the telecommunications companies. If any telecommunications service provider breaches the guidelines, the Korea Communications CommissionKCC may take necessary corrective measures against it after a hearing at which the service provider may defend its action.

Mobile Service.Competition in the mobile telecommunications industry in Korea is intense among SK Telecom, LG U+ and us. Such competition has intensified in recent years due to the implementation of mobile number portability, which enabled mobile subscribers to switch their service provider while retaining the same mobile phone number, as well as payments of handset subsidies to purchasers of new handsets who agree to minimum subscription periods.periods and the recent rollout of fourth-generation mobile services based on LTE technology by SK Telecom, LG U+ and us.

The following table shows the market shareshares in the mobile telecommunications market as of the dates indicated:

 

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

December 31, 2008

   31.5     50.5     18.0  

December 31, 2009

   31.3     50.6     18.1  

December 31, 2010

   31.6     50.6     17.8  
   Market Share (%) 
   KT
Corporation
   SK Telecom   LG U+ 

December 31, 2011

   31.5     50.6     17.9  

December 31, 2012

   30.8     50.3     18.9  

December 31, 2013

   30.1     50.0     19.9  

 

 

Source:Korea Communications Commission.The KCC.

We offer various rate plans, including those that offer a specified number of free airtime minutes per month in return for a higher monthly fee and those that are geared toward business customers. Our competitors also offer similar plans at competitive rates.

Local Telephone Service.We compete with SK Broadband and LG U+ in the local telephone service business. SK Broadband began providing local telephone service in 1999, followed by LG U+ in 2004. In addition, the services provided by mobile service providers have had a material adverse effect on KT Corporationus in terms of our revenues from fixed-line telephone services. We expect this trend to continue.

The following table shows the market shareshares in the local telephone service market as of the dates indicated:

 

   Market Share (%) 
   KT
Corporation
   SK Broadband   LG U+ 

December 31, 2008

   89.8     8.7     1.5  

December 31, 2009

   89.9     8.4     1.7  

December 31, 2010

   86.3     11.7     2.0  
   Market Share (%) 
   KT
Corporation
   SK Broadband   LG U+ 

December 31, 2011

   84.3     13.3     2.4  

December 31, 2012

   82.8     14.5     2.7  

December 31, 2013

   81.5     15.6     2.9  

 

 

Source:Korea Communications Commission.The KCC.

Although the local usage charge of our competitors and us is the same at(Won)39 per pulse (generally three minutes) and the basic monthly charge of our competitors and us is the same at(Won)5,200 depending on location,, our competitors’ non-refundable telephone service initiation charges are lower than ours. Our customers pay a non-refundable telephone service initiation charge of(Won)60,000 while customers of our competitors pay a non-refundable telephone service initiation charge of(Won)30,00030,000. Also, the basic monthly charge of our competitors is4,500 compared to our basic charge of5,200.

Domestic Long-distance Telephone Service.We compete with SK Broadband, LG U+, Onse and SK Telink in the domestic long-distance market. LG U+ began offering domestic long-distance service in 1996, followed by Onse in 1999 and SK Broadband and SK Telink in 2004. The following table shows the market shares in the domestic long-distance market as of the dates indicated:

 

   Market Share (%) 
   KT
Corporation
   SK Broadband   LG U+   Onse   SK Telink 

December 31, 2008

   85.2     3.7     7.8     1.7     1.6  

December 31, 2009

   86.3     6.8     3.4     1.6     1.9  

December 31, 2010

   82.2     11.1     3.1     1.2     2.4  
   Market Share (%) 
   KT
Corporation
   SK Broadband   LG U+   Onse   SK Telink 

December 31, 2011

   80.5     12.5     3.2     1.1     2.7  

December 31, 2012

   79.2     14.0     3.0     1.1     2.8  

December 31, 2013

   78.7     14.5     3.0     1.0     2.8  

 

Source: Korea Telecommunications Operators Association.

Source:Korea Telecommunications Operators Association.

Our competitors and we charge(Won)39 per three minutes for domestic long-distance calls up to 30 kilometers. For domestic long-distance calls greater than 30 kilometers, our competitors typically charge between 3% to 5% less than us. The following table is a comparison of our standard long-distance usage charges per 10 seconds with the standard rates of our competitors as of December 31, 2010:2013:

 

   KT
Corporation
   SK Broadband   LG U+   Onse   SK Telink 

30 kilometers or longer

  (Won)14.5    (Won)13.9    (Won)14.1    (Won)13.8    (Won)13.8  
   KT
Corporation
   SK Broadband   LG U+   Onse   SK Telink 

30 kilometers or longer

  14.5    13.9    14.1    13.8    13.8  

 

 

Source:Korea Communications Commission.The KCC.

International Long-Distance Telephone Service.Four companies, SK Broadband, LG U+, Onse and SK Telink, directly compete with us in the international long-distance market. LG U+ began offering international long-distance service in 1991, followed by Onse in 1997 and SK Broadband in 2004. SK Telink, which only provides Internet phone service, entered the international long-distance market in 2003 and offers its services at rates lower than those offor network-based international long-distance telephone services. The entry of Internet phone service providers and other telecommunications service providers, such as voice resellers, that can offer telecommunications services at rates lower than ours has increased competition in the international long-distance market and adversely affected our revenues and profitability from international long-distance services. See “—Specific Service Providers.”

Our competitors generally charge less than us for international long-distance calls. The following table is a comparison of our standard long-distance usage charges per one minute with the standard rates of our competitors as of December 31, 2010:2013:

 

  KT
Corporation
   SK
Broadband
   LG U+   Onse   SK Telink   KT
Corporation
   SK
Broadband
   LG U+   Onse   SK Telink 

United States

  (Won)282    (Won)276    (Won)288    (Won)276    (Won)156    282    276    288    276    156  

Japan

   696     672     678     672     384     696     672     678     672     384  

China

   990     984     996     984     780     990     984     996     984     780  

Australia

   1,086     1,044     1,086     1,044     528     1,086     1,044     1,086     1,044     528  

Great Britain

   1,008     966     996     966     498     1,008     966     996     966     498  

Germany

   948     912     942     912     402     948     912     942     912     402  

 

 

Source:KT Corporation.

Broadband Internet Access Service.The Korean broadband Internet access market has experienced significant growth in the past decade. SK Broadband entered the broadband market in 1999 offering both HFC and ADSL services, and we entered the market with our ADSL services in 1999, followed by Dreamline, Onse and LG U+. In addition, the entry of cable television providers that offer HFC-based broadband Internet access services at rates lower than ours has increased competition in the broadband Internet access market. We expect industry consolidation among our competitors in the near future, and smaller competitors in the broadband market today may become larger competitors.

The following table shows the market share in the broadband Internet access market as of the dates indicated:

 

   Market Share (%) 
   KT
Corporation
   SK
Broadband
   LG U+   Others 

December 31, 2008

   43.4     22.9     14.1     19.6  

December 31, 2009

   42.5     23.5     15.4     18.6  

December 31, 2010

   43.1     23.1     16.1     17.7  
   Market Share (%) 
   KT
Corporation
   SK
Broadband
   LG U+   Others 

December 31, 2011

   43.8     23.5     15.7     17.0  

December 31, 2012

   44.0     24.1     15.0     16.9  

December 31, 2013

   43.1     24.4     15.6     16.9  

 

 

Source:Korea Communications Commission.The KCC.

Our competitors generally charge less than us for broadband Internet access service. The following table is a comparison of fees for our olleh Internet Lite service with three year mandatory subscription period with fees of our competitors for comparable services as of December 31, 2010:2013:

 

  KT
Corporation
   SK
Broadband
   LG U+   Cable Providers (1)   KT
Corporation
   SK
Broadband
   LG U+   Cable
Providers (1)
 

Monthly subscription fee

  (Won)25,500    (Won)25,200    (Won)25,000    (Won)20,000    25,500    25,000    25,000    20,000  

Monthly modem rental fee

   3,000     3,000     None     1,000     None     None     None     1,000  

Additional installation fee upon moving

   10,000     10,000     20,000     20,000     10,000     10,000     20,000     20,000  

 

 

Source:KT Corporation.

 

(1)These are typical fees charged by cable providers.

Data Communication Service.We had a monopoly in domestic data communication service until 1994, when LG U+ was authorized to provide the leased-line service. The data communications service market has become more competitive with limited growth during the past decade, and we primarily compete with SK Broadband and LG U+.

Value-Added Service Providers

Value-added service providers may commence operations following filing of a report to the Korea Communications Commission.MSIP. The scope of business of a value-added service provider includes specific value-added telecommunications activities (other than services reserved for network service providers), such as data communications utilizing telecommunications facilities leased from network service providers.

Specific Service Providers

Specific service providers, such as Internet phone service providers and voice resellers, started operations in Korea in 1998. We began providing Internet phone service for international long-distance calls in May 1998. Our Internet phone service also competes with international long-distance services provided by voice resellers who have also seen sharp increases in demand for their services.

Regulation

With the establishment of the MSIP in March 2013, many of the regulatory responsibilities formerly handled by the KCC have been transferred to the MSIP. Under the Framework Act of Telecommunications Basic Law and the Telecommunications Business Law, telecommunications service providers are currently classified into three categories:

network service providers, such as us, which typically provide telecommunications services with their own telecommunications networks and related facilities. Their services may include local, domestic long-distance and international long-distance telephone services, mobile communications service, paging service and trunked radio system service;

value-added service providers, which provide telecommunications services other than those services specified for network service providers, such as data communications using telecommunications facilities leased from network service providers; and

specific service providers are broadly defined by law as telecommunications service providers that provide network services usingAct, the telecommunications network facilities or services of network service providers.

Under the Telecommunications Basic Law and the Telecommunications Business Law, the Korea Communications CommissionMSIP now has comprehensive regulatory authority over the telecommunications industry and all network service providers.

The Korea Communications CommissionMSIP has assumed primary policy and regulatory responsibility for matters such as: (i) licensing of network service providers (the MSIP authorizes the licensing of Internet Protocol Television (“IPTV”) service providers and, with the consent of the KCC, authorizes the licensing of satellite broadcasting companies); (ii) regulation of mergers and acquisitions, as well as license

suspension and termination of network service providers; (iii) providing oversight on foreign ownership ratios in network service providers; and (iv) reviewing telecommunication matters as they relate to the public interest and approving ancillary telecommunication business activities. Additionally, the MSIP is responsible for a broad range of other policy and regulatory matters, including the administration and supervision of regulatory reporting by telecommunications companies, examination and analysis of accounting and business management practices in the industry, establishing and administering policies governing telecommunications service fees, value-added service providers and specific service providers, as well as supervising reporting requirements of standard telecommunications service/user contracts.

Under the revised supervisory framework, a network service provider must be licensed by the MSIP. Our license as a network service provider permits us to engage in a wide range of telecommunications services.

The KCC’s overall policy role is to play a key role in regulatory activities aimed at protecting service users in the broadcast and telecommunications market and it continues to be responsible for investigations and sanctions regarding violations by telecommunications companies, as well as for mediating disputes between service providers and users. The KCC is established under the direct jurisdiction of the President and is comprised of five standing commissioners. Commissioners of the Korea Communications CommissionKCC are appointed by the President, and the appointment of the Chairperson must be approved at a confirmation hearing at the National Assembly. The Korea Communications Commission’s policy is to promote competition in the Korean telecommunications markets through measures designed to prevent the dominant service provider in any such market from exercising its market power in such a way as to prevent the emergence and development of viable competitors. A network service provider must be licensed by the Korea Communications Commission. Our license as a network service provider permits us to engage in a wide range of telecommunications services.

Under the Use and Protection of Credit Information Act, telecommunications service providers are also required to disclose personal credit information of their customers only for the purpose of validating and maintaining telecommunications service agreements. Korean telecommunications service providers may use their customers’ credit information only to the extent allowed by the Use and Protection of Credit Information Act, which has gained greater importance in recent years due to the occurrence of personal information leakage incidents.

The Korea Communications CommissionMSIP also has the authority to regulate the IP media market, including IP-TV services. We began offering IP-TV services with real-time high definition broadcasting onin November 17, 2008. Under the Internet Multimedia Broadcasting Business Act, anyone intending to engage in the IP media broadcasting business must obtain a license from the Korea Communications Commission.MSIP. The ownership of the shares of an IP media broadcasting company by a newspaper, a news agency or a foreigner is limited, and broadcasting of certain contents must obtain additional approval of the Korea Communications Commission.limited.

Rates

Under current regulations implementing the Telecommunications Business Act, a network service provider may set its rates at its discretion, although it must report to the Korea Communications CommissionMSIP the rates and the general terms and conditions for each type of network service provided by it. There is, however, one exception to this general rule: if a network service provider has the largest market share for a specified type of service and its revenue from that service for the previous year exceeds a specific revenue amount set by the Korea Communications Commission,MSIP, it must obtain prior approval from the Korea Communications CommissionMSIP for the rates and the general terms for that service. Each year the Korea Communications CommissionMSIP designates the service providers and the types of services for which the rates and the general terms must be approved by the Korea Communications Commission.MSIP. In 2010,2013, the Korea Communications CommissionMSIP designated us for local telephone service and SK Telecom for cellular service.mobile service, which currently remains in effect. The Korea Communications Commission,MSIP, in consultation with the Ministry of Strategy and Finance, is required to approve the rates proposed by a network service provider if (1) the proposed rates are appropriate, fair and reasonable and (2) the calculation method for the rates are appropriate and transparent.

Other Activities

A network service provider, such as us, must obtain the permission of the Korea Communications CommissionMSIP in order to:

 

engage in certain businesses specified in the Presidential Decree under the Telecommunications Business Act, such as the telecommunications equipment manufacturing business and the telecommunications network construction business;

 

change the conditions for its licenses;

 

transfer, terminate, suspend or spin off all or a part of the business for which it is licensed;

 

acquire all or a part of the business of another network service provider; or

 

enter into a merger with another network service provider.

A telephone service provider may provide some network services using the equipment it currently has byBy submitting a report to the Korea Communications Commission.MSIP, a network service provider may enter into arrangements for services to be furnished to its customers by a different telecommunications service provider and, in connection therewith, may provide its telecommunications services to, or authorize the use of all or a portion of its telecommunications facilities by, such other telecommunications service provider. The Korea Communications CommissionMSIP can revoke our licenses or order the suspension of any of our businesses if we do not comply with the regulations of the Korea Communications CommissionMSIP under the Telecommunications Business Law.Act.

The responsibilities of the Korea Communications Commission also include:

formulating the basic plan for the telecommunications industry; and

preparing periodic reports to the National Assembly of Korea regarding developments in the telecommunications industry.

In May 2010, the Korea Communications CommissionKCC issued a guideline that limits the marketing expenditure amounts of telecommunication service providers in Korea to 22%20% of their revenues, with the restrictions applicable to fixed-line and mobile segments to be calculated separately. However, as of October 2013, up to(Won)100 billion of the marketing expenditures may be applied to either segment at the discretion of the service provider. The calculation of marketing expenditure amounts under the guideline excludes advertising expenses and the calculation of revenue amounts excludes revenues from handset sales. To encourage compliance with the non-binding guideline, the Korea Communications Commission plans to release the marketing expenditure amounts of each service provider on a quarterly basis. The Korea Communications CommissionMSIP may periodically adjust the guideline to accommodate changes in market conditions.

The responsibilities of the Ministry of Knowledge EconomyMSIP include:

 

drafting and implementing plans for developing telecommunications technology;

 

fostering and providing guidance to institutions and entities that conduct research relating to telecommunications; and

 

recommending to network service providers that they invest in research and development or that they contribute to telecommunications research institutes in Korea.

In addition, since January 2000, all network service providers (other than regional paging service providers) are obligated to contribute toward the supply of “universal” telecommunications services in Korea. Telecommunications service providers designated as “universal service providers” by the Korea Communications CommissionMSIP are required to provide universal telecommunications services such as local services, local public telephone services, discount services for persons with disabilities and for certain low-income persons, telecommunications services for remote islands and wireless communication services for ships. We have been designated as a universal service provider. The costs and losses recognized by universal service providers in connection with providing these universal telecommunications services will be shared on an annual basis by all network service providers (other than regional paging service providers), including us, on a pro rata basis based on their respective net annual revenue calculated pursuant to a formula set by the Korea Communications Commission.MSIP.

Due to the amendment of the Telecommunications Business Law, effective April 9, 2001, a

A network service provider must permit other network service providers, as designated by the MSIP, to co-use wirelines connecting the switching equipment to end-users, upon the request of such other network service providers. In addition, a network service provider may permit other network service providers to co-use its wireless communication systems upon the request of any of such other network service providers. The compensation method for the co-use must be determined by the Korea Communications CommissionMSIP and be settled, by fair and proper methods.

In addition, starting April 2002, we are required to lease to other companies our fixed-lines that connect subscribers to our network. This system, which is called local loop unbundling, is intended to prevent excessive investment in local loops. This system requires us to lease the portion of our copper

lines that represent our excess capacity to other companies upon their request at rates that are determined by the Korea Communications CommissionMSIP based on our cost, and taking into consideration an appropriate rate of return, to enable them to provide voice and broadband services. Revenues from local loop unbundling, if any, are recognized as revenues from miscellaneous services.businesses.

Foreign Investment

The Telecommunications Business Act restricts the ownership and control of network service providers by foreign shareholders. Foreigners, foreign governments and “foreign invested companies” may not own more than 49.0% of the issued shares with voting rights of a network service provider, including us, and a foreign shareholder may not become our largest shareholder if such shareholder holds 5.0% or more of our shares. For purposes of the Telecommunications Business Act, the term “foreign invested company” means a company in which foreigners and foreign governments hold 15.0% or more shares with voting rights in the aggregate and a foreigner or a foreign government is the largest shareholder, provided, however, that such company will not be counted as a foreign shareholder for the purposes of the above-referenced 49.0% limit if (1) it holds less than 1.0% of our total issued and outstanding shares with voting rights.rights or (2) if the largest shareholder of such company is a government or foreign entity of a country that is a counterparty to a free trade agreement with Korea, as publicly announced by the MSIP, and the MSIP determines that the fact that such foreign government or entity holds a 15.0% or greater shareholding in such company does not present a risk of harm to the public interest. (However, the calculation of the above-referenced 49% ceiling will apply to: (x) any foreign entities that have entered into any major management-related agreement with a network service provider or the shareholder(s) thereof; and (y) foreign entities that have entered into any agreement pertaining to the settlement of fees relating to the handling of international electronic telecommunications services). As of December 31, 2010, 48.52%2013, 40.08% of our common shares were owned by foreign investors. In the event that a network service provider violates the shareholding restrictions, its foreign shareholders cannot exercise voting rights for their shares in excess of such limitation, and the Korea Communications CommissionMSIP may require corrective measures be taken to comply with the ownership restrictions. There is no restriction on foreign ownership for specific service providers and value-added service providers.

Individual Shareholding Limit

Under the Telecommunications Business Act, a foreign shareholder who holds 5.0% or more of our total shares is prohibited from becoming our largest shareholder. However, any foreign shareholder who held 5.0% or more of our total shares and was our largest shareholder on or prior to May 9, 2004 is exempt from the regulations, provided that such foreign shareholder may not acquire any more of our shares. In addition, under the Telecommunications Business Act, the Korea Communications CommissionMSIP may, if it deems it necessary to preserve substantial public interests, prohibit a foreign shareholder from being our largest shareholder. In addition, the Foreign Investment Promotion Act prohibits any foreign shareholder from being our largest shareholder, if such shareholder owns 5.0% or more of our shares with voting rights. In the event that any foreigner or foreign government acquires our shares in violation of the above provisions, the Telecommunications Business Act restricts such foreign shareholder from exercising his or her voting rights with respect to common shares exceeding such threshold. The Korea Communications CommissionMSIP may also order us or the foreign shareholder to take corrective measures in respect of the excess shares within a specified period of six months or less.

Customers and Customer Billing

We typically charge residential subscribers and business subscribers similar rates for services provided. On a case-by-case basis, we also provide discount rates for some of our high-volume business subscribers. We bill all of our customers on a monthly basis. Our customers may make payment at either payment points such as local post offices, banks or our service offices, through a direct-debit service that automatically deducts the monthly payment from a subscriber’s designated bank account, or through a direct-charge service that automatically charges the monthly payment to a subscriber’s designated credit card account. Approximately 70%70.2% of our subscribers as of December 31, 20102013 pay through the direct-debit service. Accounts of subscribers who fail to pay our invoice are transferred to a collection agency, which sends out a notice of payment. If such charges are not paid after notice, we cease to provide outgoing service to such subscribers after a period of

time determined by the type of subscribed service. If charges are still not paid two to three months after outgoing service is cut off, we cease all services to such subscribers. After service is ceased, the overdue charges that are not collected by the collection agency are written off.

Insurance

We carry insurance against loss or damage to all significant buildings and automobiles. Except for our insurance coverage of our satellites and Internet data centers, we do not carry insurance covering losses to outside plants or to equipment because we believe the cost of such insurance is excessive and the risk of material loss or damage is insignificant. We do not have any provisions or reserves against such loss or damage. We do not carry any business interruption insurance.

We provide co-location and a variety of value-added services including server-hosting services to a number of corporations whose business largely depends on critical data operated on our servers or on their servers located at our data centers. Any disruptions, interruptions, physical or electronic data loss, delays or slow downslowdowns in communication connections could expose us to potential liabilities for losses relating to the disrupted businesses of our customers relying on our services.

Information Technology and Operational Systems

Enhancement of our information technology and operational systems and efficient utilization of such systems are important in effectively promoting our core strategies. We are committed to continually investing in and enhancing our information technology systems, which provide support to many aspects of our businesses. In order to respond more effectively to a changing business environment, a new enterprise resource planning system (the “New ERP System”) was completed and implemented during the second half of 2012. The New ERP System has contributed to enhancing various aspects of our internal processes and control systems, and we are establishing various plans to effectively utilize the New ERP System and to stabilize our internal control processes in connection with the New ERP System.

Item 4.C.Organizational Structure

These matters are discussed under Item 4.B. where relevant.

Item 4.D.Property, Plants and Equipment

Our principal fixed asset is our integrated telecommunications networks. In addition, we own buildings and real estate throughout Korea.

Our fixed-line equipment vendors and mobile equipment suppliers include well-known international and local suppliers such as Samsung Electronics, LG Electronics, Cisco Systems and Apple Inc.

Mobile Networks

Our mobile network architecture includes the following components:

 

cell sites, which are physical locations equipped with base transceiver stations consisting of transmitters, receivers and other equipment used to communicate through radio channels with subscribers’ mobile telephone handsets within the range of a cell;

 

base station controllers, which connect to and control, the base transceiver stations;

 

mobile switching centers, which in turn control the base station controllers and the routing of telephone calls; and

 

transmission lines, which connect the mobile switching centers, base station controllers, base transceiver stations and the public switched telephone network.

The following table lists selected information regarding our mobile networks as of December 31, 2010:2013:

 

   CDMA   W-CDMA 

Mobile switching centers

   35     24  

Base station controllers

   300     419  

Base transceiver stations

   7,614     7,391  

Indoor and outdoor repeaters

   53,826     257,946  

   W-CDMA   LTE 

Mobile switching centers

   86     33  

Base station controllers

   692       

Base transceiver stations

   11,540     21,436  

Indoor and outdoor repeaters

   322,693     226,090  

We have a license to use 40 MHz of bandwidth in the 1.82.1 GHz spectrum to provide PCS services based on CDMA wireless network standards and another 40 MHz of bandwidth in the 2.0 GHz spectrumthat we use to provide IMT-2000 services based on W-CDMA wireless network standards. Our current right to use 40 MHz of bandwidthSuch license expires in the 1.8 GHz spectrum is scheduled to expire at the end of June 2011. We have applied to the Korea Communications Commission to allocate back to us 20 MHz of bandwidth in the 1.8 GHz spectrum, for whichDecember 2016, and we expectare required to pay a usage fee if reallocatedapproximately1.3 trillion for use of such bandwidth during the license period of 15 years. In April 2010, the KCC announced its decision to us. In addition, the Korea Communications Commission allocatedallocate 20 MHz of bandwidth in the 900 MHz spectrum to us, which will becomebecame effective onin July 1, 2011. We expect2011, for which we are required to pay a portion of the actual sales generated from using the bandwidth in the 900 MHz spectrum during the license period of 10 years as a usage fee for the bandwidth, as well as a portion of expected sales asthat was determined by the Korea Communications CommissionKCC at the time of allocation. In June 2011, our right to use 40 MHz of bandwidth in the Korea Communications Commission announced its plan1.8 GHz spectrum expired, and the KCC allocated back to auctionus the right to use 20 MHz of such bandwidth in the 1.8 GHz spectrum upon expiration pursuant to our application, for which we are required to pay a portion of the actual sales generated from using the bandwidth in the 1.8 GHz spectrum during the license period of 10 years as a usage fee for the bandwidth, as well as a portion of expected sales that was determined by the KCC at the time of allocation.

In August 2011, the KCC auctioned the right to use the remaining 20 MHz of bandwidth in the 1.8 GHz spectrum that we are scheduled to relinquish at the end of June 2011,relinquished, 10 MHz of additional bandwidth in the 800 MHz spectrum and 20 MHz of additional bandwidth in the 2.1 GHz spectrum. AccordingWe acquired the right to use the plan,10 MHz of bandwidth in the 800 MHz spectrum, for which we are required to pay a maximumtotal usage fee of261 billion during the license period of 10 years, SK Telecom acquired the right to use the 20 MHz of bandwidth may be soldin the 1.8 GHz spectrum and LG U+ acquired the right to a single service provider, and SK Telecom and we are prohibited from bidding foruse the 20 MHz of bandwidth in the 2.1 GHz spectrum. If we are allocatedWe began using the bandwidths20 MHz of bandwidth in the 800 MHz or the 1.8 GHz spectrums, we expect to pay usage fees for such bandwidths. We have also installed an intelligent network onspectrum, which became available upon termination of our mobile network infrastructure2G services, to provide a wide range of advanced call featuresour 4G LTE services starting in January 2012, and value-added services.commenced providing wideband LTE services in September 2013 and commercialized Wideband LTE-A services in March 2014.

Exchanges

Exchanges include local exchanges and “toll” exchanges that connect local exchanges to long-distance transmission facilities. We had 24.024.2 million lines connected to local exchanges and 16.01.6 million lines connected to toll exchanges as of December 31, 2010.2013.

All of our exchanges are fully automatic. We completed replacement of all electromechanical analog exchanges with digital exchanges in June 2003 in order to provide higher speed and larger volume services. Starting in 2006, we also began conversion of our exchanges to be compatible to Internet protocol platform in preparation for building our next generation broadband convergence network by 2021. As of December 31, 2010,2013, approximately 85%97% of our lines connected to toll exchanges are compatible to Internet protocol platform.

Internet Backbone

Our Internet backbone network, called KORNET, has the capacity to handle an aggregate traffic of our broadband Internet access subscribers, Internet data centers and Internet exchange system at any given moment of up to 4.66.6 Tbps as of December 31, 2010.2013. We have set up contingent plans to prepare against various incidents that could affect reliable Internet access service. Starting in 2005, we have also begun deploying our Internet protocol premium network that enables us to more reliably support olleh TV, WiBro, Internet Phone, upgraded VoIP services and other Internet protocol services. As of December 31, 2010,2013, our Internet protocol premium network had 2,224,9861,032 lines installed to provide voice over Internet protocol services and a total capacity to handle up to 595 Gbps1.4 Tbps of IP-TV, voice and WiBro service traffic.

Access Lines

As of December 31, 2010,2013, we had 14.516.0 million access lines installed, which allow us to reach virtually all homes and businesses in Korea. As part of our broadband deployment strategy, we have upgraded many of our access lines by equipping them with broadband capability using xDSL and FTTH technology. As of December 31, 2010,2013, we had approximately 12.714.4 million broadband lines with speedsspeed of at least 50 Mbps that enable us to deliver broadband Internet access and multimedia content to our customers.

Transmission Network

Our domestic fiber optic cable network consisted of 484,701636,347 kilometers of fiber optic cables as of December 31, 20102013 of which 86,815116,117 kilometers of fiber optic cables are used to connect our backbone network and 397,886520,230 kilometers are used to connect the backbone network to our subscribers. Our backbone network utilizes dense wavelength division multiplexing64Tbp Long-haul Reconfigurable Optical Add Drop Multiplexer (“ROADM”) technology for connecting major cities as well as optical add-drop multiplexer technology for connecting neighboring cities. Dense wavelength division multiplexingROADM technology improves bandwidth efficiency by enabling transmission of data to be transmitted from multiple signals across one fiber strand in a cable byand carrying each signal on a separate wavelength. We enhanced our backbone network connecting six major cities in Korea by implementing an optical cross-connector (OXC) and access network by implementing multi-service provisioning platform (“MSPP”) architecture in 2008 and2008. We are in the process of building our next generation broadband convergence network through installation of network equipment utilizing optical reconfigurable add-drop multiplexer technology and multi-service provisioning platform.by installing carrier ethernet architecture in 2014.

Our extensive domestic long-distance network is supplemented by our fully digital domestic microwave network, which consistsconsisted of 55 relay sites.sites as of December 31, 2013.

International Network

Our international network infrastructure consists of both submarine cables and satellite transmission systems, including two submarine cable-landing stations in Busan and Keoje and two satellite teleports in Kumsan and Boeun. Data services such as international private lease circuits, Internet protocol and very small aperture terminals are provided through submarine cables and satellite transmission. In order to guarantee high quality services to our end customers, our submarine cables and satellite transmission systems are linked to various points-of-presence in the United States, Asia and Europe. In addition, our international telecommunications networks are directly linked to approximately 315240 telecommunications service providers in various international destinations and are routed through our three international switching centers in Seoul, Daejeon and Busan.

Our international Internet backbone with capacity of 250542 Gbps is connected to approximately 180 Internet service providers through our two Internet gateways in HeawhaHyehwa and Guro. In addition, we operate a video backbone with capacity of one Gbps to transmit video signals from Korea to the rest of the world.

Satellites

In order to provide broadcasting, video distribution and broadband data services in select areas, we operate two satellites, Koreasat 3, 5 and 6, launched in 1999, 2006 and 2011, respectively.2010, respectively, and own certain of the transponders in two additional satellites, ABS-1 launched in 2010 and ABS-2 launched in February 2014. Additionally, we are currently undergoing international arbitration proceedings with ABS over the Mugunghwa 3 satellite, which we sold to ABS in 2011. See “Item 4.B. Business Overview—Our Services—Satellite Services.Miscellaneous Businesses” and “Item 8.A. Consolidated Financial Statements and Other Financial Information—Legal Proceedings.

International Submarine Cable Networks

International traffic is handled by telecommunications satellites and submarine cables. Because of the high cost of laying a submarine cable, the usual practice is for multiple carriers to jointly commission a new cable and share the costs and the capacity. We own interests in several international fiber optic submarine cable networks, including:

 

a 1.4% interest in the 29,000-kilometer FLAG Europe-Asia network connecting Korea, Southeast Asia, the Middle East and Europe, activated since April 1997;

 

a 1.8% interest in the 39,000-kilometer Southeast Asia-Middle East-Western Europe 3 Cable Network linking 34 countries, activated since December 1999;

a 6.7% interest in the 30,444-kilometer China-U.S. Cable Network linking Korea, China, Japan, Taiwan and the United States, activated since January 2000;

 

a 5.1% interest in the 19,000-kilometer Asia Pacific Cable Network 2 connecting Korea, China, Japan, Taiwan, Hong Kong, Philippines, Singapore and Malaysia, activated since December 2001;

 

a 20.0% interest in the 500-kilometer Korea-Japan Cable Network linking Korea and Japan, activated since March 2002.;2002; and

 

a 13.1% interest in the 16,500-kilometer Trans Pacific Express Cable Network linking Korea, China, Taiwan and the United States, activated since September 2008.

We have also invested in 8eight other international fiber optic submarine cables around the world.

Item 4A.  Unresolved Staff Comments

We do not have any unresolved comments from the Securities and Exchange Commission staff regarding our periodic reports under the Exchange Act of 1934.

Item 5.  Operating and Financial Review and Prospects

Item 5.A.Operating Results

The following discussion and analysis is based on our consolidated financial statements, which have been prepared in accordance with Korean GAAP. Korean GAAP varies in certain significant respects from accounting principles generally accepted inIFRS as issued by the United States of America. We have summarized these differences and their effect on our total equity as of December 31, 2009 and 2010 and the results of our operations for each of the years in the three-year period ended December 31, 2010, in Note 38 to the Consolidated Financial Statements.IASB.

Overview

We are an integrated provider of telecommunications services. Our principal services include mobile service, fixed-line telephone services, Internet services including broadband Internet access service and data communication service. The principal factors affecting our revenues from these services have been our rates for, and the usage volume of, these services, as well as the number of subscribers. For information on rates we charge for our services, see “Item 4. Information on the Company—Item 4.B. Business Overview—Revenues and Rates.” WeIn 2012, we determined our operating segments after the merger with KTF on June 1, 2009for financial reporting purposes as (i) the PersonalTelecommunication & Convergence Customer Group, which engages in mobileproviding various telecommunication services to individual/home customers and wireless data communications services,the convergence business, (ii) the Home Customer Group andGlobal & Enterprise Customer Group, which engageengages in fixed-line telephonetelecommunication services Internet services including broadband Internet access servicefor the global market and corporate customers, as well as data communication service, (iii) the Finance/Rental Business Group, which engages in providing various financial services such as credit card and (iii)lending, as well as automobile rental and leasing business and (iv) others, which include security services, satellite service, information technology and network services, satellite TV service and real estate development and car rental businesses.

One of the major factors contributing to our historical performance was the growth of the Korean economy, and our future performance will depend at least in part on Korea’s general economic growth and prospects. For a description of recent developments that have had and may continue to have an adverse effect on our results of operations and financial condition, see “Item 3. Key Information—Item 3.D. Risk Factors—Korea is our most important market, and our current business and future growth could be materially and adversely affected if economic conditions in Korea

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

 

mergeracquisitions and disposals of KTF into KT Corporation on June 1, 2009;interests in subsidiaries and joint ventures;

 

employee reductions and changes in severance and retirement benefits;

IMT-2000 service license payments;usage fees for bandwidths;

 

changes in the rate structure for our services;

 

handset subsidies; and

researching and implementing technology upgrades and additional telecommunication services; and

transition to International Financial Reporting Standards starting in 2011.services.

As a result of these factors, our financial results in the past may not be indicative of future results or trends in those results.

MergerAcquisitions and Disposals of KTF into KT CorporationInterests in Subsidiaries and Joint Ventures

On June 1, 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger, with the objective of maximizing management efficienciesOne key aspect of our fixed-lineoverall business strategy calls for acquisitions of businesses and mobile telecommunications operationsentering into joint ventures that complement or diversify our current business, as well as more effectively respondingdisposal or termination of such businesses from time to time. The following summarizes our recent acquisitions and disposals:

in January 2011, we acquired 5,600,000 shares of redeemable convertible preferred stock with voting rights and convertible bonds that were convertible into 5,600,000 shares of common stock of KT Skylife Co., Ltd. from Dutch Savings Holdings B.V. in January 2011 for approximately246 billion, to respond to the trend of convergence trends in the telecommunications industry. The mergerand broadcasting industries, and to seek additional synergies with our existing operations. We exercised the conversion rights on the redeemable convertible preferred stock and the convertible bonds in March 2011, and owned a 50.1% interest in KT Skylife Co., Ltd. as of December 31, 2013;

in June and October 2011, we sold a total of 5,309,189 common shares of New Telephone Company, Inc., representing all of our interests in New Telephone Company, Inc., for approximately380 billion. Located in Russia, New Telephone Company, Inc. had previously been our consolidated subsidiary providing fixed-line telephone services in Vladivostok, and our decision to dispose of our interest in that company was consummated pursuant to a “comprehensive stock transfer” under Article 360-15 of the Korean Commercial Code, whereby KTF common stockholders received 0.7192335 share of KT Corporation common stock for every one share of KTF common stock they owned.

The success of the merger of KTF with KT Corporation will depend, in part onaffected by the changing landscape in the Russian telecommunications market, where telecommunications service providers were becoming more nationalized and increasing rapidly in size as a result;

in October 2011, we, through our abilitysubsidiary KT Capital Co., Ltd., acquired an additional 1,622,520 common shares of BC Card Co., Ltd. from Woori Bank for approximately252 billion, to realize the anticipated synergies, growth opportunitiesfurther diversify our business and to a lesser extent, cost savings from combining these two companies. The realizationcreate synergies through utilization of these anticipated benefits may be impeded, delayed or reducedour mobile telecommunications network in financial services, thereby increasing our ownership interest in BC Card Co., Ltd. to 38.86%, making it our consolidated subsidiary as a result of numerous factors, somedeemed control starting in October 2011. We acquired an additional 1,349,920 common shares of BC Card Co., Ltd. in January 2012 for approximately287 billion, and owned a 69.54% interest in BC Card Co., Ltd. as of December 31, 2013; and

starting in July 2012, KT Rental Co., Ltd., our 58.0% owned subsidiary, became our consolidated subsidiary as a result of the acquisition of KT Rental’s common stock by Hana Daetoo Securities Co., Ltd. and other investors from the then-second largest shareholder in July 2012, and the restriction on our control over KT Rental pursuant to a shareholders’ agreement being resolved as a result.

Our financial condition and results of operations may be affected as a result of such acquisitions, disposals or consolidation. Furthermore, pursuing acquisitions or joint venture transactions also requires significant capital, and as we pursue further growth opportunities for the future, we may need to raise additional capital by incurring loans or through the issuances of bonds or other securities in the international capital markets, which are outside our control. Somemay lead to increased levels of debt and debt servicing costs in the future.

Bandwidth Usage Fees

One of the principal limitations on a wireless network’s subscriber capacity is the amount of bandwidth spectrum allocated to the service provider. The growth of our challenges include difficultiesmobile telecommunications business and the increase in integrating the operationsusage of KTF with those of KT Corporation, including information systems, personnel, policies and procedures, and in reorganizing or reducing overlapping personnel, operations, marketing networks and administrative functions.

Employee Reductions and Changes in Severance and Retirement Benefits

We sponsor a voluntary early retirement plan where we provide additional financial incentives for our employees whowireless data transmission services have been employed by us forsignificant

factors in the increased utilization of our bandwidth, since wireless data applications are generally more bandwidth-intensive than 20voice services. The current trend of increasing data transmission use and the increasing sophistication of multimedia content is likely to put additional strain on the bandwidth capacity of mobile service providers. We have acquired various licenses in recent years to retire early,secure additional bandwidth capacity to provide our broad range of services, for which we typically pay a portion of the actual sales generated from using the bandwidth during the license period as parta usage fee, as well as a portion of our efforts to improve operational efficiencies.expected sales as determined by the KCC at the time of allocation. In 2008, 1,141 employees retired under our voluntary early retirement plan. In 2009,August 2013, the Ministry of Science, ICT and Future Planning further auctioned 50 MHz of bandwidth in addition to our usual voluntary early retirement plan, we held a special voluntary early retirement program in December 2009 where we received applications for voluntary early retirement from employees whothe 1.8 GHz spectrum, which had been employedused by us for more than 15 yearsgovernmental entities such as the military, and provided them with additional financial incentives to retire early. The special voluntary early retirement program resulted80 MHz of bandwidth in the early retirement of 5,992 employees out of 25,340 eligible employees. In aggregate, 6,515 employees retired in 2009 under the voluntary early retirement plan and the special voluntary early retirement program. In 2010, 123 employees retired under our voluntary early retirement plan. We recorded severance indemnities relating to such voluntary early retirement plan and special voluntary early retirement program of(Won)97 billion in 2008,(Won)878 billion in 2009 and(Won)13 billion in 2010.

IMT-2000 Service License Payments

2.6 GHz spectrum, which had been used for digital multimedia broadcasting services. We acquired the right to purchase oneuse 15 MHz of three licensesbandwidth in the 1.8 GHz spectrum, for which we are required to pay a total usage fee of approximately900 billion during a license period of eight years. SK Telecom acquired the right to use 35 MHz of bandwidth in the 1.8 GHz spectrum and LG U+ acquired the right to use 40 MHz of bandwidth in the 2.6 GHz spectrum. In September 2013, we commenced providing wideband LTE services, which utilizes our adjoining 20 MHz of bandwidth in the 1.8 GHz spectrum to provide IMT-2000transmission speed of up to 150 Mbps, twice faster than those offered under standard LTE services. SK Telecom also began providing its wideband LTE services on December 15, 2000, as a memberin September 2013 and LG U+ commenced providing its wideband LTE services in January 2014. As of a consortium of companies including KT Corporation and KTF. In March 2001, KT ICOM, a company created by the consortium, paid half of the(Won)1.3 trillion license fee payable to the1, 2014, our wideband LTE services covered five metropolitan cities in Korea, Communications Commission. KTF, which subsequently merged with KT ICOM, paid(Won)110 billion in 2008,(Won)130 billion in 2009 and(Won)150 billion in 2010, and we are obligatedexpect to payexpand our wideband LTE services to all of Korea by July 2014. As of December 31, 2013, the remaining(Won)170 billion in 2011. This payable accrues interest at the applicable three-year Government bond interest rate minus 0.75%. The accrued interest is paid on an annual basis to the Korea Communications Commission. We began offeringnumber of our HSDPA-based IMT-2000 services nationwideLTE subscribers exceeded 7.8 million. Furthermore, in March 2007.2014, we commercialized advanced wideband LTE (“Wideband LTE-A”) services, which interconnects our 20 MHz of bandwidth in the 1.8 GHz spectrum used to offer wideband LTE services with the 10 MHz of bandwidth in the 900 MHz spectrum used to offer standard LTE services by utilizing inter-band carrier aggregation technology to support transmission speed of up to 225 Mbps.

Changes in the Rate Structure for Our Services

Periodically, we changeadjust our rate structure for our services. In order to mitigate the impact from lower usage charges of local and domestic long-distance calls, we have increased our basic monthly charges and began offeringoffer various optional flat rate plans for our fixed-line subscribers. Such adjustments in the rate structure have increased the portion of fixed income and stabilized our cash flow. In addition, because the growing use of mobile telecommunications services has decreased the usage of our fixed-line telephone services, we believe we are able to maximize our revenues from fixed-line telephone services by adjusting the rate structure so as to increase our basic monthly charges. We also provide bundled packages of our various services at a discount in order to attract additional subscribers to our new services. We currently bundle our broadband Internet access service with WiBro, IP-TV, Internet phone, fixed-line telephone service, internet phone servicesWiBro, and mobile services, at a discount.

The MSIP, in consultation with the Ministry of Strategy and Finance, currently approves rates charged by us for local telephone service. In addition, the MSIP currently does not regulate our domestic long-distance, international long-distance, broadband internet access and mobile service rates, but it periodically announces public policy guidelines or suggestions on tariffs for non-regulated services, which we have followed in the past. For a discussion of adjustments in our rate structure, see “Item 4. Information on the Company—Item 4.B. Business Overview—Revenues and Rates.”

Handset Subsidies

In March 2008, the Government removed a prohibition on the provision of handset subsidies and allowed mobile service providers to subsidize the purchase of new handsets by certain qualifying customers. In order to compete more effectively, we began providing such handset subsidies, which have increased, and may continue to increase, our marketing expenses. We provide handset subsidies

to subscribers who agree to use our service for a predetermined service period and purchase handsets on an installment basis. Generally, handset subsidies may be provided to any subscriber that uses our service and purchases handsets either directly from us or through third parties. Since we do not recognize revenues from sales of handsets by third parties, the trends between our handset sales and our provision for handset subsidies are not necessarily correlated. The amount recognized as a provision for handset subsidies is our best estimate of the expenditure required to settle current obligations to relevant subscribers at the end of the reporting period, which is calculated as the sum of the present values of the monthly balances for handset subsidies over the relevant service periods, taking into account the customer retention rate for relevant subscribers. On May 13, 2010, the KCC announced a guideline recommending that telecommunication service providers limit their marketing expenses to 22.0% of their annual sales, and the limit was subsequently lowered to 20.0% of their annual sales for the years 2013, 2012 and 2011. Such marketing expenses include initial commissions, monthly commissions and retention commissions paid to our authorized dealers and subscribers, including handset subsidies, but do not include advertising expenses. This guideline remains effective. While the guideline is not binding, we, as well as our competitors, nonetheless try to adhere to such guideline when feasible, which may have a material adverse effect on our businesses and results of operations. Furthermore, failure to comply with rules, regulations and corrective orders may lead to suspension of our business or imposition of monetary penalties.

For example, based on investigations conducted in December 2012 and January 2013, the KCC imposed a combined fine of approximately12 billion on SK Telecom, LG U+ and us in January 2013 (our fine being approximately2.9 billion), for providing subsidies that were higher than those allowed under current regulations to new mobile phone purchasers and subscribers, and also imposed temporary suspensions from recruiting new subscribers ranging from 20 days to 24 days. In March 2013, the KCC again imposed a combined fine of approximately5 billion on SK Telecom, LG U+ and us (our fine being approximately1.6 billion) for continuing to offer subsidies during the suspension period. In July 2013, the KCC imposed a combined fine of approximately67 billion on SK Telecom, LG U+ and us (our fine being approximately20 billion) and also imposed a seven day suspension on us from recruiting new subscribers, also in connection with providing excessive handset subsidies to new subscribers. In December 2013, the KCC again imposed a combined fine of approximately106 billion on SK Telecom, LG U+ and us (our fine being approximately30 billion), which is the largest fine ever imposed by the KCC on local mobile operators for providing excessive subsidies to new subscribers. On March 7, 2014, the MSIP imposed a temporary suspension on us for 45 days (from March 13, 2014 to April 26, 2014), SK Telecom for 45 days (from April 5, 2014 to May 19, 2014), and LG U+ for 45 days (from March 13, 2014 to April 4, 2014 and again from April 27, 2014 to May 18, 2014) from recruiting new subscribers as a result of continuing to offer excessive handset subsidies to new subscribers, despite the order from the KCC prohibiting such subsidies, which is the longest suspension period imposed on us by the Government for providing discriminatory subsidies to subscribers. We expect that the business suspension imposed on us, as well as the continuing restriction by the Government on subsidies we provide, will have an adverse effect on our operating revenues for the first quarter of 2014. Any further suspension of our business or imposition of monetary penalties by the Government could have a material adverse effect on our business.

Researching and Implementing Technology Upgrades and Additional Telecommunication Services

The telecommunications industry is characterized by continual advances and improvements in telecommunications technology, and we have been continually researching and implementing technology upgrades and additional telecommunication services to maintain our competitiveness. For example, in March 2005, we acquired a license to provide WiBro service for(Won)126 billion, and commercially launched the service in June 2006. We completed the upgrade of our 4G WiBro network and expanded our WiBro service coverage to 82 cities nationwide and major highways as of March 2011, which we believe will allow us to provide WiBro services at speeds that are approximately three times faster than our previous 3G network at a lower cost, and had approximately 377 thousand subscribers as of December 31, 2010. In addition, we are currently upgrading our broadband network to enable FTTH connection, which enhances downstreamprovides speed of up to 100 Mbps and better connection quality. FTTH is a telecommunication architecture in which a communication path is provided over optical fiber cables extending from the

telecommunications operator’s switching equipment to the boundary of home or office. FTTH uses fiber optic cable, which is able to carry a high-bandwidth signal for longer distances without degradation. FTTH enables us to deliver enhanced products and services that require high bandwidth, such asIP-TV, service and delivery of other digital media content. We will continuecontent with stronger stability.

In addition, we have been building more advanced mobile telecommunications networks based on LTE technology, which is generally referred to make capital expenditures, incur researchas 4G technology, and development expenses and implement technology upgrades and additional telecommunicationscommenced providing commercial 4G LTE services in orderthe Seoul metropolitan area on January 3, 2012. We completed the expansion of our 4G LTE service coverage nationwide in October 2012. Several wireless carriers in the United States, Europe and Asia commenced LTE services in recent years and LTE technology is currently widely accepted as the standard 4G technology. LTE technology enables data to effectively implement continual advancesbe transmitted faster than W-CDMA, up to 150 Mbps for downloading and improvementsup to 50 Mbps for uploading. We expect that the faster data transmission speed of the LTE network, combined with our existing 4G nationwide WiBro network, will allow us to offer significantly improved wireless data transmission services, providing our subscribers with faster wireless access to multimedia content. In January 2012, we also began offering 4G LTE services following the termination of our 2G services. We completed the expansion of our 4G LTE service coverage nationwide in telecommunications technology.

October 2012 and commenced providing wideband LTE services in September 2013, and commercialized Wideband LTE-A services in March 2014, as discussed above.

Transition to International Financial Reporting Standards Starting in 2011Critical Accounting Policies

In March 2007, the Financial Services Commission and the Korea Accounting Institute announced a road map for the adoption of Korean IFRS, pursuant to which all listed companies in Korea, including us, will be required to prepare their annualWe have prepared our consolidated financial statements beginning in 2011 that differ in certain respects from IFRS applied in other countries.

In preparation of such adoption, we began preparing our internal financial statements under both Korean GAAP and Korean IFRS starting in January 2010. Beginning in 2011, we have discontinued reporting under Korean GAAPaccordance with reconciliation to U.S. GAAP and instead have commenced reporting under Korean IFRS and we also plan to release annual financial statements prepared pursuant to IFRS as issued by the IASB. AlthoughThese accounting principles require our accounting department is currently analyzing the effects of adopting IFRS on our annual financial statements, it is not possible to estimate with any degree of certainty the exact impact on our annual financial statements from such adoption because the IFRS accounting policies to be adopted by us for such financial statements have not been finalized. Accordingly, there can be no assurance that the adoption of IFRS will not adversely affect our reporting results of operations or financial condition.

Critical Accounting Policies

The preparation of financial statements in conformity with Korean GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the years reported. We based our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. On an on-going basis, management evaluates its estimates. Actual results may differ from those estimates under different assumptions and conditions.

The fundamental objective of financial reporting is to provide useful information that allows a reader to comprehend our business activities. To aid in that understanding, our management has identified “critical accounting estimates.” These estimates have the potential to have a more significant impact on our financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in nature.

These critical accounting estimates include:

 

allowances for doubtful accounts;

 

useful lives of property and equipment;

 

impairment of long-lived assets, including goodwill;

 

valuation and impairment of investment securities;

 

income taxes;

deferred revenue relating to service installation fees and initial subscription fees;

post-employment benefit liabilities;

provisions; and

 

valuation of derivatives.employee reductions and changes in severance and retirement benefits.

Allowances for Doubtful Accounts

Allowance for doubtful accounts is our best estimate of the amount of probable creditimpairment losses inincurred on our existing notes and accounts receivable. We determine the allowance for doubtful notes and

accounts receivable based on an aging analysis of portfolio quality andbalances, historical write-off experience.experience, customer’s or counterparty’s credit ratings and changes in payment terms. Account balances are charged off against the allowance when all means of collection have been exhausted and the potential for recovery is considered remote. Our past experience shows that the possibility of collection is remote after three years of collection effort.

Changes in the allowances for doubtful accounts for each of the yearsour trade and other receivables in the three-year period ended December 31, 20102013 are summarized as follows:

 

  Year Ended December 31,   Year Ended December 31, 
  2008 2009 2010   2011 2012 2013 
  (In millions of Won)   (In millions of Won) 

Balance at beginning of year

  (Won)487,729   (Won)488,739   (Won)477,124    647,139   642,475   644,058  

Provision

   148,972    104,977    171,195     133,442    113,808    160,166  

Write-offs

   (147,962  (116,592  (133,095

Reversal or written-off

   (167,413  (127,189  (127,206

Changes in the scope of consolidation

   26,970    12,119    2,687  

Others

   2,337    2,845    (1,443
            

 

  

 

  

 

 

Balance at end of year

  (Won)488,739   (Won)477,124   (Won)515,224    642,475   644,058   678,262  
            

 

  

 

  

 

 

Changes in the allowances for doubtful accounts for our loans receivables in the three-year period ended December 31, 2013 are summarized as follows:

   Year Ended December 31, 
   2011  2012  2013 
   (In millions of Won) 

Balance at beginning of year

  35,583   43,587   65,196  

Provision

   30,808    32,914    40,743  

Reversal or written-off

   (22,804  (12,210  (30,448

Others

       905    (2,416
  

 

 

  

 

 

  

 

 

 

Balance at end of year

  43,587   65,196   73,075  
  

 

 

  

 

 

  

 

 

 

If economic or specific industry trends change, we would adjust our allowances for doubtful accounts by recording additional expense or benefit. Our study shows that a 5.0% decrease or increase in the historical write-off experience would increase or decrease the provision for doubtful accounts by approximately(Won)13 billion as of December 31, 2010.

Useful Lives of Property and Equipment

Property and equipment are depreciated based onusing the straight-line method over their useful lives as disclosed in Note 32.11 to the Consolidated Financial Statements. Generally, theAn asset’s residual value and useful lives are estimatedreviewed and adjusted at the time the asset is acquiredend of each financial reporting period, and are based on historical experience with similar assets as well as taking into account anticipated technological or other changes. In certain cases and as permitted under Korean GAAP, those useful lives used for accounting purposes are different from the estimated economic lives of the related asset. In addition, the estimated lives of certain other assets, including underground access to cable tunnels, and concrete and steel telephone poles are based on rates established by a ruling by the Korean National Tax Service (which is also applicable under Korean GAAP). If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation expense in future periods. A decrease of remaining estimated useful life by one year of our property and equipment would result in an increase of depreciation expense of approximately(Won)248286 billion in 2010.2013.

Impairment of Long-Lived Assets, including Goodwill

Long-lived assets generally consist of property and equipment and intangible assets.assets, including goodwill. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In addition, we evaluate our long-lived assets for impairment each year as part of our annual forecasting process. An impairment loss would be consideredrecognized when estimated undiscounted future net cash flow expected to result from the use of the asset and its eventual disposition areasset’s recoverable amount is less than its carrying amount. The recoverable amount of a long-lived asset is the greater of an asset’s fair value less costs to sell and its value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). The recoverable amounts of cash-generating units are based on their value in use calculated by applying the annual discount rate of 9.4% to the estimated future cash flows based on financial budgets for the next five years. Annual growth rates ranging from 0.0% to 2.0% were applied for the cash flows expected to be incurred after five years. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Our intangible assets include the IMT-2000 frequency usage right, which has a contractual life of 13 years and is amortized from the date commercial service is initiated through the end of its contractual life, which is November 2016. We started to amortize this frequency usage right in December 2003, and we review the IMT-2000 frequency usage right for impairment on an annual basis. In connection with our review, we utilize the estimated long-term revenue and cash flow

forecasts developed as part of our planning process. The results of our review using the testing method described above did not indicate any need to impair the IMT-2000 frequency usage right in 2010. The use of different assumptions within our cash flow model could result in different amounts for the IMT-2000 frequency usage right.

Impairment of Goodwillrecovery value.

Goodwill represents the excess of purchase price paid over the fair value assigned to the identifiable net assets of acquired businesses. The determination of the fair values of goodwill is based on management’s judgment on the expected cash flows of the cash-generating units to which the goodwill is allocated, taking market demand, competition and other economic factors into consideration.

The determination of impairments of goodwill involves the use of estimates that include, but are not limited to, the cause, timing and amount of the impairment. Impairment is based on a large number of factors, such as changes in current competitive conditions, expectations of growth in the telecommunications industry, a decline in our expected future cash flows, changes in the future availability of financing, technological obsolescence, discontinuance of services, current replacement costs and prices paid in comparable transactions.

Valuation and Impairment of Financial Assets

The determinationfair value of financial instruments, including derivative instruments, that are not traded in an active market is determined by using valuation techniques. Our management uses its judgment to select a variety of methods and makes assumptions that are mainly based on market conditions existing at the end of each reporting period.

We record rights and obligations arising from derivative instruments as assets and liabilities, which are stated at fair value. Gains and losses that result from a change in the fair value of derivative instruments are recognized in current earnings. However, for derivative instruments that qualify for cash flow hedge accounting, the effective portion of the gain or loss on the derivative instruments are recorded as gain or loss on valuation of derivatives for cash flow hedge included in accumulated other comprehensive income or loss, as applicable.

For financial assets, including assets carried at amortized cost and those classified as available-for-sale, we make an annual assessment at the end of each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. For financial assets carried at amortized cost and available-for-sale debt assets, such asset is considered impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of goodwill requiresone or more events (a “loss event”) that occurred after the initial recognition of the financial asset, which had an impact on the estimated future cash flows of the financial asset that can reliably be estimated. For equity investments classified as available-for-sale, a significant amount of management’s judgment.

We evaluate the carrying value of goodwill annually or more frequently if events or changesprolonged decline in circumstances indicate that the carrying amount may exceed estimated fair value. Goodwill impairment testing is a two-step process. The first step involves determining the fair value of the reporting unit and comparingsecurity below its cost, in addition to circumstances described below, may be considered as evidence that to the book value. Ifasset is impaired.

For assets carried at amortized cost, the fair value exceedsamount of impairment is measured as the book value, then no further testing is required. If the fair value is less than the book value, then a second step is performed. In the second step, the fair values of all of the assets and liabilities of the reporting unit, including those that may not be currently recorded, are determined. The difference between the sum of all of those fair valuesasset’s carrying amount and the overall reporting unit’spresent value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the asset’s original effective interest rate, and the carrying amount of the asset is reduced and the amount of loss is recognized in the statement of income. Loss on such asset may also be measured based on observable market price if there is an active market for the asset. For assets classified as available-for-sale, the cumulative loss, measured as the difference between the acquisition cost and the current fair value and recognized as accumulated other comprehensive income, less any impairment loss on such financial asset previously recognized in profit or loss, is a new implied goodwill amount that is compared toremoved from equity and recognized in the recorded goodwill. If implied goodwill is less than the recorded goodwill, then impairment to the recorded goodwill is recorded.

Impairmentstatement of Investment Securities

For investments in companies, whether or not publicly held, that are not controlled, but under our significant influence, we utilize the equity method of accounting. Under the equity method of accounting, our initial investment is recorded at cost and is subsequently increased to reflect our share of the investee income and reduced to reflect our share of the investee losses or dividends received. Any excess in our acquisition cost over our share of the investee’s identifiable net assets is generally recorded as investor-level goodwill or other intangibles and amortized by the straight-line method over the estimated useful life. The amortization of investor-level goodwill or other intangibles is recorded against the equity income (losses) of affiliates.income.

Significant management judgment is involved in the evaluation of declines in value of individual investments.evaluating whether a loss event has occurred. The estimates and assumptions used by management to evaluate declines in valuewhether a loss event has occurred can be impacted by many factors, such as the financial condition, earnings capacity and near-term prospects of the company in which we have invested, breach of contract such as default or delinquency in payments, disappearance of an active market for the financial asset and for publicly-traded securities,other adverse changes in the lengthpayment status of time andborrowers in the extent to which fair value has been less than cost.portfolio. The evaluation of these investments is also subject to the overall condition of the economy and its impact on the capital markets.

Income Taxes

We are required to estimate the amount of tax payable or refundable for the current year and the deferred income tax liabilities and assets for the future tax consequences of events that have been

reflected in our financial statements or tax returns. This process requires management to make assessments regarding the timing and probability of the tax impact. Actual income taxes could vary from these estimates due to future changes in income tax law or unpredicted results from the final determination of each year’s liability by taxing authorities.

We believe that the accounting estimate related to establishingassessing the realizability of deferred tax valuation allowancesassets is a “critical accounting estimate” because: (1) it requires management to make assessments about the timing of future events, including the probability of expected future taxable income and available tax planning opportunities, and (2) the impact that changes in actual performance versus these estimates could have on the realization of tax benefits as reported in our results of operations could be material. Management’s assumptions require significant judgment because actual performance has fluctuated in the past and may continue to do so.

Valuation of DerivativesDeferred Revenue relating to Service Installation Fees and Initial Subscription Fees

We record rightscharge service installation fees and obligations arising from derivative instruments as assets and liabilities,initial subscription fees related to activation of many of our services, which are stated at fair value. Gainsdeferred and losses that result fromrecognized as revenue over the changeexpected terms of customer relationships. Our estimate of expected terms of customer relationship is based on the historical rate, which may differ in the fair valuefuture. If the management’s estimation is amended, it may cause significant differences in the timing of derivative instruments are recognizedrevenue recognition and amount recognized.

Post-employment Benefit Liabilities

Our accounting of post-employment benefits, which mainly consist of a defined benefit plan (we began offering a defined contribution plan in current earnings. However, for derivative instruments that qualify for cash flow hedge accounts, the effective portion of the gain or loss on the derivative instruments are recorded as gain (loss) on valuation of derivatives for cash flow hedge included in accumulated other comprehensive income (loss).

Significant management judgment is involved in determining the fair value of derivative instruments. The estimatesDecember 2012), involves judgments about uncertain events including discount rates, life expectancy and assumptions used by our management to determine fair value can be impacted by many factors, such as the credit quality of each derivative counterparty, interest rate, market volatility or the overall condition of the economy and its impact on the capital markets.future pay inflation. Any changes in these assumptions could significantly affectwill impact the valuationcarrying amount of the defined benefit liability. The discount rates used to determine the present value of estimated future cash outflows expected to be required to settle the defined benefit liability, are determined at the end of each reporting period by reference to the yield at the reporting date on high-quality corporate bonds that have maturity dates approximating the terms of

our benefits obligations and timingthat are denominated in the same currency in which the benefits are expected to be paid. Other key assumptions for defined benefit liability are based in part on current market conditions. For defined contribution plans, we pay contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis, and we have no further payment obligations once the contributions have been paid.

Provisions

We recognize provisions at the end of recognitionthe reporting period when we have a present legal or constructive obligation, such as litigation or assets requirement obligations, as a result of valuationpast events and an outflow of resources required to settle the obligation is probable and can be reliably estimated. We measure provisions at the present value of the expenditures expected to be required to settle the obligation, which are estimated based on factors such as historical experience. We do not recognize provisions for future operating losses classifiedand recognize as otherinterest expense any increase in the provisions due to passage of time. See Notes 2.22, 3.7 and 17 to the Consolidated Financial Statements.

Employee Reductions and Changes in Severance and Retirement Benefits

In April 2014, we announced the commencement of a special voluntary early retirement program where we provide employees who had been employed by us for more than temporary.15 years with additional financial incentives to retire early or employment for two years at certain of our subsidiaries or affiliates. On April 23, 2014, our human resources committee determined that 8,304 employees will retire through this special early retirement program. We expect to record approximately1.2 trillion as severance indemnity in connection with this special early retirement program, all of which is expected to be recorded during 2014.

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

In addition to preparing financial statements in accordance with IFRS as issued by the IASB included in this annual report, we also prepare financial statements in accordance with K-IFRS, which we are required to file with the Financial Services Commission and the Korea Exchange under the Financial Investment Services and Capital Markets Act of Korea.

During the three years ended December 31, 2013, we are required to adopt certain amendments and interpretations to K-IFRS, relating to presentation of operating profit. Additionally, under K-IFRS, revenue from the development and sale of real estate is recognized using the percentage of completion method. However, under IFRS as issued by the IASB, revenue from the development and sale of real estate is recognized when an individual unit of residential real estate is delivered to the buyer. Furthermore, due to a subsequent event in which early redemption rights were exercised for certain commercial paper guaranteed by KT ENS, our consolidated subsidiary, we recognized financial losses relating to the resulting estimation of guarantee liabilities in our consolidated statements of operations prepared in accordance with IFRS as issued by the IASB, which were not reflected in our financial statements prepared in accordance with K-IFRS, which were issued on March 13, 2014. As a result, the presentation of operating results in our consolidated statements of operations prepared in accordance with IFRS as issued by the IASB included in this annual report differs from the presentation of operating results in our consolidated statements of operations prepared in accordance with K-IFRS. The table below sets forth a reconciliation of our operating profit and net income or loss as presented in our consolidated statements of operations prepared in accordance with IFRS as issued by the IASB for each of the years ended December 31, 2011, 2012 and 2013 to our

operating profit and net income or loss in our consolidated statements of operations prepared in accordance with K-IFRS, for each of the corresponding years, taking into account such differences:

   For the Year Ended December 31, 
           2011                  2012                  2013         
   (In millions of Won) 

Operating profit under IFRS as issued by the IASB

  1,987,096   1,680,099   323,384  

Effect of changes in operating income presentation

   (230,585  (470,866  493,589  

Revenue recognition of development and sale of real estate

           22,370  
  

 

 

  

 

 

  

 

 

 

Operating profit under K-IFRS

  1,756,511   1,209,233   839,343  
  

 

 

  

 

 

  

 

 

 

   For the Year Ended December 31, 
           2011                   2012                   2013         
   (In millions of Won) 

Net income(loss) under IFRS as issued by the IASB

  1,290,763    1,136,973    (87,745

Profit before income tax

      

Revenue recognition of development and sale of real estate

             22,370  

Guarantee liabilities and loss (KT ENS)

             10,538  

Income tax

             (5,414
  

 

 

   

 

 

   

 

 

 

Net income(loss) under K-IFRS

  1,290,763    1,136,973    (60,251
  

 

 

   

 

 

   

 

 

 

Recent Accounting Pronouncements under IFRS

For a summary of new standards, amendments and interpretations issued under IFRS as issued by the IASB but not effective for 2013, and which have not been adopted early by us, see Note 2 to the Consolidated Financial Statements.

Operating Revenues and Operating Expenses

Operating Revenues

Our operating revenues primarily consist of:

 

fees related to our mobile services, including initial subscription fees, monthly fees, usage charges for outgoing calls, usage charges for wireless data transmission, contents download fees and value-added monthly service fees;

 

fees from our fixed-line telephone services, including:

 

 Ø 

local service revenues, primarily consisting of (i) basic monthly charges and monthly usage charges (or fixed monthly charges for discount plans), (ii) revenues from value-added services, including local telephone directory assistance, call waiting and caller identification services, (iii) interconnection fees we charge to fixed-line and mobile service providers for their use of our local network in providing their services and (iv) revenues from local calls placed from public telephones;

 

 Ø 

non-refundable installation fees;

 

 Ø 

domestic long-distance service revenues, primarily consisting of (i) monthly usage charges (or fixed monthly charges for discount plans), (ii) interconnection fees we

charge to fixed-line and mobile service providers and voice resellers for their use of our domestic long-distance network in providing their services and (iii) revenues from domestic long-distance calls placed from public telephones;

 

 Ø 

international long-distance service revenues, primarily consisting of (i) amounts we bill to our customers for outgoing calls made to foreign countries, (ii) amounts we bill to foreign telecommunications carriers for connection to the domestic telephone network

in respect of incoming calls at the applicable settlement rate, (iii) amounts we charge to fixed-line and mobile service providers and voice resellers as interconnection fees for using our international network in providing their services and (iv) other revenues, including revenues from international calls placed from public telephones and international leased lines; and

 

 Ø 

land-to-mobile interconnection revenues;

 

Internet service revenues which consist of:

 

 Ø 

broadband Internet access service revenues, primarily consisting of installation fees and basic monthly charges; and

 

 Ø 

other Internet-related service revenues related to our infrastructure and solution services for business enterprises, IP-TV and network portal services.services;

 

revenues from goods sold that are generated primarily through sale of mobile handsets and specially designed phones for fixed-line and mobile convergence services;

 

data communications service revenues, primarily consisting of installation fees and basic monthly charges for our leased line services and Kornet Internet connection service and revenues from our satellite services;

financial service revenues, primarily consisting of fees from credit card services provided by BC Card Co., Ltd., which became our consolidated subsidiary starting in October 2011;

automobile rental service revenues, primarily consisting of fees generated from automobile rentals and leases by KT Rental Co., Ltd., which became our consolidated subsidiary starting in July 2012; and

 

miscellaneous revenues that are primarily derived from information technology and network services, satellite services, security services and real estate development and car rental businesses.development.

Operating Expenses

Our operating expenses primarily include:

 

costpurchase of goods sold,inventories, primarily consisting of our sale of mobile handsets and specially designed phones for fixed-line mobile convergence services;

 

depreciationsalaries and amortizationwages, including post-employment benefits, termination benefits and share-based payments;

depreciation expenses incurred primarily in connection with our telecommunications network facilities;

salaries and related costs, including severance indemnities that are a lump-sum amount paid to employees upon departure who have been employed by us for more than one year, share-based payments and employee welfare expenses;

 

sales commissions, primarily consisting of commissions to independent dealers related to procurement of mobile subscribers and mobile handset sales;

 

commissions, primarily consisting of commission-based payments for third-party outsourcing services, including commissions to the call center staff;

card service costs, primarily consisting of costs in connection with credit card services provided by BC Card Co., Ltd., including fees paid to member credit card companies in our network for marketing expenses and for costs associated with the present value and default risks of installment card charges which are borne by such member companies;

service cost, primarily consisting of payments for third-party outsourcing services, including payments for software development and design, data analysis and processing, and installment and maintenance of IT and satellite equipment; and

interconnection charges, which are interconnection payments to mobiletelecommunication service providers for calls from landline users and our mobile subscribers to our competitors’ mobile service subscribers; and

promotion expenses that consist primarily of handset subsidies that we offer to purchasers of new handsets who agree to minimum subscription periods.subscribers.

Operating Results—20092012 Compared to 20102013

The following table presents selected income statement data and changes therein for 20092012 and 2010.2013:

 

   For the Year Ended
December 31,
   Changes 
    2009 vs. 2010 
   2009  2010   Amount   % 
   (In billions of Won) 

Operating revenues

  (Won)19,644   (Won)21,331    (Won)1,687     8.6

Operating expenses

   18,673    19,156     483     2.6  
                

Operating income

   971    2,175     1,204     124.1  

Non-operating expense, net

   251    613     362     144.2  
                

Income from continuing operations before income tax expense

   719    1,562     843     117.2  

Income tax expense on continuing operations

   108    372     264     244.4  

Income (loss) from discontinued operations

   (2  3     5     N.A.  
                

Net income

  (Won)610   (Won)1,193    (Won)583     95.6
                
   For the Year Ended
December 31,
  Changes 
   2012 vs. 2013 
   2012  2013  Amount  % 
   (In billions of Won) 

Operating revenues

  24,644   24,058   (586  (2.4)% 

Revenue

   23,856    23,729    (127  (0.5

Others

   787    329    (458  (58.2

Operating expenses

   22,964    23,734    770    3.4  
  

 

 

  

 

 

  

 

 

  

Operating profit

   1,680    323    (1,357  (80.8

Finance income

   499    279    (220  (44.1

Finance costs

   (782  (648  134    (17.1

Income from jointly controlled entities and associates

   18    7    (11  (61.1
  

 

 

  

 

 

  

 

 

  

Profit from continuing operations before income tax

   1,415    (38  (1,453  N.A.  

Income tax expense

   278    50    (228  (82.0

Profit for the period from continuing operations

   1,137    (88  (1,225  N.A.  

Profit from discontinued operations

   (32      32    N.A.  
  

 

 

  

 

 

  

 

 

  

Profit for the period

  1,105   (88  (1,193  N.A.  
  

 

 

  

 

 

  

 

 

  

 

N.A. means not available.

N.A.means not available.

Operating Revenues

The following table presents a breakdown of our operating revenues and changes therein for 20092012 and 2010.2013:

 

  For the Year Ended
December 31,
   Changes   For the Year Ended
December 31,
   Changes 
  2009 vs. 2010    2012 vs. 2013 
  2009   2010   Amount %   2012   2013   Amount % 
  (In billions of Won)   (In billions of Won) 

Mobile services

  (Won)6,646    (Won)7,083    (Won)437    6.6  6,578    6,711    133    2.0

Fixed-line telephone services:

              

Local service revenues

   2,674     2,563     (111  (4.2   2,019     1,850     (169  (8.4

Non-refundable service installation fees

   17     15     (2  (11.8   32     27     (5  (15.6

Domestic long-distance revenues

   475     381     (94  (19.8   268     221     (47  (17.5

International long-distance revenues

   384     362     (22  (5.7   392     342     (50  (12.8

Land-to-mobile interconnection revenues

   1,147     949     (198  (17.3   663     544     (119  (17.9
               

 

   

 

   

 

  

Sub-total

   4,697     4,270     (427  (9.1   3,374     2,984     (390  (11.6

Internet services:

       

Broadband internet access service

   1,942     1,941     (1  (0.1

Other Internet-related services

   507     626     119    23.5  
             

Sub-total

   2,449     2,567     118    4.8  

Goods sold

   3,397     4,395     998    29.4  

Data communication services

   1,314     1,309     (5  (0.4

Other

   1,141     1,707     566    49.6  
             

Total operating revenues

  (Won)19,644    (Won)21,331    (Won)1,687    8.6
             

   For the Year Ended
December 31,
   Changes 
    2012 vs. 2013 
   2012   2013   Amount  % 
   (In billions of Won) 

Internet services:

       

Broadband internet access service

  2,036    2,011    (25  (1.2)% 

Other Internet-related services

   874     985     111    12.7  
  

 

 

   

 

 

   

 

 

  

Sub-total

   2,910     2,996     86    3.0  

Sale of goods

   4,590     4,066     (524  (11.4

Data communication services

   1,309     1,199     (110  (8.4

Financial services

   3,320     3,274     (46  (1.4

Automobile rental service

   253     606     353    139.5  

Other

   2,310     2,222     (88  (3.8
  

 

 

   

 

 

   

 

 

  

Total operating revenues

  24,644    24,058    (586  (2.4)% 
  

 

 

   

 

 

   

 

 

  

N.A. means not available.

Total operating revenues increaseddecreased by 8.6%2.4%, or(Won)1,687586 billion, from(Won)19,64424,644 billion in 20092012 to(Won)21,33124,058 billion in 20102013 primarily due to increasesdecreases in our mobile handset sales, other operatingsale of goods, fixed-line telephone service revenues and mobile servicedata communication services revenues, the impact of which was partially offset by decreasesincreases in our fixed-line telephoneautomobile rental service revenues and mobile service revenues.

Mobile Services

Our mobile service revenues increased by 6.6%2.0%, or(Won)437133 billion, from(Won)6,6466,578 billion in 20092012 to(Won)7,0836,711 billion in 20102013 primarily due to a 6.8%the launching of our wideband LTE services in September 2013, and the corresponding increase in our average revenue per user, as wideband LTE service products generally have higher rates due to the numbergreater amount of data included in such rates. Such increase in average revenue per user was partially offset by a 0.3% decrease in our mobile subscribers from 15.0 millionapproximately 16,502,000 as of December 31, 20092012 to 16.0 million as ofapproximately 16,454,000 in December 31, 2010.2013.

Fixed-line Telephone Services

Our fixed-line telephone service revenues decreased by 9.1%11.6%, or(Won)427390 billion, from(Won)4,6973,374 billion in 20092012 to(Won)4,2702,984 billion in 20102013 primarily due to decreases in local service revenues, land-to-mobile interconnection revenues, local service revenuesand international and domestic long-distance revenues. Specifically:

 

Land-to-mobile interconnection revenues decreased by 17.3%, or(Won)198 billion, from(Won)1,147 billion in 2009 to(Won)949 billion in 2010 primarily due to an increase in the volume of calls between mobile subscribers, which in turn led to a reduction in the volume of calls between landline users to mobile subscribers.

Local service revenues decreased by 4.2%8.4%, or(Won)111169 billion, from(Won)2,6742,019 billion in 20092012 to(Won)2,5631,850 billion in 2010.2013. The number of local call pulses decreased by 5.2%19.4% from 20092012 to 20102013, and the number of lines in service decreased by 7.2% from 2012 to 2013, primarily due to the continuing substitution effect from increase in usage of mobile telephone services, and Internet phone services. However,services and other VoIP services such as Kakaotalk, Line and Skype.

Land-to-mobile interconnection revenues decreased by 17.9%, or119 billion, from663 billion in 2012 to544 billion in 2013 primarily due to a decrease in the effectnumber of such decreases was partially offset by participation by some of ourcalls made from landline users to mobile subscribers in optional flat rate plans,2013 compared to 2012. We recognize as well as an increaseland-to-mobile interconnection revenue the entire amount of the usage charge collected from the landline user for a call initiated by a landline user to a mobile service subscriber.

International long-distance revenues decreased by 12.8%, or50 billion, from392 billion in revenues from VoIP services.2012 to342 billion in 2013 primarily due to a decrease in the outgoing

international long-distance call minutes by 15.7% from 2012 to 2013, primarily due to the continuing substitution effect from increase in usage of Internet phone services and other VoIP services such as Kakaotalk, Line and Skype, as well as a 7.2% decrease in the number of lines in service from 2012 to 2013.

 

Domestic long-distance revenues decreased by 19.8%17.5%, or(Won)9447 billion, from(Won)475268 billion in 20092012 to(Won)381221 billion in 20102013 primarily due to a decrease in the number of domestic long-distance call minutes by 23.2%20.2% from 20092012 to 20102013, primarily due to the continuing substitution effect from increase in usage of mobile telephone services, and Internet phone services. The effectservices and other VoIP services such as Kakaotalk, Line and Skype, as well as a 7.2% decrease in the number of such decreases was partially offset by participation by some of our subscriberslines in optional flat rate plans.service from 2012 to 2013.

Internet Services

Our Internet service revenues increased by 4.8%3.0%, or(Won)11886 billion, from(Won)2,4492,910 billion in 20092012 to(Won)2,5672,996 billion in 20102013 primarily due to an increase in the number of IP-TV subscribers from 1.24.0 million as of December 31, 20092012 to 2.15.0 million as of December 31, 2010. The revenues from broadband Internet access service remained stable at(Won)1,942 billion2013, the impact of which was offset in 2009part by an increase in our IP-TV subscribers who participate in bundled products that offer discounts when subscribing to our other services, and(Won)1,941 billion in 2010.

Goods Sold

Revenues from goods sold increased by 29.4%, or(Won)998 billion, from(Won)3,397 billion in 2009 to(Won)4,395 billion in 2010 primarily due to an increase in the number of HSDPA-based IMT-2000 service compatible handsets and smart phonesour broadband subscribers from 8.0 million as of December 31, 2012 to 8.1 million as of December 31, 2013.

Sale of Goods

Revenues from sale of goods decreased by 11.4%, or524 billion, from4,590 billion in 2012 to4,066 billion in 2013 primarily due to a decrease in the number of smartphones sold, including Apple iPhones that we launchedresulting from increased competition in November 2009.the mobile handset market, as well as business suspensions imposed on us by the KCC during 2013 in connection with excessive handset subsidies as discussed above.

Data Communications

Data communications service revenues decreased by 0.4%8.4%, or(Won)5110 billion, from(Won)1,314 billion in 2009 to(Won)1,309 billion in 20102012 to1,199 billion in 2013 primarily due to service fee discounts offered to government agencies and a decrease in revenues related to Kornet broadband Internet connection service to institutional customersfrom our leased lines, resulting from increased competition in the expirationtelecommunications market in Korea.

Financial Services

Financial service revenues decreased by 1.4%, or46 billion, from3,320 billion in 2012 to3,274 billion in 2013 primarily due to a decrease in commission revenues from our financial subsidiaries, in particular BC Card Co., Ltd., resulting from a decrease in the rate of certain leased-line contracts.commission BC Card. Co., Ltd. charges for purchases, which in turn resulted from increased competition in the financial services market during 2013.

Automobile Rental

Automobile rental revenues increased by 139.5%, or353 billion, from253 billion in 2012 to606 billion in 2013 primarily due to the recognition of full year income from KT Rental Co., Ltd. in 2013, which became our consolidated subsidiary and related revenues became a part of our consolidated revenue starting in July 2012, following the acquisition of KT Rental’s common stock by Hana Daetoo Securities Co., Ltd. and other investors from the second largest shareholder in July 2012, and the restriction on our control over KT Rental pursuant to a shareholders’ agreement being removed as a result. See Note 37 to the Consolidated Financial Statements.

Others

Other operating revenues increaseddecreased by 49.6%3.8%, or(Won)56688 billion, from(Won)1,1412,310 billion in 20092012 to(Won)1,7072,222 billion in 20102013 primarily due to an increasea 19.3%,57 billion, or decrease in sales ofoperating revenues from KT Telecop Co., Ltd., our real estate properties.subsidiary specializing in security services.

Operating Expenses

The following table presents a breakdown of our operating expenses and changes therein for 20092012 and 2010.2013:

 

   For the Year Ended
December 31,
   Changes 
     2009 vs. 2010 
           2009       2010           Amount          %     
   (In billions of Won) 

Salaries and wages

  (Won)2,193    (Won)2,163    (Won)(30  (1.4

Provision for severance benefits

   1,128     243     (885  (78.5

Employee welfare

   587     374     (213  (36.2

Depreciation

   2,874     2,820     (54  (1.9

Commissions

   1,262     1,450     188    14.9  

Interconnection charges

   1,227     1,245     18    1.5  

Cost of services

   582     804     222    38.2  

Cost of goods sold

   3,119     4,087     968    31.1  

Promotion expenses

   1,122     1,228     106    9.4  

Sales commissions

   1,805     1,621     (184  (10.1

Others(1)

   2,774     3,121     347    12.4  
                

Total operating expenses

  (Won)18,673    (Won)19,156    (Won)483    2.6
                
   For the Year Ended
December 31,
   Changes 
     2012 vs. 2013 
   2012  2013   Amount  % 
   (In billions of Won) 

Salaries and wages

  3,097   3,289    192    6.2

Depreciation

   2,894    3,108     214    7.4  

Commissions

   1,426    1,260     (166  (11.6

Interconnection charges

   901    885     (16  (1.8

Purchase of inventories

   4,851    3,566     (1,285  (26.5

Changes of inventories

   (259  321     580    N.A.  

Sales commission

   2,230    2,315     85    3.8  

Service cost

   1,264    1,834     570    45.1  

Card service costs

   2,771    2,703     (68  (2.5

Others (1)

   3,789    4,453     664    17.5  
  

 

 

  

 

 

   

 

 

  

Total operating expenses

  22,964   23,734    770    3.4
  

 

 

  

 

 

   

 

 

  

 

N.A. means not available.

 

(1)Including transfer to other accounts.operating expenses (which include miscellaneous expenses, loss on disposal of property and equipment, impairment loss on property and equipment, loss on disposal of intangible assets, loss on disposal of investments in associates and joint ventures, impairment loss on investments in associates and joint ventures, donations and bad debt expenses), amortization of intangible assets, rent, insurance premium, utilities, international interconnection fee, installation fee, taxes and dues, research and development expenses and advertising expenses.

Total operating expenses increased by 2.6%3.4%, or(Won)483770 billion, from(Won)18,67322,964 billion in 20092012 to(Won) 19,15623,734 billion in 20102013 primarily due to increases in costother operating expenses, change of goods sold, cost of services, commissionsinventories, service costs, depreciation and promotion expenses,salaries and wages, the impact of which was partially offset by decreasesa decrease in provision for severance benefits related to special voluntary early retirement programs, employee welfare and sales commissions.purchase of inventories. Specifically:

 

Cost of goods soldOther operating expenses increased by 31.1%17.5%, or(Won)968664 billion, from(Won)3,1193,789 billion in 20092012 to(Won) 4,0874,453 billion in 20102013, primarily due to loss on disposal of approximately277 billion in 2013 in connection with the expenses incurred for our business support system project, as well as loss on disposal of approximately220 billion in 2013 on our obsolete tangible and intangible assets.

We recorded an increase in inventories of259 billion in 2012, compared to a decrease of321 billion in 2013, primarily due to temporary year-end accounting treatment of inventories for a shipment of smartphones which were in transit at the end of 2012, as well as an increase in impairment loss by66 billion on our merchandise inventories incurred in 2013 compared to 2012.

Service cost increased by 45.1%, or570 billion, from1,264 billion in 2012 to1,834 billion in 2013 as a result of increases in expenses relating to our systems/network integration business and expenses relating to purchase of multimedia contents fromthird-party developers.

Depreciation expenses increased by 7.4%, or214 billion, from2,894 billion in 2012 to3,108 billion in 2013 primarily due to an increase in depreciation expenses of271 billion from a full-year recognition of depreciation expenses of KT Rental’s operating assets, which became our consolidated subsidiary starting in July 2012 as described above.

Salaries and wages increased by 6.2%, or192 billion, from3,097 billion in 2012 to3,289 billion in 2013 primarily due to an increase in the number of high-end HSDPA-compatible handsets and smart phones sold, including the Apple iPhone that we launchedour employees resulting from our newly consolidated subsidiaries in November 2009,2013, as well as various other smart phones that we launched in 2010.

Cost of services, which primarily relate to purchases of content for IP-TV services, increased by 38.2%, or(Won)222 billion, from(Won)582 billion in 2009 to(Won)804 billion in 2010 primarily due to an increase in sales of pay-per-view programming to IP-TV subscribers.

Our commissions, which primarily relate to payments for third-party outsourcing services, including commissions to the call center staff, increased by 14.9%, or(Won)188 billion, from(Won) 1,262 billionsalaries and severance benefits in 2009 to(Won)1,450 billion in 2010 primarily due to outsourcing of our activation and installation activities to third-parties.

Our promotion expenses, which consist primarily of handset subsidies, increased by 9.4%, or(Won)106 billion, from(Won)1,122 billion in 2009 to(Won)1,228 billion in 2010 primarily due to an increase in the sales volume of HSDPA-compatible handsets and smart phones.2013.

These factors were partially offset by the following:

 

Our provision for severance benefitsoperating expenses related to purchase of inventories decreased by 78.5%26.5%, or(Won)8851,285 billion, from(Won)1,1284,851 billion in 20092012 to(Won)2433,566 billion in 2010 primarily due to a decrease in provision for severance benefits relating to a special voluntary early retirement program. In December 2009, we held a special voluntary early retirement program in which 5,992 employees participated and received additional financial incentives to retire early, whereas we did not have any such special voluntary early retirement program in 2010.

Employee welfare, which primarily relates to expenditures for employees such as education and healthcare subsidies, decreased by 36.2%, or(Won)213 billion, from(Won)587 billion in 2009 to(Won)374 billion in 2010 primarily due to a change in our compensation policy which reduced certain seasonal bonuses classified as employee welfare, and instead increased benefits classified as salaries.

Sales commissions, which primarily relate to procurement of mobile subscribers and mobile handset sales by our independent dealers, decreased by 10.1%, or(Won)184 billion, from(Won)1,805 billion in 2009 to(Won)1,621 billion in 20102013 primarily due to a decrease in the ratenumber of sales commissions we paid to our independent dealers.smartphones sold as discussed above.

Operating IncomeProfit

Due to the factors described above, our operating income increasedprofit decreased by 124.1%80.8%, or(Won)1,2041,357 billion, from(Won)9711,680 billion in 20092012 to(Won)2,175323 billion in 2010.2013. Our operating margin, which is operating incomeprofit as a percentage of operating revenues, increaseddecreased from 4.9%6.8% in 20092012 to 10.2%1.3% in 2010.2013.

Non-OperatingFinance Income (Expenses)(Costs)

The following table presents a breakdown of our non-operatingfinance income and expenses on a net basiscosts and changes therein for 20092012 and 2010.2013:

 

   For the Year Ended
December 31,
  Changes 
    2009 vs. 2010 
       2009          2010          Amount      % 
   (In billions of Won) 

Interest income

  (Won)197   (Won)143   (Won)(54  (27.5)% 

Interest expense

   (505  (529  (24  4.7  

Net foreign currency transaction loss

   (4  (3  1    (27.9

Net foreign currency translation gain

   223    34    (189  (84.8

Net gain (loss) on valuation of equity method investments

   (14  27    41    N.A.  

Net loss on disposal of property and equipment

   (119  (165  (46  38.7  

Net gain (loss) on settlement of derivatives

   1    (1  (2  N.A.  

Net loss on valuation of derivatives

   (174  (8  166    (95.5

Other bad debts expense

   (47  (9  38    (80.2

Donations

   (39  (81  (42  106.2  

Net other non-operating revenues (losses)

   230    (21  (251  N.A.  
              

Net non-operating expenses

  (Won)(251 (Won)(613 (Won)(362  144.2
              
   For the Year  Ended
December 31,
  Changes 
   2012 vs. 2013 
     2012      2013    Amount  % 
   (In billions of Won) 

Interest income

  203   109   (94  (46.3)% 

Interest expense

   (472  (450  22    (4.7

Net foreign currency transaction gain (loss)

   2    6    4    200.0  

Net foreign currency translation gain (loss)

   259    100    (159  (61.4

Net loss on settlement of derivatives

   (5  (3  2    (40.0

Net gain (loss) on valuation of derivatives

   (241  (105  136    (56.4

Net other finance costs

   (29  (25  4    (13.8
  

 

 

  

 

 

  

 

 

  

Net finance costs

  (283 (368 (85  30.0
  

 

 

  

 

 

  

 

 

  

 

N.A. means not available.

N.A.means not available.

Our net non-operating expensesfinance costs increased by 144.2%30.0%, or(Won)36285 billion, from(Won)251283 billion in 20092012 to(Won)613368 billion in 20102013 primarily due to our recognition of net other non-operating revenues in 2009 compared to net other non-operating losses in 2010, a decreasedecreases in net foreign currency translation gain a decrease inand interest income, an increase in net loss on disposal of property and equipment and an increase in donations, the impact of which was partially offset by a decrease in net loss on valuation of derivatives. Specifically:

 

We recorded net other non-operating revenues of(Won)230 billion in 2009 compared to net other non-operating losses of(Won)21 billion in 2010 primarily due to refunds of(Won)90 billion to our subscribers of fixed-line telephone services with optional flat rate plans who requested termination of such plans in 2010.

Our net foreign currency translation gain decreased by 84.8%61.4%, or(Won)189159 billion, from(Won)223259 billion in 20092012 to(Won)34100 billion in 20102013, as the Market Average Exchange Rate of the Won against the U.S. dollar appreciated from(Won)1,257.51,153.3 to US$1.00 as of December 31, 20082011 to(Won) 1,167.61,071.1 to US$1.00 as of December 31, 2009 but the level of appreciation decreased during 2010 to(Won)1,138.9 to US$1.00 as of December 31, 2010. The impact of such decrease in net foreign currency translation gain was largely offset by2012, and further appreciated at a decrease in net loss on valuation of derivatives discussed below.lesser pace

to1,055.3 to US$1.00 as of December 31, 2013. The impact of such decrease in net foreign currency translation gain was partially offset by a decrease in net loss on valuation of derivatives discussed below.

 

Our interest income decreased by 27.5%46.3%, or(Won)5494 billion, from(Won)197203 billion in 20092012 to(Won)143109 billion in 20102013 primarily due to a decrease in our average balance of interest-earning assets from 20092012 to 2010, including2013, resulting from a reduction in our holdings of cash and cash equivalents,accounts receivables from our handset sales in 2013 due to the reasons discussed above, as well as a general decrease in general interest rates in Korea during such periods.from 2012 to 2013.

Our net loss on disposal of property and equipment increased by 38.7%, or(Won)46 billion, from(Won)119 billion in 2009 to(Won)165 billion in 2010 primarily due to an increase in equipment disposal, in particular machinery.

Our donations increased by 106.2%, or(Won)42 billion, from(Won)39 billion in 2009 to(Won)81 billion in 2010 primarily due to an increase in our donations to employee welfare funds.

These factors were partially offset by our netthe following:

Net loss on valuation of derivatives which decreased by 95.5%56.4%, or(Won)166136 billion, from(Won)174241 billion in 20092012 to(Won)8105 billion in 20102013, primarily due to a decrease in losses from our combined interest rate currency swap contracts asdue to the lower rate of appreciation of the exchange raterates of the Won against the Japanese Yen and the U.S. dollar fluctuatedfrom December 31, 2012 to December 31, 2013.

Income (Loss) from Jointly Controlled Entities and Associates

Income from jointly controlled entities and associates decreased by 61.1%, or11 billion, from18 billion in 2012 to7 billion in 2013, primarily due to the loss of income recognized under this line item from KT Rental in 2013, as discussed above.it became our consolidated subsidiary in July 2012, and we recorded an income of9 billion from KT Rental in 2012, as any associated gains from KT Rental until July 2012 were recognized under this line item.

Income Tax Expense on Continuing Operations

Our income tax expense on continuing operations increaseddecreased by 244.4%82.0%, or(Won)264228 billion, from(Won) 108278 billion in 20092012 to(Won)37250 billion in 20102013 primarily due to an increase in incomeour recognition of a loss from continuing operations before income tax of38 billion in 2013 compared to a profit from continuing operation of1,415 billion in 2012. We incurred a tax expense despite incurring a loss before income tax in 2013, as well as a decreasewe, in preparing our consolidated financial statements, aggregate the tax credit carryforwardsresults of ourselves and deductions.our subsidiaries, which had taxable income. See Note 2629 to the Consolidated Financial Statements. OurWe had an effective tax rate increased from 15.0%of 19.6% in 2009 to 23.8% in 2010, primarily due to a decrease in tax credit carryforwards and deductions in 2010.2012. We had net deferred income tax assets of(Won)545537 billion as of December 31, 2010.2013.

Net IncomeProfit from Discontinued Operations

We recognized a loss from discontinued operations of32 billion in 2012, compared to none in 2013, primarily due to the loss recognized from our sale of our 93.8% interest in KT Tech, Inc. in August 2012, as well as our share of net loss of KT Tech, Inc. until the completion of sale, which we recorded under this category in 2012, whereas there were no discontinued operations in 2013 which required recognition of income or loss under this category. See Note 40 to the Consolidated Financial Statements.

Profit for the Period

Due to the factors described above, our net income increased by 95.6%, orwe recorded a profit for the period of(Won)583 billion, from(Won) 6101,105 billion in 20092012, compared to a loss of(Won)1,19388 billion in 2010.2013. Our net income margin, which is net incomeprofit for the period as a percentage of operating revenues, increased from 3.1%was 4.5% in 2009 to 5.6%2012, and our net loss margin, which is loss for the period as a percentage of operating revenues, was 0.4% in 2010.2013.

Segment Results—PersonalTelecommunication & Convergence Customer Group

Our operating revenues for this segment, prior to adjusting for inter-segment transactions, decreased by 6.2%, or994 billion, from15,932 billion in 2012 to14,938 billion in 2013, primarily due to a decrease in revenues from individual fixed-line telephone subscribers.

Our operating income for this segment, prior to adjusting for inter-segment transactions, decreased by 92.9%, or681 billion, from733 billion in 2012 to52 billion in 2013, as the 6.2% decrease in the segment’s operating revenues outpaced a 2.1% decrease in operating expenses, primarily due to the reasons discussed above. Operating margin, which is operating income as a percentage of total operating revenues prior to adjusting for inter-company sales, decreased from 4.6% in 2012 to 0.3% in 2013.

Depreciation and amortization, prior to adjusting for inter-segment transactions, increased slightly by 0.2%, or5 billion, from2,440 billion in 2012 to2,445 billion in 2013.

Segment Results—Global & Enterprise Group

Our operating revenues for this segment, prior to adjusting for inter-segment transactions, decreased by 0.5%, or14 billion, from2,931 billion in 2012 to2,917 billion in 2013, primarily due to the spin-offs of KT Sat Co., Ltd., KT Estate Inc. and KT Media Hub Co., Ltd. during 2013 and the corresponding decrease in operating revenues from such subsidiaries which were recognized under this segment.

Our operating income for this segment, prior to adjusting for inter-segment transactions, decreased by 27.8%, or91 billion, from327 billion in 2012 to236 billion in 2013, as operating revenues decreased by 0.5% while operating expenses increased by 3.0%, primarily due to an increase in rental expenses recognized under this segment in connection with the sale and leaseback transactions of certain real estate properties which occurred during 2011 and 2012. Operating margin decreased from 11.2% in 2012 to 8.1% in 2013.

Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 0.2%, or1 billion, from485 billion in 2012 to486 billion in 2013.

Segment Results—Finance/Rental Business Group

Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 9.0%, or336 billion, from3,717 billion in 2012 to4,053 billion in 2013, primarily due to the consolidation of full year revenues in 2013 from KT Rental Co., Ltd. which became our consolidated subsidiary starting in July 2012.

Our operating income for this segment, prior to adjusting for inter-segment transactions, increased by 51.4%, or95 billion, from185 billion in 2012 to280 billion in 2013, as the 9.0% increase in the segment’s operating revenues outpaced a 6.8% increase in operating expenses, primarily due to the reasons discussed above. Operating margin increased from 5.0% in 2012 to 6.9% in 2013.

Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 119.8%, or218 billion, from182 billion in 2012 to400 billion in 2013, primarily due to the effect of full-year consolidation of KT Rental Co., Ltd. and the related assets in 2013 as described above, as well as additional purchases of automobiles by KT Rental Co., Ltd. during 2013 which increased the depreciable asset base.

Segment Results—Others

Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 19.8%, or842 billion, from4,252 billion in 2012 to5,094 billion in 2013, primarily due to the spin-offs of KT Sat Co., Ltd., KT Estate Inc. and KT Media Hub Co., Ltd. during 2013 and the corresponding recognition of operating revenues from such subsidiaries under this segment.

Our operating income for this segment, prior to adjusting for inter-segment transactions, increased by 245.8%, or204 billion, from83 billion in 2012 to287 billion in 2013, as the 19.8% increase in the segment’s operating revenues outpaced a 15.3% increase in operating expenses, primarily due to the reasons discussed above. The operating margin increased from 2.0% in 2012 to 5.6% in 2013.

Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 58.5%, or86 billion, from147 billion in 2012 to233 billion in 2013, primarily due to the increase in depreciable assets under this segment due to the spin-off of subsidiaries as discussed above.

Operating Results—2011 Compared to 2012

The following table presents selected income statement data and changes therein for 2011 and 2012:

   For the Year Ended
December 31,
  Changes 
    2011 vs. 2012 
   2011  2012  Amount  % 
   (In billions of Won) 

Operating revenues

  22,088   24,644   2,556    11.6

Revenue

   21,311    23,856    2,545    11.9  

Others

   777    787    10    1.3  

Operating expenses

   20,101    22,964    2,863    14.2  
  

 

 

  

 

 

  

 

 

  

Operating profit

   1,987    1,680    (307  (15.5

Finance income

   270    499    229    84.8  

Finance costs

   (642  (782  (140  21.8  

Income (loss) from jointly controlled entities and associates

   (6  18    24    N.A.  
  

 

 

  

 

 

  

 

 

  

Profit from continuing operations before income tax

   1,609    1,415    (194  (12.1

Income tax expense

   318    278    (40  (12.6

Profits for the year from continuing operations

   1,291    1,137    (154  (11.9

Profit (loss) from discontinued operations

   165    (32  (197  N.A.  
  

 

 

  

 

 

  

 

 

  

Profit for the period

  1,455   1,105   (350  (24.1)% 
  

 

 

  

 

 

  

 

 

  

N.A. means not available.

Operating Revenues

The following table presents a breakdown of our operating revenues and changes therein for 2011 and 2012:

   For the Year Ended
December 31,
   Changes 
     2011 vs. 2012 
   2011   2012   Amount  % 
   (In billions of Won) 

Mobile services

  6,813    6,578    (235  (3.4)% 

Fixed-line telephone services:

       

Local service revenues

   2,286     2,019     (267  (11.7

Non-refundable service installation fees

   38     32     (6  (15.8

Domestic long-distance revenues

   308     268     (40  (13.0

International long-distance revenues

   398     392     (6  (1.5

Land-to-mobile interconnection revenues

   782     663     (119  (15.2
  

 

 

   

 

 

   

 

 

  

Sub-total

   3,812     3,374     (438  (11.5

Internet services:

       

Broadband internet access service

   1,868     2,036     168    9.0  

Other Internet-related services

   867     874     7    0.8  
  

 

 

   

 

 

   

 

 

  

Sub-total

   2,735     2,910     175    6.4  

Sale of goods

   4,369     4,590     221    5.0  

Data communication services

   1,271     1,309     38    3.0  

Financial services

   996     3,320     2,324    233.3  

Automobile rental service

        253     253    N.A.  

Other

   2,090     2,310     220    10.5  
  

 

 

   

 

 

   

 

 

  

Total operating revenues

  22,088    24,644    2,556    11.6
  

 

 

   

 

 

   

 

 

  

N.A. means not available.

Total operating revenues increased by 11.6%, or2,556 billion, from22,088 billion in 2011 to24,644 billion in 2012 primarily due to increases in our financial service revenues, other revenues and automobile rental service revenues, the impact of which was partially offset by decreases in our fixed-line telephone service revenues and mobile service revenues.

Mobile Services

Our mobile service revenues decreased by 3.4%, or235 billion, from6,813 billion in 2011 to6,578 billion in 2012 primarily due to various rate reduction measures we adopted in August 2011 upon discussion with the KCC, in particular for those applicable to 3G smartphones, the impact of which was further enhanced by a decrease in our mobile subscribers from 16.6 million as of December 31, 2011 to 16.5 million as of December 31, 2012. For a discussion of reduction in rates for our mobile services, see “Item 4.B.—Business Overview—Revenues and Rates—Mobile Services.”

Fixed-line Telephone Services

Our fixed-line telephone service revenues decreased by 11.5%, or(Won)1,074438 billion, from(Won)9,3143,812 billion in 20092011 to(Won)10,3883,374 billion in 2010,2012 primarily due to decreases in local service revenues, land-to-mobile interconnection revenues and domestic long-distance revenues. Specifically:

Local service revenues decreased by 11.7%, or267 billion, from2,286 billion in 2011 to2,019 billion in 2012. The number of local call pulses decreased by 9.3% from 2011 to 2012, and the number of lines in service decreased by 4.9% from 2011 to 2012, primarily due to the substitution effect from increase in usage of mobile telephone services and Internet phone services.

Land-to-mobile interconnection revenues decreased by 15.2%, or119 billion, from782 billion in 2011 to663 billion in 2012 primarily due to a decrease in the number of calls made from landline users to mobile subscribers in 2012 compared to 2011. We recognize as land-to-mobile interconnection revenue the entire amount of the usage charge collected from the landline user for a call initiated by a landline user to a mobile service subscriber.

Domestic long-distance revenues decreased by 13.0%, or40 billion, from308 billion in 2011 to268 billion in 2012 primarily due to a decrease in the number of domestic long-distance call minutes by 7.7% from 2011 to 2012, primarily due to the substitution effect from increase in usage of mobile telephone services and Internet phone services, as well as a 4.9% decrease in the number of lines in service from 2011 to 2012.

Internet Services

Our Internet service revenues increased by 6.4%, or175 billion, from2,735 billion in 2011 to2,910 billion in 2012 primarily due to an increase in the number of our broadband subscribers from 7.8 million as of December 31, 2011 to 8.0 million as of December 31, 2012, and an increase in the number of IP-TV subscribers from 3.1 million as of December 31, 2011 to 4.0 million as of December 31, 2012, the impact of which was offset in part by an increase in our IP-TV subscribers who participate in bundled products that offer discounts when subscribing to our other services.

Sale of Goods

Revenues from sale of goods increased by 5.0%, or221 billion, from4,369 billion in 2011 to4,590 billion in 2012 primarily due to an increase in the number of smartphones sold, in particular LTE smartphones, that had relatively higher prices.

Data Communications

Data communications service revenues increased by 3.0%, or38 billion, from1,271 billion in 2011 to1,309 billion in 2012 primarily due to an increase in revenues from our network equipment installment, lease and maintenance services, primarily those relating to our IP-based integrated control solutions and equipment.

Financial Services

Financial service revenues increased by 233.3%, or2,324 billion, from996 billion in 2011 to3,320 billion in 2012 primarily due to the recognition of full year income from BC Card Co., Ltd. in 2012, which became our consolidated subsidiary and related revenues became a part of our consolidated revenue starting in October 2011.

Automobile Rental

We did not record any automobile rental service revenues in 2011, while we recorded revenues of253 billion in 2012, due to the consolidation of KT Rental Co., Ltd. starting in July 2012 as a result of acquisition of KT Rental’s common stock by Hana Daetoo Securities Co., Ltd. and other investors from the second largest shareholder in July 2012, and the restriction on our control over KT Rental pursuant to a shareholders’ agreement being removed as a result. See Note 37 to the Consolidated Financial Statements.

Others

Other operating revenues increased by 10.5%, or220 billion, from2,090 billion in 2011 to2,310 billion in 2012 primarily due to a112 billion increase in revenues (after intercompany elimination) from H&C Network, which provides call center services to BC Card Co., Ltd. and other financial service providers, as a result of the recognition of full year income from H&C Network in 2012, which became our consolidated subsidiary and related revenues became a part of our consolidated revenue starting in October 2011, a85 billion increase in revenues from KT Skylife as a result of an increase in subscribers in 2012 compared to 2011, and the increases in related installment fees and home shopping network sales, and a56 billion increase in revenues from KT Networks Corporation (which changed its name to KT ENS Corporation in 2013) as a result of an increase in our network construction projects as well as sales in our ecologically safe or “green” information technology equipment. Such increases were offset in part by a47 billion decrease in gains from sale and leaseback of land and buildings to our equity-method investee or special purpose companies specializing in real estate investments, from298 billion in 2011 to251 billion in 2012. See Note 26 to the Consolidated Financial Statements.

Operating Expenses

The following table presents a breakdown of our operating expenses and changes therein for 2011 and 2012:

   For the Year Ended
December 31,
  Changes 
   2011 vs. 2012 
   2011   2012  Amount  % 
   (In billions of Won) 

Salaries and wages

  2,854    3,097   243    8.5  

Depreciation

   2,645     2,894    249    9.4  

Commissions

   1,448     1,426    (22  (1.5

Interconnection charges

   1,116     901    (215  (19.3

Purchase of inventories

   4,519     4,851    332    7.3  

Changes of inventories

   36     (259  (295  N.A.  

Sales commission

   1,865     2,230    365    19.6  

Service cost

   1,331     1,264    (67  (5.0

Card service costs

   708     2,771    2,063    291.4  

Others(1)

   3,579     3,789    210    5.9  
  

 

 

   

 

 

  

 

 

  

Total operating expenses

  20,101    22,964   2,863    14.2
  

 

 

   

 

 

  

 

 

  

N.A. means not available.

(1)Including other operating expenses (which include miscellaneous expenses, loss on disposal of property and equipment, impairment loss on property and equipment, loss on disposal of intangible assets, loss on disposal of investments in associates and joint ventures, impairment loss on investments in associates and joint ventures, donations and bad debt expenses), amortization of intangible assets, rent, insurance premium, utilities, international interconnection fee, installation fee, taxes and dues, research and development expenses and advertising expenses.

Total operating expenses increased by 14.2%, or2,863 billion, from20,101 billion in 2011 to22,964 billion in 2012 primarily due to increases in card service costs, purchase of handsets, sales commission and depreciation, the impact of which was partially offset by decreases in change of inventories and interconnection charges. Specifically:

Card service costs increased by 291.4%, or2,063 billion, from708 billion in 2011 to2,771 billion in 2012 primarily due to the consolidation of the full year expenses of BC Card Co., Ltd. in 2012 compared to only three months of expenses in 2011 as described above.

Our operating expenses related to purchase of inventories increased by 7.3%, or332 billion, from4,519 billion in 2011 to4,851 billion in 2012 primarily due to an increase in

the number of smart phones sold. However, the rate of increase in our expenses relating to purchase of handsets was higher than the rate of increase in our revenues relating to sale of goods, due to the decrease in our margins as a result of increased competition.

Sales commissions, which primarily relate to commissions to our third-party vendors for sales of mobile handsets and mobile and fixed-line service products, increased by 19.6%, or365 billion, from1,865 billion in 2011 to2,230 billion in 2012 primarily due to increases in sales of our LTE mobile service products and LTE smartphones by such third-party vendors, as a result of increases in our total mobile subscribers and subscribers switching to LTE services in 2012.

Depreciation expenses increased by 9.4%, or249 billion, from2,645 billion in 2011 to2,894 billion in 2012 primarily due to an increase in depreciation expenses of175 billion from depreciation expenses of KT Rental’s operating assets, which became our consolidated subsidiary starting in July 2012 as explained above, as well as an increase in HSDPA-compatible handsetsdepreciation expenses of84 billion from an increase in capital expenditures made by KT Corporation, primarily for LTE-related structures.

These factors were partially offset by the following:

We recorded operating expenses relating to changes of inventories, which represent a decrease in our inventories, of36 billion in 2011, compared to an increase in inventories of259 billion in 2012, primarily due to temporary year-end accounting treatment of inventories for a shipment of smartphones which were in transit at the end of the year.

Interconnection charges decreased by 19.3%, or215 billion, from1,116 billion in 2011 to901 billion in 2012 primarily due to decreases in land-to-mobile and smartmobile-to-mobile interconnection rates charged by other telecommunications operators or are set by the KCC, as applicable, as well as a decrease in the number of calls made from fixed-line phones sold.to mobile phones.

Operating Profit

Due to the factors described above, our operating profit decreased by 15.5%, or307 billion, from1,987 billion in 2011 to1,680 billion in 2012. Our operating margin, which is operating profit as a percentage of operating revenues, decreased from 9.0% in 2011 to 6.8% in 2012.

Finance Income (Costs)

The following table presents a breakdown of our finance income and costs and changes therein for 2011 and 2012:

   For the Year Ended
December 31,
  Changes 
    2011 vs. 2012 
  2011  2012  Amount  % 
   (In billions of Won) 

Interest income

  152   203   51    33.6

Interest expense

   (481  (472  9    (1.9

Net foreign currency transaction gain (loss)

   10    2    (8  (80.0

Net foreign currency translation gain (loss)

   (80  259    339    N.A.  

Net loss on settlement of derivatives

   (27  (5  22    (81.5

Net gain (loss) on valuation of derivatives

   55    (241  (296  N.A.  

Net other finance costs

   (1  (29  (28  2,800.0
  

 

 

  

 

 

  

 

 

  

Net finance costs

  (372 (283 89    (23.9)% 
  

 

 

  

 

 

  

 

 

  

N.A. means not available.

Our net finance costs decreased by 23.9%, or89 billion, from372 billion in 2011 to283 billion in 2012 primarily due to our recognition of net foreign currency translation loss in 2011 compared to a net gain in 2012 and an increase in interest income, the impact of which was partially offset by our recognition of net gain on valuation of derivatives in 2011, compared to a net loss in 2012. Specifically:

We recorded net foreign currency translation loss of80 billion in 2011 compared to net foreign currency translation gain of259 billion in 2012 as the Market Average Exchange Rate of the Won against the U.S. dollar depreciated from1,138.9 to US$1.00 as of December 31, 2010 to1,153.3 to US$1.00 as of December 31, 2011 but it appreciated to1,071.1 to US$1.00 as of December 31, 2012. The impact of such net foreign currency translation gain was partially offset by a net loss on valuation of derivatives discussed below.

Our interest income increased by 33.6%, or51 billion, from152 billion in 2011 to203 billion in 2012 primarily due to an increase in our average balance of interest-earning assets from 2011 to 2012, including our holdings of cash and cash equivalents.

These factors were partially offset by the following:

We recorded net gain on valuation of derivatives of55 billion in 2011 compared to net loss on valuation of derivatives of241 billion in 2012, primarily due to an increase in losses from our currency swap contracts due to the appreciation of the exchange rates of the Won against the Japanese Yen and the U.S. dollar from December 31, 2011 to December 31, 2012, whereas we recorded gains in our currency swap contracts in 2011 due to the depreciation of the Won against the U.S. dollar and the Japanese Yen during 2011.

Income (Loss) from Jointly Controlled Entities and Associates

We recorded a loss from jointly controlled entities and associates of6 billion in 2011 compared to a gain from jointly controlled entities and associates of18 billion in 2012 primarily due to a gain of9 billion recorded in connection with our share of KT Rental’s net income until July 2012 (KT Rental became our consolidated subsidiary starting in July 2012 as described above, and any associated gains until July 2012 are recognized under this category), whereas the loss in 2011 primarily resulted from a one-time unrealized loss of30 billion recorded in connection with the sale and leaseback of certain of our properties to K-REALTY CR-REIT I, our equity-method investee specializing in real estate investments established in December 2011.

Income Tax Expense

Our income tax expense decreased by 12.6%, or40 billion, from318 billion in 2011 to278 billion in 2012 primarily due to a decrease in our profit from continuing operations before income tax by 12.1%, or194 billion, from1,609 billion in 2011 to1,415 billion in 2012. See Note 29 to the Consolidated Financial Statements. As a result of the foregoing, our effective tax rate decreased from 19.8% in 2011 to 19.6% in 2012. We had net deferred income tax assets of473 billion as of December 31, 2012.

Profit from Discontinued Operations

We recognized profit from discontinued operations of165 billion in 2011, compared to loss from discontinued operations of32 billion in 2012, primarily due to profits recognized from our sale of our 79.96% controlling interest in New Telephone Company to Vimpel-Communications in June and

October 2011, as well as our share of net income of New Telephone Company until the completion of sale, and the loss recognized from our sale of our 93.8% interest in KT Tech, Inc. in August 2012, as well as our share of net loss of KT Tech, Inc. until the completion of sale, which we recorded under this category. See Note 40 to the Consolidated Financial Statements.

Profit for the Period

Due to the factors described above, our profit for the period decreased by 24.1%, or350 billion, from1,455 billion in 2011 to1,105 billion in 2012. Our net income margin, which is profit for the period as a percentage of operating revenues, decreased from 6.6% in 2011 to 4.5% in 2012.

Segment Results—Telecommunication & Convergence Customer Group

Our operating revenues for this segment, prior to adjusting for inter-segment transactions, decreased by 1.4%, or224 billion, from16,156 billion in 2011 to15,932 billion in 2012, primarily due to a decrease in revenues from individual fixed-line telephone subscribers as well as decrease in revenues from our mobile services resulting from a reduction in our mobile service charges.

Our operating income for this segment, prior to adjusting for inter-segment transactions, decreased by 35.7%, or407 billion, from1,140 billion in 2011 to733 billion in 2012, as the segment recorded a 1.4% decrease in operating revenues while recording a 1.2% increase in operating expenses, primarily due to the reasons discussed above. Operating margin, which is operating income as a percentage of total operating revenues prior to adjusting for inter-company sales, decreased from 7.1% in 2011 to 4.6% in 2012.

Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 42.1%4.7%, or(Won) 438110 billion, from(Won)1,0402,330 billion in 20092011 to(Won)1,4782,440 billion in 2010,2012, primarily due to an increase in capital expenditures made for structures relating to our LTE network.

Segment Results—Global & Enterprise Group

Our operating revenues for this segment, prior to adjusting for inter-segment transactions, decreased by 7.5%, or236 billion, from3,167 billion in 2011 to2,931 billion in 2012, primarily due to a decrease in revenues from sales of tangible assets (such as real estate and copper from our decommissioned telephone cables that are recognized in this segment) in 2012 compared to 2011, primarily due to adverse real estate and metal market conditions in 2012.

Our operating income for this segment, prior to adjusting for inter-segment transactions, decreased by 37.8%, or199 billion, from526 billion in 2011 to327 billion in 2012, as the 11.5%7.5% decrease in the segment’s operating revenues outpaced a 1.4% decrease in operating expenses, primarily due to the reasons discussed above. Operating margin decreased from 16.6% in 2011 to 11.2% in 2012.

Depreciation and amortization, prior to adjusting for inter-segment transactions, decreased by 4.0%, or20 billion, from505 billion in 2011 to485 billion in 2012, primarily due to the spin-off of our satellite business by establishing KT Sat Co., Ltd. in December 2012, and the resulting reduction in related depreciable assets.

Segment Results—Finance/Rental Business Group

Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 267.7%, or2,706 billion, from1,011 billion in 2011 to3,717 billion in 2012,

primarily due to the consolidation of full year revenues in 2012 from BC Card Co., Ltd. which became our consolidated subsidiary starting in October 2011 and revenues from KT Rental Co., Ltd. which became our consolidated subsidiary starting in July 2012, as described above.

Our operating income for this segment, prior to adjusting for inter-segment transactions, increased by 400.0%, or148 billion, from37 billion in 2011 to185 billion in 2012, as the 267.7% increase in the segment’s operating revenues outpaced a 7.7%the 262.6% increase in operating expenses, primarily due to the reasons discussed above. Operating margin, which is operating income as a percentage of total operating revenues prior to adjusting for inter-company sales, increased from 11.2%3.7% in 20092011 to 14.2%5.0% in 2010.2012.

Depreciation and amortization, prior to adjusting for inter-segment transactions, decreasedincreased by 8.4%970.6%, or(Won)85165 billion, from(Won)1,01417 billion in 20092011 to(Won)929182 billion in 2010. Property and equipment and intangible assets, prior to adjusting for inter-segment transactions, decreased by 1.2%, or(Won)56 billion, from(Won)4,757 billion in 2009 to(Won)4,701 billion in 2010.

Segment Results—Home Customer Group and Enterprise Customer Group

Our operating revenues for this segment, prior to adjusting for inter-segment transactions, decreased by 2.6%, or(Won)263 billion, from(Won)10,109 billion in 2009 to(Won)9,846 billion in 2010, primarily due to a decrease in fixed-line telephone service revenues, the impact of which was partially offset by an increase in revenues from Internet-related services.

We recorded operating loss, prior to adjusting for inter-segment transactions, of(Won)44 billion in 2009 compared to operating income of(Won)575 billion in 2010, as the 8.7% decrease in the segment’s operating expenses outpaced a 2.6% decrease in operating revenues,2012, primarily due to the reasons discussedeffect of consolidation of KT Rental Co., Ltd. and the related assets starting in July 2012 as described above. Operating margins were (0.4)% in 2009 and 5.8% in 2010.

Depreciation and amortization, prior to adjusting for inter-segment transactions, decreased by 3.4%, or(Won)69 billion, from(Won)2,055 billion in 2009 to(Won)1,986 billion in 2010. Property and equipment and intangible assets, prior to adjusting for inter-segment transactions, decreased by 2.5%, or(Won)268 billion, from(Won)10,653 billion in 2009 to(Won)10,385 billion in 2010.

Segment Results—Others

Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 38.1%5.3%, or(Won)922213 billion, from(Won)2,4244,039 billion in 20092011 to(Won)3,3464,252 billion in 2010,2012, primarily due to an increaseincreases in sales of our real estate properties.revenues from H&C Network Co., Ltd. and KT Skylife Co., Ltd. as discussed above.

We recordedOur operating loss,income for this segment, prior to adjusting for inter-segment transactions, ofdecreased by 21.0%, or(Won)522 billion, from105 billion in 2009 compared2011 to operating income of(Won)14983 billion in 2010,2012, as the 38.1% increase in the segment’s operating revenues outpaced a 31.6%5.3% increase in operating expenses.revenues was outpaced by a 6.0% increase in operating expenses, primarily due to the reasons discussed above. Operating margins were (0.2)%margin decreased from 2.6% in 2009 and 4.5%2011 to 2.0% in 2010.2012.

Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 28.4%20.5%, or(Won)5725 billion, from(Won)200122 billion in 20092011 to(Won)257147 billion in 2010. Property and equipment and intangible assets, prior to adjusting for inter-segment transactions, increased by 113.8%, or(Won)705 billion, from(Won)619 billion in 2009 to(Won)1,324 billion in 2010.

Operating Results—2008 Compared to 2009

The following table presents selected income statement data and changes therein for 2008 and 2009.

   For the Year Ended
December 31,
  Changes 
    2008 vs. 2009 
   2008  2009  Amount  % 
   (In billions of Won) 

Operating revenues

  (Won)19,587   (Won)19,644   (Won)57    0.3

Operating expenses

   18,144    18,673    529    2.9  
              

Operating income

   1,443    971    (472  (32.7

Net non-operating income (expense)

   (733  (251  482    (65.8
              

Income from continuing operations before income tax expense

   710    719    9    1.3  

Income tax expense on continuing operations

   168    108    (60  (35.7

Income (loss) from discontinued operations

   (29  (2  27    93.1  
              

Net income

  (Won)513   (Won)610   (Won)97    18.9
              

Operating Revenues

The following table presents a breakdown of our operating revenues and changes therein for 2008 and 2009.

   For the Year Ended
December 31,
   Changes 
     2008 vs. 2009 
   2008   2009   Amount  % 
   (In billions of Won) 

Mobile services

  (Won)6,424    (Won)6,646    (Won)222    3.5

Fixed-line telephone services:

       

Local service revenues

   2,752     2,674     (78  (2.8

Non-refundable service installation fee

   28     17     (11  (39.3

Domestic long-distance revenues

   587     475     (112  (19.1

International long-distance revenues

   442     384     (58  (13.1

Land-to-mobile interconnection revenues

   1,391     1,147     (244  (17.5
                

Sub-total

   5,200     4,697     (503  (9.7

Internet services:

       

Broadband internet access service

   2,041     1,942     (99  (4.9

Other Internet-related services

   440     507     67    15.2  
                

Sub-total

   2,481     2,449     (32  (1.3

Goods sold

   3,066     3,397     331    10.8  

Data communication services

   1,336     1,314     (22  (1.6

Other

   1,080     1,141     61    5.6  
                

Total operating revenues

  (Won)19,587    (Won)19,644    (Won)57    0.3
                

Total operating revenues increased by 0.3%, or(Won)57 billion, from(Won)19,587 billion in 2008 to(Won)19,644 billion in 2009 primarily due to increases in our mobile handset sales, mobile service revenues and other operating revenues, the impact of which was partially offset by decreases in our fixed-line telephone service revenues, Internet service revenues and data communication service revenues.

Mobile Services

Mobile service revenues increased by 3.5%, or(Won)222 billion, from(Won)6,424 billion in 2008 to(Won)6,646 billion in 2009 primarily due to a 4.5% increase in the number of mobile subscribers from 14.4 million as of December 31, 2008 to 15.0 million as of December 31, 2009.

Fixed-line Telephone Services

Our fixed-line telephone service revenues decreased by 9.7%, or(Won)503 billion, from(Won)5,200 billion in 2008 to(Won)4,697 billion in 2009 primarily due to decreases in land-to-mobile interconnection revenues, domestic long-distance revenues and local service revenues.Specifically:

Land-to-mobile interconnection revenues decreased by 17.5%, or(Won)244 billion, from(Won)1,391 billion in 2008 to(Won)1,147 billion in 20092012, primarily due to an increase in the volume2012 of calls between mobile subscribers, which in turn reduced the volumedepreciable assets owned by KT Skylife such as home satellite equipment, as a result of calls between landline users to mobile subscribers.

Domestic long-distance revenues decreased by 19.1%, or(Won)112 billion, from(Won)587 billion in 2008 to(Won)475 billion in 2009 primarily due to a decrease in the number of domestic long-distance call minutes in 2009 compared to 2008 primarily due to the substitution effect from increase in usage of mobile telephone services and Internet phone services. The effect of such decreases was partially offset by participation by some of our subscribers in optional flat rate plans.

Local service revenues decreased by 2.8%, or(Won)78 billion, from(Won)2,752 billion in 2008 to(Won)2,674 billion in 2009. The number of local call pulses in 2009 compared to 2008 decreased by 32.5% primarily due to the substitution effect from increase in usage of mobile telephone services and the Internet phone services. However, the effect of such decreases was substantially offset by participation by some of our subscribers in optional flat rate plans, as well as an increase in revenues from value-added services.

Internet Services

Our Internet service revenues decreased by 1.3%, or(Won)32 billion, from(Won)2,481 billion in 2008 to(Won)2,449 billion in 2009 primarily due to a decrease in broadband Internet access service revenues, the impact of which was partially offset by an increase in other Internet-related service revenues. Specifically:

Broadband Internet access service revenues decreased by 4.9%, or(Won)99 billion, from(Won)2,041 billion in 2008 to(Won)1,942 billion in 2009, primarily due to discounts offered to long-term subscribers and bundled products in 2009. The effect of such decreases was offset in part by an increase in the number of fixed-line olleh Internet subscribers from 6.7 million subscribers as of December 31, 2008 to 7.0 million subscribers as of December 31, 2009.

Other Internet-related service revenues increased by 15.2%, or(Won)67 billion, from(Won)440 billion in 2008 to(Won)507 billion in 2009 primarily due to increases in revenues from our IP-TV services.

Goods Sold

Revenues from goods sold increased by 10.8%, or(Won)331 billion, from(Won)3,066 billion in 2008 to(Won)3,397 billion in 2009 primarily due to an increase in the number of HSDPA-based IMT-2000 service compatible handsets and smart phones sold, including the Apple iPhone that we launched in November 2009.

Data Communications

Data communications service revenues decreased by 1.6%, or(Won)22 billion, from(Won)1,336 billion in 2008 to(Won)1,314 billion in 2009 primarily due to service fee discounts offered to government agencies and a decrease in revenues related to Kornet broadband Internet connection service to institutional customers resulting from the expiration of certain leased-line contracts.

Others

Other operating revenues increased by 5.6%, or(Won)61 billion, from(Won)1,080 billion in 2008 to(Won)1,141 billion in 2009 primarily due to an increase in revenues from real estate development activities.subscribers.

Operating Expenses

The following table presents a breakdown of our operating expenses and changes therein for 2008 and 2009.

   For the Year Ended
December 31,
   Changes 
     2008 vs. 2009 
   2008   2009   Amount  % 
   (In billions of Won) 

Salaries and wages

  (Won)2,268    (Won)2,193    (Won)(75  (3.3)% 

Severance indemnities

   361     1,128     767    212.5  

Depreciation

   3,214     2,874     (340  (10.6

Commissions

   1,354     1,262     (92  (6.8

Interconnection charges

   1,234     1,227     (7  (0.6

Cost of goods sold

   2,365     3,119     754    31.9  

Promotion expenses

   1,080     1,122     42    3.9  

Sales commissions

   2,130     1,805     (325  (15.3

Others(1)

   4,138     3,943     (195  (4.7
                

Total operating expenses

  (Won)18,144    (Won)18,673    (Won)529    2.9
                

(1)Including transfer to other accounts.

Total operating expenses increased by 2.9%, or(Won)529 billion, from(Won)18,144 billion in 2008 to(Won)18,673 billion in 2009 primarily due to increases in severance indemnities related to special voluntary early retirement programs and cost of goods sold, the impact of which was partially offset by decreases in depreciation, sales commissions and commissions. Specifically:

Our severance indemnities increased significantly by 212.5%, or(Won)767 billion, from(Won)361 billion in 2008 to(Won)1,128 billion in 2009 primarily due to an increase in severance indemnities relating to a special voluntary early retirement program. In December 2009, we held a special voluntary early retirement program where we received applications for voluntary early retirement from employees who had been employed by us for more than 15 years and provided them with additional financial incentives to retire early.

Cost of goods sold increased by 31.9%, or(Won)754 billion, from(Won)2,365 billion in 2008 to(Won)3,119 billion in 2009 primarily due to an increase in the sales of Internet phone handsets as well as an increase in the number of high-end HSDPA-compatible handsets and smart phones sold, including the Apple iPhone that we launched in November 2009.

These factors were partially offset by the following:

Depreciation decreased by 10.6%, or(Won)340 billion, from(Won)3,214 billion in 2008 to(Won)2,874 billion in 2009 reflecting a general decrease in our capital expenditures through 2009.

Sales commissions, which primarily relate to procurement of mobile subscribers and mobile handset sales by our independent dealers, decreased by 15.3%, or(Won)325 billion, from(Won)2,130 billion in 2008 to(Won)1,805 billion in 2009 primarily due to a decrease in the number of new mobile subscribers.

Operating Income

Due to the factors described above, our operating income decreased by 32.7%, or(Won)472 billion, from(Won)1,443 billion in 2008 to(Won)971 billion in 2009. Our operating margin, which is operating income as a percentage of operating revenues, decreased from 7.4% in 2008 to 4.9% in 2009.

Non-Operating Income (Expenses)

The following table presents a breakdown of our non-operating income and expenses on a net basis and changes therein for 2008 and 2009.

      Changes 
   For the Year Ended
December 31,
  2008 vs. 2009 
   2008  2009  Amount  % 
   (In billions of Won) 

Interest income

  (Won)151   (Won)197   (Won)46    30.5

Interest expense

   (480  (505  (25  5.2  

Net foreign currency transaction gain (loss)

   3    (4  (7  N.A.  

Net foreign currency translation gain (loss)

   (762  223    985    N.A.  

Net gain on disposal of equity method investment securities

       62    62    N.M.  

Net loss on disposal of property and equipment

   (90  (119  (29  32.6  

Reversal of impairment loss on property and equipment

   6    103    97    1,616.7  

Net gain on settlement of derivatives

   8    1    (7  (87.5

Net gain (loss) on valuation of derivatives

   640    (174  (814  N.A.  

Net other gains (losses)

   (208  (35  173    (83.2
              

Net non-operating income (expenses)

  (Won)(733 (Won)(251 (Won)482    (65.8)% 
              

N.A.means not applicable.

N.M.means not meaningful.

Our net non-operating expenses decreased by 65.8%, or(Won)482 billion, from(Won)733 billion in 2008 to(Won)251 billion in 2009 primarily due to net foreign currency translation loss in 2008 compared to net foreign currency translation gain in 2009, an increase in reversal of impairment loss on property and equipment and net loss on disposal of equity method investment securities in 2008 compared to net gain on disposal of equity method investment securities in 2009, the impact of which was partially offset by net gain on valuation of derivatives in 2008 compared to net loss on valuation of derivatives in 2009. Specifically:

We recorded net foreign currency translation loss of(Won)762 billion in 2008 compared to net foreign currency translation gain of(Won)223 billion in 2009 as the Market Average Exchange Rate of the Won against the U.S. dollar depreciated from(Won) 938.2 to US$1.00 as of December 31, 2007 to(Won)1,257.5 to US$1.00 as of December 31, 2008 but appreciated to(Won)1,167.6 to US$1.00 as of December 31, 2009. The impact of such foreign currency translation gain/loss was largely offset by loss/gain from valuation of derivatives discussed below.

Our reversal of impairment loss on property and equipment increased sixteen-fold, or(Won)97 billion, from(Won)6 billion in 2008 to(Won)103 billion in 2009 primarily due to an increase in compensation that we received from third parties for relocation of our property and equipment that resulted in impairment loss.

We did not record any net gain on disposal of equity method investment securities in 2008 compared to net gain on disposal of equity method investment securities of(Won)62 billion in

2009. We recorded such gain in 2009 primarily due to the sale of our interest in U-Mobile. We sold all of our interest in U-Mobile with a book value of(Won)65 billion for US$100 million to a third party in September 2009.

These factors were partially offset by the following:

We recorded net gain on valuation of derivatives of(Won)640 billion in 2008 compared to net loss on valuation of derivatives of(Won)174 billion in 2009 primarily due to gains and losses from our combined interest rate currency swap contracts as the exchange rate of the Won against the U.S. dollar fluctuated as discussed above.

Income Taxes Expense on Continuing Operations

Our income tax expense on continuing operations decreased by 35.7%, or(Won)60 billion, from(Won)168 billion in 2008 to(Won)108 billion in 2009 primarily due to decreases from changes in deferred income tax assets unrecognized related to equity method investment securities as well as tax rate changes, the impact of which was partially offset by a decrease in tax credits. See Note 26 to the Consolidated Financial Statements. Our effective tax rate decreased from 23.7% in 2008 to 15.1% in 2009, primarily due to higher tax credit carryforwards in 2009 compared to 2008. We had net deferred income tax assets of(Won)551 billion as of December 31, 2009.

Net Income

Due to the factors described above, our net income increased by 18.9%, or(Won)97 billion, from(Won)513 billion in 2008 to(Won)610 billion in 2009. Our net income margin, which is net income as a percentage of operating revenues, increased from 2.6% in 2008 to 3.1% in 2009.

Segment Results—Personal Customer Group

Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 11.6%, or(Won)968 billion, from(Won)8,346 billion in 2008 to(Won)9,314 billion in 2009, primarily due to an increase in the number of mobile subscribers as well as an increase in HSDPA-compatible handsets and smart phones sold.

Our operating income, prior to adjusting for inter-segment transactions, increased by 129.1%, or(Won)586 billion, from(Won)454 billion in 2008 to(Won)1,040 billion in 2009, as the 11.6% increase in the segment’s operating revenues outpaced a 4.8% increase in operating expenses, primarily due to the reasons discussed above. Operating margin increased from 5.4% in 2008 to 11.2% in 2009.

Depreciation and amortization, prior to adjusting for inter-segment transactions, decreased by 9.3%, or(Won)104 billion, from(Won)1,118 billion in 2008 to(Won)1,014 billion in 2009. Property and equipment and intangible assets, prior to adjusting for inter-segment transactions, decreased by 3.7%, or(Won)181 billion, from(Won)4,938 billion in 2008 to(Won)4,757 billion in 2009.

Segment Results—Home Customer Group and Enterprise Customer Group

Our operating revenues for this segment, prior to adjusting for inter-segment transactions, decreased by 14.2%, or(Won)1,676 billion, from(Won)11,785 billion in 2008 to(Won)10,109 billion in 2009, primarily due to a decrease in fixed-line telephone service revenues, the impact of which was partially offset by an increase in revenues from Internet-related services.

We recorded operating income, prior to adjusting for inter-segment transactions, of(Won)1,113 billion in 2008 compared to operating loss of(Won)44 billion in 2009, as the 14.2% decrease in the segment’s operating revenues outpaced a 4.9% decrease in operating expenses, primarily due to the reasons discussed above. Operating margins were 9.4% in 2008 and (0.4)% in 2009.

Depreciation and amortization, prior to adjusting for inter-segment transactions, decreased by 6.8%, or(Won)150 billion, from(Won)2,205 billion in 2008 to(Won)2,055 billion in 2009. Property and equipment and intangible assets, prior to adjusting for inter-segment transactions, decreased by 1.6%, or(Won)173 billion, from(Won)10,826 billion in 2008 to(Won)10,653 billion in 2009.

Segment Results—Others

Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 3.0%, or(Won)70 billion, from(Won)2,354 billion in 2008 to(Won)2,424 billion in 2009, primarily due to an increase in revenues from our media intellectual property rights.

We recorded operating income, prior to adjusting for inter-segment transactions, of(Won)29 billion in 2008 compared to operating loss of(Won)5 billion in 2009, as the 4.4% increase in the segment’s operating expenses outpaced a 3.0% increase in operating revenues, primarily due to the reasons discussed above. Operating margins were 1.2% in 2008 and (0.2)% in 2009.

Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 26.6%, or(Won)42 billion, from(Won)158 billion in 2008 to(Won)200 billion in 2009. Property and equipment and intangible assets, prior to adjusting for inter-segment transactions, decreased by 6.2%, or(Won)41 billion, from(Won)660 billion in 2008 to(Won)619 billion in 2009.

Item 5.B.Liquidity and Capital Resources

The following table sets forth the summary of our cash flows determined in accordance with Korean GAAP for the periods indicated.indicated:

 

  For the Years Ended December 31,   For the Years Ended December 31, 
        2008             2009             2010         2011 2012 2013 
  (In billions of Won)   (In billions of Won) 

Net cash provided by operating activities

  (Won)2,920   (Won)3,399   (Won)3,245    2,164   5,725   4,111  

Net cash used in investing activities

   (3,532  (2,872  (3,436   (2,666  (3,851  (3,783

Net cash provided by (used in) financing activities

   1,051    (930  (129   772    (1,278  (312

Cash and cash equivalents at beginning of period

   1,385    1,891    1,538     1,179    1,462    2,058  

Cash and cash equivalents at end of period

   1,891    1,538    1,193     1,462    2,058    2,071  

Net increase (decrease) in cash and cash equivalents

   506    (353  (345   284    595    13  

Capital Requirements

Historically, our capital requirements consisted principally of purchases of property and equipment and other assets and repayments of borrowings. In our investing activities, we used cash of(Won)3,3623,236 billion in 2008,2011,(Won)2,7743,760 billion in 20092012 and(Won)3,2393,088 billion in 20102013 for the acquisition of property and equipment and investment property, primarily construction-in-progress. In our financing activities, we used cash of(Won)2,1476,058 billion in 2008,2011,(Won)1,4464,591 billion in 20092012 and(Won)1,8955,956 billion in 20102013 for repayment of current portion of bondsborrowings and long-term borrowings.bonds.

In recent years, we have also required capital for acquisitions of treasury shares for retirement and payments of retirement and severance benefits related to our early retirement programs. For the acquisition of treasury shares for retirement, we spent(Won)74 billion in 2008,(Won)528 billion in 2009 and(Won)0.3 billion in 2010. Subsequent to such repurchases, we retired most of the treasury shares that we repurchased. We also recorded payments of severance benefits of(Won)221235 billion in 2008,2011,(Won)1,345111 billion in 20092012 and(Won)1,249371 billion in 2010. In 2009 and 2010, our payments were particularly high due to a special voluntary early retirement program held in December 2009 in which we received applications for voluntary early retirement from employees who had been employed by us for more2013.

than 15 years and provided them with additional financial incentives to retire early. The special voluntary early retirement program resulted in the early retirement of 5,992 employees out of 25,340 eligible employees.

From time to time, we may also require capital for investments involving acquisitions, including shares of our affiliates, and strategic relationships. On June 1, 2009, KTF merged into KT Corporation pursuant to a “comprehensiveFor example, we acquired redeemable convertible preferred stock transfer” under Article 360-15 of the Korean Commercial Code, whereby KTF common stockholders received 0.7192335 sharewith voting rights and convertible bonds of KT CorporationSkylife for246 billion in January 2011, which increased our interest in the company from 32.1% to 53.1% subsequent to exercise of conversion rights. In October 2011, we, through our subsidiary KT Capital Co., Ltd., acquired an additional 1,622,520 common stock for every one share of KTF common stock they owned. We delivered 45,629,480 treasury shares and 700,108 shares of our newly issuedBC Card Co., Ltd. from Woori Bank for approximately252 billion. We acquired an additional 1,349,920 common shares to KTF shareholdersof BC Card Co., Ltd. in connection with the merger.January 2012 for approximately287 billion, and owned a 69.54% interest in BC Card Co., Ltd. as of December 31, 2013. Any such additional investments or acquisitions may require significant capital.

Our cash dividends paid to shareholders and non-controlling interests amounted to(Won)409595 billion in 2008,2011,(Won)229498 billion in 20092012 and(Won)494511 billion in 2010.2013.

We anticipate that capital expenditures, and, to a lesser extent, repayment of outstanding contractual obligations and commitments will represent the most significant use of funds for the next several years. We may also require capital for purchase of additional treasury shares and shares of our affiliates as well as investments involving acquisitions and strategic relationships. We compete in the telecommunications sector in Korea, which is rapidly evolving. In recent years, business combinations in the telecommunications industry have significantly changed the competitive landscape of the Korean telecommunications industry. We may need to incur additional capital expenditures to keep up with unexpected developments in rapidly evolving telecommunications technology. There can be no assurance that we will be able to secure funds on satisfactory terms from financial institutions or other sources that are sufficient for our unanticipated needs.

Payments of contractual obligations and commitments will also require considerable resources. In our ordinary course of business, we routinely enter into commercial commitments for various aspects of our operations, including repair and maintenance. We have also provided guarantees to our affiliates. See 18Note 20 to the Consolidated Financial Statements for a disclosure of the guarantees provided.

The following table sets forth selected information regarding our contractual obligations to make future payments as of December 31, 2010:2013:

 

  Payments Due by Period   Payments Due by Period 

Contractual Obligations(1)

  Total   Less than
1 Year
   1-3
Years
   4-5
Years
   After 5
Years
   Total   Less than
1 Year
   1-3
Years
   4-5
Years
   After 5
Years
 
  (In billions of Won)   (In billions of Won) 

Long-term debt obligations (including current portion of long-term debt)

  (Won)9,686    (Won)2,437    (Won)3,825    (Won)2,432    (Won)1,082    10,873    2,382    4,097    2,673    1,721  

Capital lease obligations

   22     6     16            

Capital lease obligations (including any interests)

   75     22     53            

Operating lease obligations

   8     5     3               633     78     152     156     247  

Severance payment obligations(2)

   469     3     9     62     395     4,655     112     298     398     3,847  

Long-term accounts payable—others

   170     170                    1,177     276     372     204     325  
                      

 

   

 

   

 

   

 

   

 

 

Total

  (Won)10,355    (Won)2,621    (Won)3,853    (Won)2,494    (Won)1,477    17,413    2,870    4,972    3,431    6,140  
                      

 

   

 

   

 

   

 

   

 

 

Estimate of interest payment based on contractual interest rates effective as of December 31, 2010

  (Won)1,406    (Won)449    (Won)573    (Won)206    (Won)179  

Estimate of interest payment based on contractual interest rates effective as of December 31, 2013

  1,624    401    538    261    424  
                      

 

   

 

   

 

   

 

   

 

 

 

 

(1)Contractual obligations represent contractual liabilities as of the consolidated balance sheet date excluding refundable deposits for telephone installation and accruals for customer call bonus points, which do not have definitive payment schedules.

(2)Does not include any severance payments due beyond 10 years, due to the uncertainties involved in the calculation of such payments.

Capital Resources

We have traditionally met our working capital and other capital requirements principally from cash provided by operations, while raising the remainder of our requirements primarily through debt financing. From time to time, we have also disposed of our treasury shares to meet our capital requirements.

Our major sources of cash have been net cash provided by operating activities, including net income,profits for the period, expenses not involving cash payments such as depreciation and amortization, and proceeds from issuance of bonds and long-term borrowings. We expect that these sources will continue to be our principal sources of cash in the future. Net incomeProfit for the period was(Won)5131,455 billion in 2008,2011 and(Won)6101,105 billion in 20092012, and we recorded a loss for the period of(Won)1,19388 billion in 20102013 due to the reasons discussed in Item 5.A. Operating Results. Depreciation and amortization of intangible assets was(Won)3,7032,996 billion in 2008,2011,(Won)3,3613,314 billion in 20092012 and(Won)3,2853,621 billion in 20102013 primarily reflecting our capital investment activities during the recent years. Aggregate cashyears, including our purchase of bandwidths for our operations, investments in LTE-related structures and acquisition of real estate. Cash proceeds from issuance of bonds and long-term borrowings were(Won)3,7807,262 billion in 2008,2011,(Won)1,4994,259 billion in 20092012 and(Won)2,0356,200 billion in 2010. We also met the capital required for the June 2009 merger with KTF through delivery of 45,629,480 treasury shares and 700,108 shares of our newly issued common shares to KTF shareholders in consideration of the merger.2013. As of December 31, 2010,2013, we held 17,895,96417,308,160 treasury shares.

In 2013, we spun off a portion of our trade receivables relating to handset sales to several special purpose companies, as part of our efforts to improve our cash and asset management. We also entered into asset management agreements with each of these special purpose companies, and will be receiving management fees from such companies. See Note 20 to the Consolidated Financial Statements.

We believe that we have sufficient working capital available to us for our current requirements and that we have a variety of alternatives available to us to satisfy our financial requirements to the extent that they are not met by funds generated by operations, including the issuance of debt securities and bank borrowings denominated in Won and various foreign currencies. For example, we updated our Medium Term Note programsuccessfully issued US$350 million of 3.875% notes due 2017 in June 2005 fromJanuary 2012, three series of notes for an aggregate amount of Japanese Yen 30 billion in January 2013, three series of notes for an aggregate amount of410 billion in April 2013, US$1 billion to US$2300 million floating rate notes due 2018 in August 2013 and300 billion of which US$700 million remained unused as of December 31, 2010.commercial paper due 2019 in February 2014. See Note 41 to the Consolidated Financial Statements. However, our ability to rely on some of these alternatives could be affected by factors such as the liquidity of the Korean and the global financial markets, prevailing interest rates, our credit rating and the Government’s policies regarding Won currency and foreign currency borrowings. Other factors which could materially affect our liquidity in the future include unanticipated increase in capital expenditures and decrease in cash provided by operations resulting from a significant decrease in demand for our services. We may also need to raise additional capital sooner than we expect in order to fund unanticipated investments and acquisitions.

Our total shareholders’ equity was(Won)11,08812,588 billion as of December 31, 2008,2011,(Won)10,66713,218 billion as of December 31, 20092012 and(Won)11,49612,837 billion as of December 31, 2010.2013.

Liquidity

We had a working capital (current assets minus current liabilities) surplus of(Won)1,8331,067 billion as of December 31, 2008,2011, deficit of(Won)1,031750 billion as of December 31, 20092012 and deficit of(Won)6431,252 billion as of December 31, 2010.The2013. The following table sets forth the summary of our significant current assets for the periods indicated.indicated:

 

   As of December 31, 
   2008   2009   2010 
   (In billions of Won) 

Cash and cash equivalents, net

  (Won)1,891    (Won)1,538    (Won)1,193  

Short-term investment assets

   417     444     166  

Trade accounts receivable, net

   3,015     3,622     3,843  

Inventories, net

   425     699     656  
   As of December 31, 
   2011   2012   2013 
   (In billions of Won) 

Cash and cash equivalents

  1,462    2,058    2,071  

Short-term loans receivables, net

   698     668     839  

Trade and other receivables, net

   6,191     5,908     5,240  

Inventories, net

   676     935     674  

Our cash, cash equivalents and net short-term investment assetsloans receivable maturing within one year totaled(Won)2,3082,160 billion as of December 31, 2008,2011,(Won)1,9822,726 billion as of December 31, 20092012 and(Won)1,3592,910 billion

as of December 31, 2010.2013. Under Korean GAAP,IFRS as issued by IASB, bank deposits held at call and all other highly liquid temporary cash instruments within maturities of three months are considered as cash equivalents. Short-term investment assetsloans receivables primarily consist of timeloans and trust depositsother non-derivative financial assets with fixed or determinable payments that are not quoted in an active market with maturities between four toof twelve months and short-term loans and current portion of securities such as beneficiary certificates and available-for-sale securities.or less.

The following table sets forth the summary of our significant current liabilities for the periods indicated:

 

   As of December 31, 
   2008   2009   2010 
   (In billions of Won) 

Trade accounts payable

  (Won)834    (Won)1,485    (Won)1,531  

Short-term borrowings

   274     368     469  

Current portion of bonds and long-term borrowings, net

   1,440     1,690     2,435  

Other accounts payable

   1,476     2,439     1,620  

Accrued expenses

   528     483     554  
   As of December 31, 
   2011   2012   2013 
   (In billions of Won) 

Trade and other payables

  5,902    7,221    7,414  

Borrowings

   2,125     3,197     3,021  

As of December 31, 2010,2013, we entered into various commitments with financial institutions totaling(Won)2,7222,892 billion and US$10181 million. See Note 1820 to the Consolidated Financial Statements. As of December 31, 2010,2013,(Won)563155 billion and US$19 million were outstandingwas used under these facilities. We have not had, and do not believe that we will have, difficulty gaining access to short-term financing sufficient to meet our current requirements.

Capital Expenditures

We used cash of(Won)3,3623,236 billion in 2008,2011,(Won)2,7743,760 billion in 20092012 and(Won)3,2393,088 billion in 20102013 for the acquisition of property and equipment and investment property, primarily construction-in-progress.

Our current capital expenditure plan, on a non-consolidated basis, calls for the expenditure of approximately(Won)3,2002,700 billion in 2011,2014, which may be adjusted depending on market conditions and our results of operations. The principal components of our capital investment plans are:

 

approximately(Won)4761,014 billion in general expansion and modernization of our wireless network infrastructure;infrastructure (including approximately978 billion in capital investments for LTE service);

 

approximately(Won)1,0261,209 billion in capital investments for IMT-2000 (W-CDMA) service;

approximately(Won)100 billion in capital investments for WiBro service;

approximately(Won)186 billion in capital investments for IP-TV service;general expansion and modernization of our fixed-line network infrastructure; and

 

approximately(Won)127477 billion in capital investments for development ofour other services, over Internet protocol.including overhead costs.

Inflation

We do not consider that inflation in Korea has had a material impact on our results of operations in recent years. Inflation in Korea was 4.7%4.0% in 2008, 2.8%2011, 2.2% in 20092012 and 2.9%1.3% in 2010.2013. See “Item 3. Key Information—Item 3.D. Risk Factors—Korea is our most important market, and our current business and future growth could be materially and adversely affected if economic conditions in Korea deteriorate.”

Recent Accounting Pronouncements in Korean GAAP

We did not adopt any significant Korean accounting standards issued or revised in 2010.

U.S. GAAP Reconciliation

In 2008, we recorded net income of(Won)573 billion under U.S. GAAP compared to net income of(Won)513 billion under Korean GAAP, primarily because of difference in the treatment of reversal of goodwill amortization and depreciation. In 2009, we recorded net income of(Won)840 billion under U.S. GAAP compared to net income of(Won)610 billion under Korean GAAP, primarily because of difference in the treatment of service installation fees, reversal of goodwill amortization and depreciation. In 2010, we recorded net income of(Won)1,196 billion under U.S. GAAP compared to net income of(Won)1,193 billion under Korean GAAP. Total equity under U.S. GAAP is lower than under Korean GAAP by(Won)478 billion as of December 31, 2008,(Won)211 billion as of December 31, 2009 and(Won)396 billion as of December 31, 2010.

For further discussion of the principal differences between Korean GAAP and U.S. GAAP as they relate to us, see Note 38 to the Consolidated Financial Statements.

Recent Accounting Pronouncements in U.S. GAAP

In September 2006, the Financial Accounting Standards Board (“FASB”) issued enhanced guidance for using fair value to measure assets and liabilities by establishing a common definition of fair value, providing a framework for measuring fair value under GAAP, and expanding the disclosure requirements about fair value measurements. In February 2008, the FASB deferred the adoption of such guidance for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis. We adopted the fair value guidance for nonfinancial assets and nonfinancial liabilities on January 1, 2009 with no material impact to our consolidated financial statements. In April 2009, the FASB issued additional guidance on fair value, which provided: (a) additional application guidance for estimating fair value when the volume and activity for the asset or liability have greatly decreased and (b) indicators for identifying transactions that are not considered orderly. The additional guidance was effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted the provisions in 2009 with no material impact to our consolidated financial statements.

In December 2007, the FASB issued an amended accounting guidance on business combinations. The guidance revises the method of accounting for a number of aspects of business combinations including acquisition costs, contingencies (including contingent assets, contingent liabilities and contingent purchase price) and post-acquisition exit activities of acquired businesses. We adopted the guidance in 2009 with no material impact to our consolidated financial statements.

In December 2007, the FASB issued new accounting guidance on noncontrolling interests in consolidated financial statements. The new accounting guidance requires that a noncontrolling interest in the equity of a subsidiary be accounted for and reported as equity, provides revised guidance on the treatment of net income and losses attributable to the noncontrolling interest and changes in ownership interests in a subsidiary and requires additional disclosures that identify and distinguish between the interests of the controlling and noncontrolling owners. We retrospectively adopted the presentation and disclosure requirements of the new guidance. The adoption of the new guidance did not have a material effect on our consolidated financial statements.

In March 2008, the FASB issued enhanced guidance for disclosures about derivative instruments and hedging activities by expanding the disclosure requirements regarding: (1) how and

why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. In addition, this guidance requires qualitative disclosures about objectives and strategies for using derivatives described in the context of an entity’s risk exposures, quantitative disclosures about the location and fair value of derivative instruments and associated gains and losses, and disclosures about credit-risk-related contingent features in derivative instruments. We adopted the new guidance in 2009 with no material impact to our consolidated financial statements.

In April 2008, the FASB amended the factors that we should consider when developing renewal or extension assumptions used in the determination of useful lives of intangible assets. These assumptions should be consistent with the expected cash flow method used to measure the fair value of intangible assets. The amended guidance was applicable prospectively to intangible assets acquired after January 1, 2009 with no material impact to our consolidated financial statements.

In November 2008, the FASB ratified guidance approved by the Emerging Issues Task Force addressing how the business combination and noncontrolling interest guidance issued by the FASB might impact the accounting for equity method investments. The guidance was effective prospectively for new investments acquired in fiscal years beginning on or after December 15, 2008. We adopted the guidance in 2009 with no material impact on our consolidated financial statements.

In July 2009, the FASB issued the FASB Accounting Standard Codification (“Codification” or “ASC”), which became the single source of authoritative U.S. GAAP. Following the Codification, the FASB will not issue any new standard in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASU”), which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification. We adopted the Codification, as required, for annual periods ending after September 15, 2009. As a result, references to accounting literature contained in our financial disclosures have been updated to reflect the new ASC structure.

In June 2009, the FASB amended the consolidation rules related to Variable Interest Entities (“VIEs”). The new rules expand the primary beneficiary analysis to incorporate a qualitative review of which entity controls and directs the activities of the VIE. The amendments also modify the rules regarding the frequency of ongoing reassessments of whether a company is the primary beneficiary. Under the revised guidance, we are required to perform ongoing reassessments as opposed to only when certain triggering events occur, as was previously required. We adopted the new guidance in 2010 with no material impact on our consolidated financial statements.

In October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU No. 2009-13”). The update addresses how revenues should be allocated among all products and services included in sales arrangements. It establishes a selling price hierarchy for determining the selling price of each product or service, with vendor-specific objective evidence at the highest level, third-party evidence of selling price at the intermediate level, and the best estimate of the selling price at the lowest level. It replaces “fair value” with “selling price” in revenue allocation guidance, eliminates the residual method as an acceptable allocation method and requires the use of the relative selling price method as the basis for allocation. It also significantly expands the disclosure requirements for such arrangements, including, potentially, certain qualitative disclosures. ASU No. 2009-13 will be effective prospectively for sales entered into or materially modified in fiscal years beginning on or after June 15, 2010. The FASB permits early adoption of ASU No. 2009-13, applied retrospectively, to the beginning of the year of adoption. We adopted ASU No. 2009-13 in 2010 with no material impact on our consolidated financial statements.

In October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements That Include Software Elements” (“ASU No. 2009-14”). The update clarifies the guidance for allocating and measuring revenue, including how to identify software that is out of the scope. The update also amends accounting and reporting guidance for revenue arrangements involving both tangible products and software that is “more than incidental to the tangible product as a whole.” Such types of software and hardware will be outside of the scope of software revenue guidance, and the hardware components will also be outside of the scope of software revenue guidance and may result in more revenue recognized at the time of the hardware sale. Additional disclosures will discuss allocation of revenue to products and services in sales arrangements and the significant judgments applied in the revenue allocation method, including impacts on the timing and amount of revenue recognition. ASU 2009-14 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. ASU No. 2009-14 has the same effective date, including early adoption provisions, as ASU No. 2009-13. We must adopt ASU No. 2009-14 and ASU No. 2009-13 at the same time. We adopted ASU No. 2009-14 in 2010 with no material impact on our consolidated financial statements.

In December 2009, the FASB issued ASU No. 2009-16, “Transfers and Servicing” (“ASU No. 2009-16”). This update removes the concept of a qualifying special-purpose entity (“QSPE”) and creates more stringent conditions for reporting a transfer of a portion of financial asset as sale. To determine if a transfer is to be accounted for as sale, the transferor must assess whether it and all of the entities included in its consolidated financial statements have surrendered control of the assets. This update became effective on January 1, 2010, with adoption applied prospectively for transfers that occur on and after the effective date. The elimination of the QSPE concept required an entity to retrospectively assess all current off-balance sheet QSPE structures for consolidation under ASC Topic 810, “Consolidation,” and record a cumulative-effect adjustment to retained earnings for any consolidation change. Retrospective application of ASU No. 2009-16, particularly the QSPE removal, was assessed as part of the analysis required from ASU No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.”

In December 2009, the FASB issued ASU No. 2009-17. This update addressed the primary beneficiary assessment criteria for determining whether an entity is required to consolidate a VIE. This update requires an entity to determine whether it is the primary beneficiary by performing a qualitative assessment, rather than using the quantitative-based model required under the previous accounting guidance. The qualitative assessment consists of determining whether the entity has both the power to direct the activities that most significantly impact the VIE’s economic performance and has the right to receive benefits or obligation to absorb losses that could potentially be significant to the VIE. This update became effective on January 1, 2010. We adopted ASU No. 2009-16 and No. 2009-17 in 2010 with no material impact on our consolidated financial statements.

In January 2010, the FASB amended the disclosure guidance related to fair value measurements. The amended disclosure guidance requires new fair value measurement disclosures and clarifies existing fair value measurement disclosure requirements. The amended disclosure guidance related to disclosures about purchases, sales, issuances and settlements of Level 3 instruments became effective for fiscal years beginning after December 15, 2010. The remaining amended disclosure guidance will be effective for annual reporting periods beginning after December 15, 2009. We adopted this guidance in 2010 with no material impact on our financial statements.

In January 2010, the FASB issued authoritative guidance for improving disclosures about fair value measurements, which requires new and amended disclosure requirements for classes of assets and liabilities, inputs and valuation techniques and transfers between levels of fair value measurements and accounting for distributions to shareholders with components of stock and cash,

which clarifies the accounting for distributions to shareholders that offer them the ability to elect to receive their entire distribution in cash or shares of equivalent value. This guidance became effective in January 2010. We adopted this guidance in 2010 with no material impact on our consolidated financial statements.

In February 2010, the FASB issued ASU 2010-09 to amend ASC 855, Subsequent Events to address certain implementation issues. The amendments remove the requirement for an SEC filer to disclose a date in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. Additionally, the FASB has clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The amendment is effective for interim or annual periods ending after June 15, 2010. We adopted this guidance in 2010 with no material impact on our consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20 to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. This amendment is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. We adopted ASU 2010-20 in 2010 and disclosed the additional information related to credit risk in our consolidated financial statements.

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

In order to maintain our leadership in the converging telecommunications business environment and develop additional platforms, services and applications, we operate:

 

a technology strategynew business development and incubation center;

 

a technology development center;

a centralan infrastructure R&D laboratory;

 

a networkservice R&D laboratory; and

 

an economics and management researcha convergence R&D laboratory.

As of December 31, 2010, these research centers employed a total of 512 researchers and employees. As of April 30, 2011, our researchers and employees at our research centers had 82 doctoral degrees and 249 master’s degrees. As of December 31, 2010,2013, KT Corporation had 5,9455,183 registered patents domestically and 456808 registered patents internationally.

UnderThe MSIP has the Information and Communications Industry Promotion Act,authority to recommend to network service providers and specific service providers are obligated to contribute 0.75% and 0.5% of their total annual revenues, respectively, to the Institute of Information Technology Advancement, which uses the fund to promotethat they provide funds for national research and development in information technology. We make contributions as aof telecommunications technology and related projects. The required annual contribution is 0.5% (0.75% for market dominant service providers like us) of revenues attributable to key communications services (excluding revenues from telecommunications service using an allotted frequency if the consideration for such allotted frequency has been paid) from wireless subscribers for the previous year, and is applicable only to those network service providerproviders who have at least30 billion in total sales for the previous year and specific service providerhave recorded no net loss in the current period. Under the policy, the maximum amount of the annual contribution to be made cannot exceed 70.0% of the Korean government (Information and Telecommunication Improvement Fund),net profit for the Korea Electronic Telecommunication Research Institute and other research and development institutes.corresponding period of each company. Including such contributions, total expenditures (which include capitalized expenses) on research and development were(Won)283304 billion in 2008,2011,(Won)263476 billion in 20092012 and(Won)295309 billion in 2010.2013.

In recent years, we have focused our research and development efforts in the following areas:

 

open IP-TV service platform;simplifying complex core networks and reducing costs;

 

smart home solutions;combining in-building management solutions for fixed-line and wireless networks;

 

location-based servicescombining operation management systems for fixed-line and social network services;wireless networks;

 

cloud service platform;finding solutions for ultra-definition television set top box and additional solutions for smart IPTV;

 

aggregating heterogeneous wireless access for double network technologiesthroughput;

a broadband internet solution that is 10 times faster using legacy copper and fiber lines;

a smart-grid platform for backbone and access network;global energy control operation centers from South Korea to Finland;

a telecommunication cloud solution which combines network resource virtualization with cloud computing resource; and

 

future network structurecreating a new convergence business model based on Information Communication Technology (ICT) and solutions.incubating new businesses.

Item 5.D.  Trend Information

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

Item 5.E.Off-balance Sheet Arrangements

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

Item 5.F.Tabular Disclosure of Contractual Obligations

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

Item 5.G.Safe Harbor

See “Item 3. Key Information—Item 3.D. Risk Factors—Forward-looking statements may prove to be inaccurate.”

Item 6.  Directors, Senior Management and Employees

Item 6.A.Directors and Senior Management

Directors

Our board of directors has the ultimate responsibility for the administration of our affairs. Our articles of incorporation provide for a board of directors consisting of:

 

up to three non-independent directors, including the Chief Executive Officer; and

 

up to eight outside directors.

All of our directors are elected at the general shareholders’ meeting. If the total assets of a company listed on the KRX KOSPI Market as of the end of the preceding year exceeds(Won)2,000 billion, which is the case with us, the Commercial Code of Korea requires such company to have more than three outside directors with more than half of its total directors being outside directors. The term of office for all directorsa director is up to three years, but the term is extended to the close of the annual shareholders’ meeting convened with respect to the last full fiscal year of the term.a director’s term of office. If the term of office for thea director is not completed and ends before the close of the annual general meeting of shareholders convened with respect to the last full fiscal year withinof such director’s term of office and a new director is appointed in his or her place, the term of office for such newreplacement director will becoincide with the uncompleted remaining term of office of his or her predecessor.

Under the Commercial Code of Korea, we must establish a committee to nominate candidates for outside directors within the board of directors, and outside directors must make up not lessmore than half of the total members of the outside director candidate nominating committee. According to our articles of incorporation, such committee must consist of one non-independent director and all of our outside directors.directors, other than for election of an outside director resulting from the expiration of the term of the office, in which case such outside director whose term is expiring may not be a member of the committee. Our Outside Director Candidate Nominating Committee nominates outside director candidates for appointment at the general shareholders’ meeting.

Upon the request of any director (to the extent that the board of directors does not separately authorize only a particular director to make such request), a meeting of the board of directors will be

assembled. The chairperson of the board of directors is elected from among the outside directors by a resolution of the board of directors. The term of office of the chairperson is for one year.

Our current directors are as follows:

 

Name

  

Position

 Director
Since
 Date of Birth  Expiration
of

Term of
Office
 

Non-Independent Directors(1)

     

Suk-Chae LeeChang-Gyu Hwang

  

Chief Executive Officer

January 2014 (2)January 23, 1953   January 2009September 11, 194520122017  

Sang-Hoon LeeHoon Han

  

Senior Executive Vice President

 March 2009January 24, 19552012

Hyun-Myung Pyo

President2014 March 2009October 21,23, 1958   20152012

Heon Moon Lim

Senior Executive Vice President

March 2014November 15, 19602015  

Outside Directors(1)

     

E. Han KimDo Kyun Song

  

Chairperson of the Board of Directors, Chair Professor, University of MichiganAdvisor, Bae, Kim & Lee LLC

March 2013September 20, 1943   March 2009May 27, 194620122016  

Choon-Ho Lee

Chairperson of the Board of Directors of Korea Educational Broadcasting System

March 2009July 22, 19452012

Jeung-Soo HuhKeuk Je Sung

  

Professor, Kyungpook NationalGraduate School of Pan Pacific International Studies, Kyunghee University

 March 2012March 2009June 4, 1943   June 10, 196020122015  

Jong-Hwan SongSang Kyun Cha

  

Professor, Myongji University

March 2010September 5, 19442013

Hae-Bang Chung

Professor, SchoolDepartment of Law, Konkuk University

March 2010September 1, 19502013

Chan-Jin Lee

Chief Executive Officer, DreamWiz Inc.

March 2010October 25, 19652013

Hyun Nak Lee

Consultant, Kyonggi Ilbo

March 2011November 4, 19412014

Byong Won Bahk

Visiting Professor, School of Business,Electrical and Computer Engineering, Seoul National University

 March 2012March 2011February 19, 1958   2016September 24, 1952

Jong-Goo Kim

Of Counsel, New Dimension Law Group

March 2014July 7, 1941   2017

Chu-Hwan Yim

Honorary President, Korean Institute of Communications and Information Sciences

March 2014February 9, 19492016

Pil Hwa Yoo

Professor, Graduate School of Business, Sungkyunkwan University

March 2014January 13, 19542015

Suk-Gwon Chang

Professor, Department of Business Administration, Hanyang University

March 2014February 21, 19562015

Dae-Keun Park

Professor, Department of Economics and Finance, Hanyang University

March 2014March 15 19582017  

 

 

(1)All of our standingnon-independent and outside directors beneficially own less than one percent of the issued shares of KT Corporation in the aggregate.

(2)On November 12, 2013, Mr. Suk-Chae Lee resigned from his position as the President and Chief Executive Officer of KT Corporation. Mr. Chang-Gyu Hwang’s appointment as the new Chief Executive Officer was approved at an extraordinary general meeting of shareholders held on January 27, 2014.

Chang-Gyu Hwang is a non-independent director and has served as our chief executive officer since January 2009.2014. Prior to joining us, he served as a Distinguished Chair Professor at Sungkyunkwan University, president and National Chief Technology Officer of the Office of Strategic Research and Development Planning at the former Ministry of Knowledge and Economy, president and chief technology officer of the Corporate Technology Office at Samsung Electronics Co., Ltd. and as president and chief executive officer of the Semiconductor Business at Samsung Electronics Co., Ltd. Mr. Hwang holds a bachelor’s degree and a master’s degree in electric engineering from Seoul National University and a Ph.D. in electronic and computer engineering from the University of Massachusetts, Amherst.

Hoon Han is a non-independent director and has served as the senior executive vice president of the Corporate Planning Group since February 2014. He has previously served as the chairperson of the board of directors of Spatial Information Industry Promotion Institute, chief executive officer of KT Networks and as executive director of KT’s Home Consumer Strategy department. Mr. Han holds a bachelor’s degree in industrial engineering from Seoul National University, a master’s degree in industrial engineering from Korea Advanced Institute of Science and Technology, and a Ph.D. in engineering economic systems from Stanford University.

Heon Moon Lim is a non-independent director and has served as senior executive vice president of KT’s Customer Business Group since February 2014. He has previously served as a professor of economics and management at Chungnam University, executive director for KT’s Telecom & Convergence department, and as executive director of KT’s Home Consumer department. Mr. Lim holds a bachelor’s degree in business administration from Yonsei University and a Ph.D. in business administration from Seoul National University.

Do Kyun Songhas served as our outside director since March 2013. He is currently an advisor to the law firm of Bae, Kim & Lee LLC,LLC. He was formerly a standing member of the KCC and the chief economic advisorexecutive officer of Seoul Broadcasting System Co., Ltd. Mr. Song holds a bachelor’s degree in Spanish literature from Hanguk University of Foreign Studies.

Keuk Je Sunghas served as our outside director since March 2012. He is currently a professor at Kyunghee University Graduate School of Pan-Pacific International Studies. He was formerly Korea’s chief negotiator to the PresidentWorld Trade Organization’s General Agreement on Trade in Services. Mr. Sung holds a Ph.D. in managerial economics and decision sciences from Kellogg Graduate School of Business at Northwestern University.

Sang Kyun Chahas served as our outside director since March 2012. He is currently a Professor of Electrical and Computer Engineering at Seoul National University. Previously, he founded Transact In Memory, Inc. in the United States, which was acquired by SAP AG in 2005, and was subsequently transformed into SAP Labs Korea, Inc. He continues to serve as a director of SAP Labs Korea, Inc. Mr. Cha holds a Ph.D. in database systems from Stanford University.

Jong-Goo Kimhas served as our outside director since March 2014. He is currently of counsel to the New Dimension Law Group. Previously, he served as the minister of the Ministry of Justice and as the head of the Seoul Supreme Prosecutors’ Office. Mr. Kim holds both a bachelor’s and a master’s degree in law from Seoul National University and a Ph.D. in law from Dongguk University.

Chu-Hwan Yim has served as our outside director since March 2014. He is currently an honorary president of the Korean Institute of Communications and Information Sciences and is currently serving as an outside director for Korea Electric Power Corporation. Mr. Yim was formerly the president of Korea MinisterDigital Cable Laboratories, president of InformationElectronics and Telecommunications Research Institute, and Vice Ministersecretary general of the Telecommunications Technology Association. Mr. Yim holds both a bachelor’s and a master’s degree in industrial education from Seoul National University and a Ph.D. in telecommunication systems from Technical University of Braunshweig.

Pil Hwa Yoo has served as our outside director since March 2014 and is a current member of our audit committee. He is also the dean and professor of marketing at the Graduate School of Business at Sungkyunkwan University and serves as an outside director for Kyobo Life Insurance Co. Ltd. Mr. Yoo was formerly the vice president of Korean Academic Society of Business Administration and an editor of Korea Management Review. Mr. Yoo holds a bachelor’s degree in business administration from Seoul National University, a master’s degree in business from Northwestern University and a Ph.D. from Harvard University.

Suk-Gwon Changhas served as our outside director since March 2014. He is currently a professor of business administration at Hanyang University and the president of the Korea Operations Research and Management Science Society. Mr. Chang was formerly the dean of Hanyang Cyber University Graduate School and the president of the Korea Association for Telecommunication Policy and Korea Media Management Association. Mr. Chang holds a bachelor’s degree in industrial engineering from Seoul National University, a master’s degree in industrial engineering from Korea Advanced Institute of Science and Technology, and a Ph.D. in management science from Korea Advanced Institute of Science and Technology.

Dae-Keun Park has served as our outside director since March 2014. He is currently a professor of economics and finance at Hanyang University, chair of the Financial Development Review Committee at the Financial Services Commission and director of Hanyang Economic Research Institute. Mr. Park was formerly vice president of the Korea Finance and Economy.Money Association and a member of the Steering Committee at the Korea Finance Corporation. Mr. LeePark holds a bachelor’s degree in economics from Seoul National University, an M.A. degree in political economy from Boston University and a Ph.D. degree in economics from Boston University.

Sang-Hoon Lee is a non-independent director and has served as the president of the Enterprise Customer Group since March 2009. He has previously served as senior executive vice president of the Business Development Group and executive vice president of the Business Marketing Unit. Mr. Lee holds a bachelor’s degree in engineering from Seoul National University and both his master’s degree and Ph.D degree in electric engineering from University of Pennsylvania.

Hyun-Myung Pyo is a non-independent director and has served as the president of the Personal Customer Group since December 2009. He has previously served as senior executive vice president of the Corporate Center and senior vice president of the WiBro Business Unit and head of the Marketing Group of KTF. Mr. Pyo holds a bachelor’s degree in electronic engineering from Korea University and both his graduate and Ph.D degrees in electronic engineering from Korea University.

E. Han Kim has served as our outside director since March 2009. He is currently a chair professor of business administration at University of Michigan and has served as outside director of POSCO and Hana Bank. Mr. Kim holds a bachelor’s degree from Rochester University, a master’s degree in business administrationmanagement science from Cornell UniversityKorea Advanced Institute of Science and Technology and a Ph.D. degree in finance from State University of New York-Buffalo.

Choon-Ho Lee has served as our outside director since March 2009. She is currently the chairperson of the board of directors of Korea Educational Broadcasting System. Ms. Lee has served as a director of the board of Seoul Foundation for Arts and Culture. She holds a bachelor’s degree in politics and foreign affairs from Ewha Womans University and has received both her graduate and Ph.D. degrees in education from Inha University.

Jeung-Soo Huh has served as our outside director since March 2009. He is currently a professor of material science and metallurgical engineering at Kyungpook National University and was formerly a visiting professor at Manchester University. Mr. Huh holds a bachelor’s degree in physical metallurgy from Seoul National University, a graduate degree in material engineering from Seoul National University and a Ph.D. degree in material engineering from Massachusetts Institute of Technology.

Jong-Hwan Song was elected as our outside director in March 2010. He is currently a professor of North Korean studies at Myongji University. Mr. Song holds a bachelor’s degree and a graduate degree in international relations from Seoul National University and a Ph.D. degree in political science from Hanyang University.

Hae-Bang Chung was elected as our outside director in March 2010. He is currently a professor at Konkuk University School of Law. Mr. Chung holds a bachelor’s degree and a graduate degree in law from Seoul National University and a graduate degree in economics from Vanderbilt University.

Chan-Jin Lee was elected as our outside director in March 2010. He is currently the chief executive officer of DreamWiz Inc. and was formerly the chief executive officer of Hancom Inc. Mr. Lee holds a bachelor’s degree in mechanical engineering from Seoul National University.

Hyun-Nak Leehas served as our outside director since March 2011. He is currently a consultant at Kyonggi Ilbo and was formerly a chief executive officer of Kyonggi Ilbo and an executive director and chief editor of Donga Ilbo. Mr. Lee holds a master’s degree in economics from Seoul National University.

Byong-Won Bahk has served as our outside director since March 2011. He is currently a visiting professor at Seoul National University School of Business. He was formerly a vice minister of the Ministry of Finance and Economy, a chief executive officer and chairperson of board of directors at Woori Finance Holdings Co., Ltd. and a chairperson of board of directors at Woori Bank. Mr. Bahk holds a master’s degree in economics from WashingtonHarvard University.

For the purposes of the Korean Commercial Code, our Chief Executive Officer is deemed to be the “representative director” who is authorized to perform all judicial and extra-judicial acts relating to

our business. Our shareholders elect the Chief Executive Officer in accordance with the provisions of the Commercial Code and our articles of incorporation. A candidate for Chief Executive Officer is nominated by a committee formed for that purpose. The Chief Executive Officer Candidate Nominating Committee consists of:

 

all of our outside directors; and

 

one non-independent director who is not a candidate.

Under our articles of incorporation, the Chief Executive Officer Candidate Nominating Committee must submit a draft management contract between the company and the candidate covering the management objectives of the company to the shareholders’ meeting at the time of nomination of the candidate to the meeting. When the draft management contract has been approved at the shareholders’ meeting, the company enters into such management contract with the Chief Executive Officer. In such case, the chairperson of the Chief Executive Officer Candidate Nominating Committee, on behalf of the company, signs the management contract.

The board of directors may conduct performance review discussions to determine if the new Chief Executive Officer performed his or her duties under the management contract, or hire a professional evaluation agency for such purpose. If the board of directors determines, based on the results of the performance review, that the new Chief Executive Officer has failed to achieve the management goals, it may propose to dismiss the Chief Executive Officer at a shareholders’ meeting.

Senior Management

Our executive officers consist of President, Senior Executive Vice President, Executive Vice Presidents and Senior Vice Presidents. The executive officers other than the non-independent directors are appointed by the Chief Executive Officer and may serve up to three years.

The current executive officers are as follows:

 

Name(1)

  

Title and Responsibilities

  Current
Position Held
Since
  Years
with the
Company
 Date of Birth

Ho-Ick Suk

Vice Chairperson, Corporate Relations GroupJune 20092November 27, 1952

Seong-Bok Jeong

President, Legal & Ethics OfficeJanuary 20092December 7, 1954

Yu-Yeol Seo

President, Home Customer GroupJanuary 201033September 9, 1956

Doo-Whan Choi

President, Corporate Technology GroupDecember 20064January 10, 1954

Sam-Soo Pyo

President, Senior AdvisorDecember 20102December 12, 1953

Il-Young KimKyu-Taek Nam

  Senior Executive Vice President, Corporate CenterMarketing Group  January 20102014  228  September 8, 1956February 6, 1961

Sung-Man KimKyu-Shik Shin

Senior Executive Vice President, Global & Enterprise GroupJanuary 20143June 7, 1957

Seong-Mook Oh

  Senior Executive Vice President, Network Group  January 20092014 28  October 3, 1956August 20, 1960

Jung-Hee Song

Senior Executive Vice President, System Integration GroupJanuary 20110February 18, 1958

Han-SukKi Chul Kim

  Senior Executive Vice President, Global Business UnitIT Group  January 20102014  219  January 12, 19561, 1955

Hong-Jin KimIn-Sung Jun

  Senior Executive Vice President, STO Support UnitSeptember 20101April 25, 1953

In-Sung Jeon

Senior Executive Vice President, Group Shared ServiceCorporate Relations Group  January 20102014  3132  October 9, 1958

Gyoo-Taek NamJeong-Tae Park

Senior Executive Vice President, Legal & Ethics OfficeJanuary 201430December 10, 1959

Hae-Jung Park

  Executive Vice President, Corporate CenterIntegrated Marketing Communication Business UnitJanuary 20147May 23, 1963

Jong-Jin Chae

Executive Vice President, Enterprise Network Business UnitJanuary 201426June 25, 1961

Cha-Hyun Yoon

Executive Vice President, Network Design UnitJanuary 201429December 2, 1961

Dong-Myun Lee

Executive Vice President, Institute of Convergence TechnologyJanuary 201423October 15, 1962

Yoon-Young Park

Executive Vice President, Future Business Development Group, Institute of Convergence TechnologyJanuary 201422April 18, 1962

Kyoung-Lim Yun

Executive Vice President, Future Convergence Strategy OfficeFebruary 20144June 14, 1963

Mun-Whan Lee

Executive Vice President, Strategy & Planning OfficeJanuary 201425October 1, 1963

Bum-Joon Kim

Executive Vice President, Synergy Management Office  October 2010January 20149March 25, 1965

In-Hoe Kim

Executive Vice President, Financial Management Office, Corporate Planning GroupJanuary 20140June 25, 1964

Kwang-Suk Shin

Executive Vice President, Value Management Department, Financial Management Office, Corporate Planning GroupJanuary 2014 25  February 6, 1961January 5, 1960

Sang-Jik LeeDong-Hoon Han

Executive Vice President, Management Support GroupJanuary 201433September 12, 1959

Sang-Bong Nam

  Executive Vice President, Legal Affairs Center, Legal & Ethics OfficeJanuary 20141October 19, 1963

Tae-Yol Yoo

Executive Vice President, Economics & Management Research InstituteJanuary 201430April 4, 1960

Hyeon-Mo Ku

Executive Vice President, CEO OfficeJanuary 201427January 13, 1964

Dae-San Lee

Executive Vice President, Group Department, CEO OfficeJanuary 201427January 10, 1961

Yun-Su Kim

Senior Vice President, Customer Strategy Business UnitJanuary 201422November 2, 1963

Jae-Hyeon Kim

Senior Vice President, Sales Operating Business UnitJanuary 201417September 26, 1962

Young-Sik Park

Senior Vice President, Small & Medium Business UnitJanuary 201436April 9, 1957

Jin-Chul Kim

Senior Vice President, Customer Satisfaction UnitJanuary 201425May 25, 1962

Myung-Beom Pyun

Senior Vice President, Northern Seoul Sales HeadquarterJanuary 201417  June 200919, 1960

Dae-Gi Gong

  2Senior Vice President, Gwanghwamun Sales Branch, Northern Seoul Sales Headquarter  September 6, 1965January 201427March 13, 1960

Hyon-Seog Lee

Senior Vice President, Southern Seoul Sales HeadquarterJanuary 201422March 10, 1962

Name(1)

  

Title and Responsibilities

  Current
Position Held
Since
  Years
with the
Company
 Date of Birth

Kyu-Shik ShinHee-Youp Chang

  ExecutiveSenior Vice President, Gangnam Sales Branch, Southern Seoul Sales HeadquarterJanuary 201428October 1, 1959

Seong-Yll Cheon

Senior Vice President, Sinsa Sales Branch, Southern Seoul Sales HeadquarterJanuary 201427April 15, 1960

Hong-Jae Lee

Senior Vice President, Western Seoul Sales HeadquarterJanuary 201429August 29, 1962

Gang-Geun Lee

Senior Vice President, Busan Sales HeadquarterJanuary 201425June 22, 1961

Dong-Kwang Kim

Senior Vice President, Daegu Sales HeadquarterJanuary 201419March 23, 1962

Hyeong-Chul Park

Senior Vice President, Jeonnam Sales HeadquarterJanuary 201428February 2, 1962

Youn-Mo Jeon

Senior Vice President, Jeonbuk Sales HeadquarterJanuary 201417September 6, 1960

Dae-Su Park

Senior Vice President, Chungnam Sales HeadquarterJanuary 201425October 28, 1963

Jun-Su Jeong

Senior Vice President, Chungbuk Sales HeadquarterJanuary 201422November 2, 1962

Seung-Gyum Kim

Senior Vice President, Gangwon Sales HeadquarterJanuary 201428June 21, 1961

Sung-Kyu Yang

Senior Vice President, Jeju Sales HeadquarterJanuary 201426March 14, 1962

Kook-Hyun Kang

Senior Vice President, Marketing Strategy Business UnitJanuary 201425September 8, 1963

Jong-Jin Park

Senior Vice President, Marketing Strategy Department, Marketing Strategy Business UnitJanuary 201422August 14, 1963

Hyoung-Wook Kim

Senior Vice President, Device Business UnitJanuary 201417April 24, 1963

Bong-Goon Kwak

Senior Vice President, Data Service Business UnitJanuary 201429March 2, 1960

Hye-Jeong Yun

Senior Vice President, Service Development Department, Data Service Business UnitJanuary 201423June 12, 1966

Hee Kyoung Song

Senior Vice President, Enterprise IT Business UnitJanuary 20141July 24, 1964

Ki-Jong Moon

Senior Vice President, Enterprise Business Performing UnitJanuary 201437September 30, 1957

Yang-Hwan Ryoo

Senior Vice President, Enterprise Business Consulting UnitJanuary 201436October 12, 1958

Jae-Gyo Kim

Senior Vice President, Public Customer Business Unit  January 20112014  035  June 7, 1957September 23, 1958

Sang-Hong LeeYoon-Sik Jeong

  ExecutiveSenior Vice President, Technology Strategy OfficeEnterprise Customer Business Unit  January 201020145September 30, 1964

Tae-Sung Lim

Senior Vice President, Global Business UnitJanuary 201423March 4, 1963

Pan-Sik Shin

Senior Vice President, Global Professional Group, Global Business UnitJanuary 2014 27  August 13, 1955February 25, 1959

Kyung-Soo LeeJae-Yoon Park

  ExecutiveSenior Vice President, Fixed and Mobile Network Strategy Business Unit  December 2010January 2014  1928  February 5,December 18, 1960

Tae-Il Park

Executive Vice President, Network Technical Support UnitJanuary 201033February 24, 1956

Hyun-Mi Yang

Executive Vice President, Combined Customer Strategy UnitDecember 20102December 4, 1963

Young-Hee Song

Executive Vice President, Contents and Media Business UnitDecember 20102February 10, 1961

Young-HeeCheol-Gyu Lee

Executive Vice President, Group Consulting Support OfficeDecember 201030August 7, 1957

Eun-Hye Kim

Executive Vice President, GMC Strategy OfficeDecember 20100January 6, 1971

Yeon-Hak Kim

Executive Vice President, Value Management OfficeJune 200924May 17, 1962

Hong-Seok Seo

Executive Vice President, External Support OfficeJanuary 20110November 20, 1960

Yong-Taek Cho

Executive Vice President, Corporate Relations Support OfficeJuly 20092September 7, 1954

Gil-Joo Lee

Executive Vice President, Public Relations OfficeNovember 200635September 20, 1955

Sang-Hyo Kim

Executive Vice President, Human Resource OfficeMay 20101April 1, 1956

Tae-Yol Yoo

Executive Vice President, Economics & Management Research LaboratoryJanuary 200927April 4, 1960

Jeong-Tae Park

Executive Vice President, Purchasing Strategy OfficeJanuary 200927December 10, 1959

Jung Hwa

  Senior Vice President, Corporate Center Group Strategy DepartmentNetwork Operation & Maintenance Unit  December 2010January 2014  2228  August 10, 196424, 1960

Se-HyunChang-Seok Seo

Senior Vice President, Network Technology UnitJanuary 201420July 5, 1967

Mi-Na Oh

  Senior Vice President, Corporate Center New Business StrategyCore Network Technology Department, Network Technology Unit  January 20112014  0July 2, 1963

Dong-Hyun Han

Senior Vice President, Corporate Center Strategic Investment DepartmentJanuary 20093June 26, 1967

Tae-Ki Min

Senior Vice President, Synergy Management Office Marketing Alignment DepartmentDecember 201023August 7, 1962

Sun-Cheol Gweon

Senior Vice President, Synergy Management Office Investment Management DepartmentDecember 2010 20  March 1, 1962April 11, 1969

Eun-Soo Park

Senior Vice President, Ethical Management DepartmentJanuary 201021January 10, 1962

Hyun-Mo Gu

Senior Vice President, Personal Customer Strategy UnitDecember 201024January 13, 1964

Kuk-Hyun Kang

Senior Vice President, Personal Marketing Strategy DepartmentJanuary 201022September 8, 1963

Hyung-WookYoung-Hyun Kim

  Senior Vice President, Mobile Handset Planning DepartmentGangbuk Network Operation & Maintenance Headquarter  January 20112014  1436  April 24, 1963December 19, 1958

Seok-Gyoon NaYoung-Sik Kim

  Senior Vice President, Personal Customer Business UnitGangnam Network Operation & Maintenance Headquarter  June 2009January 2014  2624  October 26, 1958March 15, 1961

Hyun-Suk LeeHo-Won Moon

  Senior Vice President, Marketing Planning DepartmentBusan Network Operation & Maintenance Headquarter  January 20112014  1928  March 10, 1962

Myung-Bum Pyun

Senior Vice President, Seoul Mobile Marketing CenterJune 200914June 19, 1960

Chang-Young Yoon

Senior Vice President, Strategic Distribution Marketing CenterDecember 201025February 24, 1957

Won-Sik Han

Senior Vice President, Mobile Data Business Unit  January 201026October 26, 1960

Seong-Mook Oh

Senior Vice President, Mobile Network UnitDecember 201025August 20, 19607, 1959

Name(1)

  

Title and Responsibilities

  Current
Position Held
Since
  Years
with the
Company
 Date of Birth

Tae-Il KwonJong-Ok Park

  Senior Vice President, Metropolitan Mobile Network O&M CenterDecember 201026June 19, 1960

Tae-Hyo Ahn

Senior Vice President, Personal Fast IncubationIT Strategy & Planning Business Unit  December 2010January 2014  2623  January 24, 1962

Bong-Goon KwakJune-Keun Kim

  Senior Vice President, Mobile IncubationManagement Infrastructure Department, IT Strategy & Planning Business Unit  January 20102014  264  March 2, 1960November 12, 1966

Hun-Mun LimSang-Yong Lee

  Senior Vice President, Home CustomerData & Information Security Department, IT Strategy & Planning Business Unit  December 2010January 2014  243December 23, 1967

Yi-Shik Kim

Senior Vice President, Big Data Analysis Department, IT Strategy & Planning Business UnitJanuary 20141October 16, 1968

Dong-Sik Yun

Senior Vice President, Service Platform Business UnitJanuary 201426June 9, 1963

Ji-Yun Kim

Senior Vice President, Cloud Platform Business UnitJanuary 20142January 27, 1968

Young-Myoung Kim

Senior Vice President, Research Support Department, Institute of Convergence TechnologyJanuary 201425  November 15,13, 1961

Hong-Beom Jeon

Senior Vice President, Infra LaboratoryJanuary 201423October 3, 1962

Sook-Kyung Sung

Senior Vice President, Intellectual Property Rights Department, Infra LaboratoryJanuary 201414November 18, 1964

Seong-Choon Lee

Senior Vice President, Service LaboratoryJanuary 201429March 28, 1960

Hye-JungJi-Hie Kim

Senior Vice President, Big Data Development Practical Job Training, Future Business Development Group, Institute of Convergence TechnologyJanuary 20141August 6, 1965

Jae-Ho Song

Senior Vice President, Future Convergence Strategy OfficeJanuary 201421March 26, 1966

Seong-Hoon Kim

Senior Vice President, Future Convergence Strategy OfficeJanuary 20141September 29, 1964

Dong-Seope Park

  Senior Vice President, Home Integrative Marketing Communication UnitCorporate Planning Department, Strategy & Planning Office  December 2010January 201429November 5, 1961

Pill-Jai Lee

Senior Vice President, Strategic Investment Department, Strategy & Planning OfficeFebruary 201426October 3, 1961

Jeff Kahng

Senior Vice President, Valuation Department, Synergy Management OfficeJanuary 20141August 13, 1966

Weon-Kyung Kim

Senior Vice President, Human Resources OfficeJanuary 201423June 15, 1963

Doo-Seong Cheon

Senior Vice President, HR Development Center, Human Resources OfficeJanuary 2014 4  May 23, 19631, 1968

Yong-HwaJae-Eui Choi

Senior Vice President, Educational Dispatch, Human Resources OfficeFebruary 201427April 17, 1961

Hoon Cho

Senior Vice President, Educational Dispatch, Human Resources OfficeFebruary 201421December 4, 1966

Eung-Ho Lee

Senior Vice President, Educational Dispatch, Human Resources OfficeFebruary 201423December 7, 1962

Min-Woo Seo

Senior Vice President, Educational Dispatch, Human Resources OfficeJanuary 201428February 7, 1960

Hyun-Yok Sheen

Senior Vice President, Management Support OfficeJanuary 201421August 25, 1968

Won-Sic Hahn

Senior Vice President, Procurement Cooperation OfficeJanuary 201429October 26, 1960

Han-Sup Lee

Senior Vice President, Network Technology Investigation Department, Procurement Cooperation OfficeJanuary 201418March 6, 1966

Young-Pil Park

  Senior Vice President, Home Channel Business UnitCorporate Relations Support Department, Corporate Relations Group  January 20102014  288  March 2, 1958February 9, 1968

Moon-Chul JungYoung-Ho Oh

  Senior Vice President, Site Reformation CenterPublic Relations Office  January 2010March 2014  2516  August 5, 1957September 16, 1962

Young-Lyoul LeeMin-Woo Seo

  Senior Vice President, Olleh TV UnitDecember 20104September 17, 1962

Yoon-Mo Jun

Senior Vice President, Southern Seoul Marketing CenterDecember 201014September 6, 1960

Jin-Hoon Kim

Senior Vice President, Northern Seoul Marketing CenterDecember 201024May 5, 1960

Jun-Soo Jung

Senior Vice President, Southern Gyeonggi Marketing CenterDecember 201019November 2, 1962

Jong-Hack Kang

Senior Vice President, Busan Marketing CenterJune 200925April 5, 1959

Jung-Won Park

Senior Vice President, Gyeongnam Marketing CenterPublic Relations Office  January 20102014  25July 26, 1959

Doo-Soo Jung

Senior Vice President, Incheon Marketing CenterJanuary 201033August 22, 1959

Ouk-Young Yoo

Senior Vice President, Daegu Marketing CenterDecember 201035December 20, 1956

Ki-Hun Yoo

Senior Vice President, Northern Gyeonggi Marketing CenterJanuary 2010 28  January 1, 1957

Moon-Hwan Lee

Senior Vice President, Corporate Customer Strategy DepartmentJanuary 200922October 1, 1963

Yoon-Sik Jung

Senior Vice President, Enterprise Customer Business Unit 1December 20102September 30, 1964

Kyung-Seok Park

Senior Vice President, Enterprise Customer Business Unit 2December 201025  February 10, 1958

Young-Sik Park

Senior Vice President, Small & Medium Business UnitDecember 201033April 9, 1957

Dong-Hoon Han

Senior Vice President, Service Delivery Business UnitDecember 201030April 9, 1959

Ki-Soong Jang

Senior Vice President, Corporate Fast Incubation UnitDecember 201026October 17, 1958

Jong-Jin Chae

Senior Vice President, Corporate Product Business UnitDecember 201026June 25, 1961

Ju-Ouk Uhm

Senior Vice President, Northern Seoul Corporate Business CenterJanuary 201026March 17,7, 1960

Seung-Dong Gye

Senior Vice President, Southern Seoul Corporate Business CenterDecember 201034June 6, 1958

Hyung-Chul Park

Senior Vice President, Southern Gyeonggi Corporate Business CenterDecember 201025February 2, 1962

Jin-Sik Park

Senior Vice President, Daejeon Corporate Business CenterDecember 201025August 5, 1959

Sung-Hwan Gong

Senior Vice President, Jeonnam Corporate Business CenterDecember 201025December 21, 1960

Pan-Sik Shin

Senior Vice President, Jeonbuk Corporate Business CenterJuly 200924February 25, 1959

Gang-Geun Lee

Senior Vice President, Gangwon Corporate Business CenterJanuary 201022June 22, 1961

Name(1)

  

Title and Responsibilities

  Current
Position Held
Since
  Years
with the
Company
 Date of Birth

Dong-Myun Lee

Senior Vice President, Technology Strategy CenterDecember 201020October 15, 1962

Yoon-YoungByung-Sam Park

  Senior Vice President, Technology DevelopmentLegal Affairs Department, Legal Affairs Center, Legal & Ethics Office  January 20102014  19April 18, 1962

Han-Wook Jung

Senior Vice President, Central R&D LaboratoryJanuary 201025January 22, 1961

Sung-Chun Lee

Senior Vice President, Fixed and Mobile Network R&D CenterDecember 201026May 28, 1960

Hong-Bum Jun

Senior Vice President, Smart Green Development DepartmentJanuary 201020October 3, 1962

Cha-Hyun Yoon

Senior Vice President, Network Establishment Business UnitDecember 201026December 2, 1961

Yung-Sig Yoon

Senior Vice President, Network O&M Business UnitDecember 201027November 20, 1956

Chan-Kyung Park

Senior Vice President, Gangbuk Network O&M CenterJanuary 20105January 1, 1959

Dae-San Lee

Senior Vice President, Gangnam Network O&M CenterDecember 201024January 10, 1961

Tae-Geun Kim

Senior Vice President, Central Network O&M CenterDecember 201028March 16, 1059

Jong-Ok Lee

Senior Vice President, Honam Network O&M CenterDecember 201028June 3, 1960

Jong-Seog Koh

Senior Vice President, Daegu Network O&M CenterDecember 201022August 7, 1959

Young-Hyun Kim

Senior Vice President, Busan Network O&M CenterJanuary 201033December 19, 1958

Sang-Cheon Shim

Senior Vice President, Customer Service Business UnitDecember 201025May 19, 1960

Jung-Sik Suh

Senior Vice President, Cloud Computing Service Business UnitApril 20104August 18, 1969

Dong-Shik Yoon

Senior Vice President, Cloud Computing Service Infrastructure DepartmentApril 201023June 9, 1963

Kyung-Kon Koh

Senior Vice President, Internet Service Business UnitDecember 20102April 28, 1963

Hyun-Kyu Lee

Senior Vice President, Combined Platform & Software Business UnitJanuary 20110May 13, 1962

Jae Lee

Senior Vice President, BIT Business CenterDecember 2010 1  March 2, 1970October 13, 1966

Hyung-Joon Kim

Senior Vice President, Global Planning DepartmentDecember 201017November 2, 1963

Sang-Wook Kim

Senior Vice President, Global GTM2 DepartmentDecember 20101February 14, 1965

Young-Mo Kwon

Senior Vice President, Satellite Business DepartmentDecember 201022April 1, 1958

Joon-Shik Park

Senior Vice President, STO Support DepartmentNovember 20111February 16, 1967

Gwang-Suk Shin

Senior Vice President, Value Management Department 1December 201022January 5, 1960

Sung-Jin Lee

Senior Vice President, Financial Accounting DepartmentJanuary 200915December 2, 1958

Hwa-Joon Cho

Senior Vice President, Finance DepartmentJanuary 201017February 24, 1957

Bum-Joon Kim

Senior Vice President, Investor Relations DepartmentSeptember 20056March 25, 1965

Jae-Geun Choi

Senior Vice President, Business Public Relations DepartmentJanuary 20102November 30, 1961

Hee-SooHee-Su Kim

  Senior Vice President, Economics & Management Research LaboratoryInstitute  March 2011January 2014  03  October 15, 1962

Sa-Il Kwon

Senior Vice President, Business Support OfficeMarch 201034January 30, 1957

Seong-Hoon Shim

Senior Vice President, Secretarial OfficeJanuary 201023February 25, 1964

Name(1)

Title and Responsibilities

Current
Position Held
Since
Years
with the
Company
Date of Birth

Geun-Mook Cho

Senior Vice President, Educational DispatchDecember 201028November 7, 1958

Dae-Soo Park

Senior Vice President, Educational DispatchDecember 201022October 28, 1963

Choong-SeopKyung-Joon Lee

  Senior Vice President, Educational DispatchProject Planning Department, Economics & Management Research Institute  December 2010January 2014  1123  June 3, 19582, 1963

Sun-Jong HeoHwa Jung

  Senior Vice President, R&DPEG, Project Planning Department, Economics & Management Research Institute  November 2010January 2014  525  March August 10, 1964

Sang-Wook Seo

Senior Vice President, PEG, Project Planning Department, Economics & Management Research InstituteJanuary 20142January 26, 1972

Hyo-Sill Kim

Senior Vice President, PEG, Project Planning Department, Economics & Management Research InstituteJanuary 201421April 17, 1963

Jae-Yon Cha

Senior Vice President, Finance Department, CEO OfficeJanuary 201423 1959September 25, 1965

 

(1)All of our executive officers beneficially own less than one percent of the issued shares of KT Corporation in the aggregate.

Item 6.B.  Compensation

Compensation of Directors and Executive Officers

In 2010,2013, the total amount of salaries, bonuses (including long-term performance-based incentives for directors) and allowances paid and accrued to all directors and executive officers of KT Corporation for services in all capacities was approximately(Won)42 billion.6.2 billion, which were paid on a cash basis.

Until February 2010, we had no incentive based compensation program for outside directors. Instead, compensation was paid to outside directors in fixed amounts as an allowance for any expenses they incurred in executing their duties. The aggregate amount accrued by usboard of directors introduced a new compensation program for outside directors in March 2010, which consists of cash and stock grants and requires a one year lock-up period, at a ratio of 3 to provide retirement benefits to such persons1. The total cash basis remuneration for outside directors for 2013 was recorded at(Won)6 billion639 million.

The compensation of our directors and executive officers who received total annual compensation exceeding500 million in 2010. Starting in 2009, we no longer pay long-term performance-based incentives to our outside directors.2013 were as follows:

Name

Position

Total Compensation
in 2013

Composition of
Total Compensation

(In millions of Won)

Lee, Seok Chae

Former Representative

Director

2,979476 million (salary);1,339 million (bonus);11 million (benefits);1153 million (severance)

Pyo, Hyeon Myeong

President890406 million (salary);446 million (bonus);38 million (benefits)

Kim, II Yeong

President768302 million (salary);363 million (bonus);103 million (benefits)

Lee, Sang Hun

President96675 million (salary);512 million (bonus);15 million (benefits);364 million (severance)

The chairperson of the Chief Executive Officer Candidate Nominating Committee enters into an employment agreement on our behalf with our Chief Executive Officer. The employment agreement sets certain management targets to be achieved by the Chief Executive Officer, including a target for the amount of “EBITDA” to be achieved in each year. EBITDA is defined as earnings before interest, tax, depreciation and amortization. Failure to achieve certain thresholds below the targets will allow the board of directors to take actions with respect to the Chief Executive Officer’s employment, including proposing to the shareholders’ meeting an early termination of his employment. In addition, the head of each of our functional departments, the president of each of our subsidiaries and the heads of each regional head office have entered into employment agreements with the Chief Executive Officer that provide for similar management targets to be achieved by each of our departments, subsidiaries and regional head offices.

Item 6.C.  Board Practices

As of December 31, 2010,2013, none of our non-independent or outside directors maintained directors’ service contracts with us or with any of our subsidiaries providing for benefits upon termination of employment.

Corporate Governance Committee

The Corporate Governance Committee is comprised of four outside directors and one standingnon-independent director, Choon-Ho Lee, E. Han Kim, Jeung-Soo Huh, Hae-Bang ChungSuk-Gwon Chang, Do Kyun Song, Sang Kyun Cha, Dae-Keun Park and Hyun-Myung Pyo.Hoon Han. The chairperson is Choon-Ho Lee.Suk-Gwon Chang. The committee is responsible for the review of matters with respect to our Corporate Governance Guidelines and our performance under such guidelines to monitor effectiveness of our corporate governance.

Outside Director Candidate Nominating Committee

The Outside Director Candidate Nominating Committee consists of one non-independent director and all of our outside directors, other than for election of an outside director resulting from the

expiration of the term of the office, in which case such outside director whose term is expiring may not be a member of the committee. The committee’s duties include reviewing the qualifications of potential candidates and proposing nominees to serve as outside directors on our board of directors.directors to the shareholders at the general meeting of shareholders. The committee members’ terms expire immediately after the adjournment of the shareholders’ meeting where the outside directors are elected.

Evaluation and Compensation Committee

The Evaluation and Compensation Committee is currently comprised of four outside directors, Jeung-Soo Huh, Choon-Ho Lee, Jong-HwanChu-Hwan Yim, Do Kyun Song, Pil Hwa Yoo and Chan-Jin Lee.Suk-Gwon Chang. The chairperson is Jeung-Soo Huh.Chu-Hwan Yim. The committee’s duties include prior review of the Chief Executive Officer’s management goals, terms and conditions proposed for inclusion in the employmentmanagement contract of the Chief Executive Officer, including, but not limited to, determining whether the Chief Executive Officer has achieved the management goals, and the determination of compensation of the Chief Executive Officer and thenon-independent directors. The committee members are elected by the board after the closing of the annual meeting, and the term of the committee members is for one year.

Executive Committee

The Executive Committee is currently comprised of all of the non-independent directors. The chairperson is Suk-Chae Lee.Chang-Gyu Hwang. The committee’s duties include the establishment and management

of branch offices, the acquisition and disposal of real estate having market value between(Won)15 billion to(Won)30 billion, making investments and providing guarantees upbetween15 billion to(Won)30 billion, the disposal and sale of stocks of our subsidiaries, which stocks have a market value of between(Won)15 billion and(Won)30 billion, provided that no change of control with respect to such subsidiary occurs as a result of such disposal or sale, the authorization of charitable contributions between(Won)100 million to(Won)1 billion and the issuance of certain debt securities.

Related-Party Transactions Committee

The Related-Party Transactions Committee is currently comprised of four outside directors, Jong-Hwan Song, Chan-Jin Lee, Hyun-Nak LeeKeuk Je Sung, Jong-Goo Kim, Chu-Hwan Yim and Byong Won Bahk.Dae-Keun Park. The chairperson is Jong-Hwan Song.Keuk Je Sung. This committee reviews transactions between KT Corporation and its subsidiaries and ensures compliance with applicable antitrust laws. The committee members are elected by the board after the annual meeting, and the term of the committee members is for one year.

Audit Committee

Under the Commercial Code of Korea and our articles of incorporation, we are required to establish an audit committee comprised of three or more outside directors comprised of at least two-thirds of the audit committee members. Audit Committee members must also meet the applicable independence criteria set forth under the rules and regulations of the Sarbanes-Oxley Act of 2002. The committee is currently comprised of E. HanJong-Goo Kim, Hae-Bang Chung, Hyun-Nak LeeKeuk Je Sung, Sang Kyun Cha and Byong Won Bahk.Pil Hwa Yoo. The chairperson is Hae-Bang Chung.Jong-Goo Kim and the financial expert is Pil Hwa Yoo. Members of the committee are elected by our shareholders at the shareholders’ meeting. Our internal and external auditors report directly to the committee.

The duties of the committee include:

 

appointing independent auditors;

 

approving the appointment and recommending the dismissal of the internal auditor;

evaluating performance of independent auditors;

 

approving services to be provided by the independent auditors;

 

reviewing annual financial statements;

 

reviewing audit results and reports;

 

reviewing and evaluating our system of internal controls and policies; and

 

examining improprieties or suspected improprieties.

In addition, in connection with the shareholders’ meeting, the committee examines the agenda for, and financial statement and other reports to be submitted by the board of directors, at each shareholders’ meeting.

Item 6.D.  Employees

On a non-consolidated basis, we had 31,15532,451 employees as of December 31, 2010,2013, compared to 30,84132,186 employees as of December 31, 20092012 and 35,06331,981 employees as of December 31, 2008. Prior to the merger with KT Corporation, KTF had 2,560 employees as of December 31, 2008.2011.

The Voluntary Early Retirement Plans

We regularly sponsor a voluntary early retirement planplans where we provide additional financial incentives for our employees to retire early, as part of our efforts to improve operational efficiencies. In 2008, 1,1412011, 2012 and 2013, 314, 183 and 269 employees, respectively, retired under KT Corporation’s voluntary early retirement plan.this program.

In 2009,April 2014, we had a voluntary early retirement plan where we received applications from employees who had been employed by us for more than 20 years. In addition, we heldannounced the commencement of a special voluntary early retirement program in the fourth quarter of 2009 where we received applications for voluntary early retirement from employees who hadhave been employed by us for more than 15 years and provided themyears. This special early retirement program provides our employees with additional financial incentives to retire early. In aggregate, 6,515early as part of our efforts to improve operational efficiencies. Our employees retired in 2009 underwill be offered the voluntaryoption of either receiving additional severance payment or employment for two years at certain of our subsidiaries or affiliates as part of the special retirement scheme. On April 23, 2014, our human resources committee determined that 8,304 employees will retire through this special early retirement plan and theprogram. We expect to record approximately1.2 trillion as severance indemnity in connection with this special voluntary early retirement program.

In 2010, 123 employees retired under KT Corporation’s voluntary early retirement plan. We did not have a special voluntary early retirement program, in 2010.all of which is expected to be recorded during 2014.

Labor Relations

We consider our current relations with our work force to be good. However, in the past, we have experienced opposition from our labor union for our strategy of restructuring to improve our efficiency and profitability by disposing of non-core businesses and reducing our employee base.

As of December 31, 2010,2013, about 78.6%78.0% of allthe employees of KT Corporation were members of the KT Trade Union. On behalf of its members, the Union negotiates with us a collective bargaining agreement every two years, and our current collective bargaining agreement expires on May 23, 2013.2015. The current collective bargaining agreement provides that even in the event of a strike, the minimum number of employees necessary to operate the telecommunications business must continue to work.

The Union also negotiates with us an annual agreement on wages on behalf of its members. Under the Act of the Promotion of Worker’s Participation and Cooperation, our Employee-Employer

Cooperation Committees, which are composed of representatives of management and labor for each business unit and regional office, meet quarterly to discuss employee grievances, working conditions and potential employee-initiated improvements in service or management.

Recent amendments to the Trade Union and Labor Relations Adjustment Act (“Labor Act”), which will becomebecame effective on July 1, 2011, allow multiple labor unions to be formed within one company. Therefore, additional labor unions may be formed by our employees. Pursuant to such amendments, our employees formed a new labor union called “KT New Union” in August 2011. The amended Labor Act also requires such multiple unions to consolidate themselves into a single channel when negotiating with the company on behalf of their members and to enter into a single collective bargaining agreement with the company. As a result of the recent consolidation of labor unions, KT Trade Union was selected as the bargaining representative of the labor unions. Its term as the bargaining representative will last for two years from January 1, 2014, and will expire on December 31, 2015.

Employee Stock Ownership and Benefits

We have an employee stock ownership association, which may purchase on behalf of its members up to 20.0% of any of our shares offered publicly in Korea. The employee stock ownership association owned 1.56%1.05% of our issued shares as of December 31, 2010.2013.

In accordance with the National Pension Act of Korea, we contribute an amount equal to 4.5% of an employee’s standard monthly wages, and each employee contributes 4.5% of his or her standard monthly wages, into his or her personal pension account. Our employees, including executive officers as well as non-executive employees, are subject to a pension insurance system, under which we make monthly contributions to the pension accounts of the employees, and upon retirement, such employees are paid the pension amount due from their pension accounts. Prior to JanuaryApril 2011, our executive and non-executive employees were subject to a lump-sum severance payment system, under which they were entitled to receive a lump-sum severance payment upon termination of their employment, based on their length of service and salary level at the time of termination. Starting in JanuaryApril 2011, in accordance with the Korean Employee Retirement Income Security Act, we replaced such lump-sum severance payment system with our current pension insurance system in the form of a defined benefit plan, and also introduced a defined contribution plan in December 2012, with a total combined unfunded portion of approximately(Won)350586 billion as of December 31, 2010. Our employees have the option of choosing either the defined benefit plan or the defined contribution plan.2013. Lump-sum severance amounts previously accrued prior to our adoption of the current pension insurance system continue to remain payable. We also provide a wide range of fringe benefits to our employees, including housing, housing loans, company-provided hospitals and schools, a company-sponsored pension program, an employee welfare fund, industrial disaster insurance, cultural and athletic facilities, physical education grants, meal allowances, medical examinations and training and resort centers. See “Item 5. Operating and Financial Review and Prospects—Item. 5.A. Operating Results—Salaries and Related Costs.”

Employee Training

The objective of our training program is to develop information and technology specialists who are able to create value for our customers. In order to develop skills of our employees, we require 60 hours of training per year from most of our employees, using individually-tailored curriculums based on individual assessments. We also operate Cyber Academy to provide online classes to our employees, as well as offer various foreign language classes to our employees. In addition, we provide tuition and living expense reimbursements to our high potential individuals who pursue graduate programs in Korea and abroad, as well as provide financial assistance to those who pursue work-related professional licenses or participate in after-work study programs.

Item 6.E.  Share Ownership

Common Stock

The persons who are currently our directors held, as a group, 35,0335,599 common shares as of March 31, 2011,2014, the most recent date for which this information is available. The table below shows the ownership of our common shares by directors:

 

Shareholders

  Number of Common
Shares Owned
 

Suk-Chae LeeChang-Gyu Hwang

   21,204  

Sang-Hoon LeeHoon Han

   10,3161,500  

Hyun-Myung PyoHeon Moon Lim

   3,513907  

E. HanPil Hwa Yoo

Suk-Gwon Chang

Keuk Je Sung

396

Sang Kyun Cha

2,796

Do Kyun Song

Jong-Goo Kim

     

Choon-Ho LeeDae-Keun Park

     

Jeung-Soo Huh

Jong-Hwan Song

Hae-Bang Chung

Chan-Jin Lee

Hyun Nak Lee

Byong Won BahkChu-Hwan Yim

     

Stock Options

We have not granted any stock options to our current directors and executive officers.

Item 7.  Major Shareholders and Related Party Transactions

Item 7.A.  Major Shareholders

The following table sets forth certain information relating to the shareholders of our common stock as of December 31, 2010:2013:

 

Shareholders

  Number of
Shares
   Percent of
Total
Shares Issued
 

National Pension Corporation

   21,557,950     8.26

NTTDoCoMo, Inc.

   14,257,813     5.46

Employee stock ownership association

   4,069,147     1.56

Directors as a group

   28,073     0.01

Public

   203,302,861     77.86

KT Corporation (held in the form of treasury stock)(1)

   17,895,964     6.85
          

Total issued shares

   261,111,808     100.00
          

(1)Includes shares of treasury stock owned by our treasury stock fund.

Shareholders

  Number of
Shares
   Percent of
Total
Shares Issued
 

National Pension Corporation

   23,298,800     8.92

NTTDoCoMo, Inc.

   14,257,813     5.46

Employee stock ownership association

   2,748,359     1.05

Directors as a group

   16,721     0.01

Public

   203,481,955     77.93

KT Corporation (held in the form of treasury stock)

   17,308,160     6.63
  

 

 

   

 

 

 

Total issued shares

   261,111,808     100.00
  

 

 

   

 

 

 

Item 7.B.Related Party Transactions

We have issued guarantees of(Won)10 billion as of December 31, 2008,(Won)10 billion as of December 31, 2009 and(Won)38 billion as of December 31, 2010 in favor of our consolidated subsidiaries. We have also engaged in various transactions with our subsidiaries and affiliated companies. See Notes 18 and 32Note 34 to the Consolidated Financial Statements.

In November 2010, we also entered into a contract with Dreamwiz Corp., whose chief executive officer is Mr. Chan Jin Lee who serves as We have not issued any guarantees in favor of our outside director, to obtain social network-related support services for our websitewww.olleh.com. The term of the service contract is for a period of five years from November 2010 to November 2015 for an estimated aggregate service fee of(Won)370 million.consolidated subsidiaries.

Item 7.C.  Interests of Experts and Counsel

Not applicable.

Item 8.  Financial Information

Item 8.A.  Consolidated Statements and Other Financial Information

See “Item 18—Financial Statements” and pages F-1 through F-96.F-95.

Legal Proceedings

In November 2009, 56 of our former customers began a claim against us for an aggregate(Won)130 million in damages, alleging that we improperly subscribed them to our optional flat rate plans for fixed-line services without properly obtaining their consent or giving notification. The Seoul Central District Court ruled in our favor of us on all claims in May 2011, and the plaintiffs filed an appeal in June 2011.

The Seoul High Court overruled the plaintiffs’ appeal in December 2011, and the plaintiffs subsequently filed an appeal to the Supreme Court of Korea. In March 2012, the Supreme Court of Korea denied the plaintiffs’ appeal. In connection with this complaint, the Korea Communications CommissionKCC investigated our past practices regarding our subscription of customers to optional flat rate plans, and issued an administrative decision in April 2011 which imposed several corrective orders including amendments to our standard terms of use and issuance of an administrative fine of approximately(Won)10 billion. We paid such fines to the Korea Communications CommissionKCC and implemented its corrective orders.

As part of our decision to apply for reallocation of the 20 MHz bandwidth in the 1.8 GHz spectrum, we applied to the KCC to terminate our 2G services, and on November 23, 2011, the KCC approved our plan. However, on November 30, 2011, approximately 900 of our 2G service subscribers filed a class-action suit against the KCC for its approval of our plan, claiming that we used improper means to reduce our 2G subscribers to comply with regulatory requirements before terminating the 2G PSC services and that the KCC did not consider such factor in approving our plan. On December 6, 2011, the Seoul Administrative Court issued a preliminary injunction, which temporarily suspended our termination of the 2G services until the case went to trial. We immediately appealed the decision and the Seoul High Court overruled the preliminary injunction on December 26, 2011 and reinstated the KCC’s approval. Accordingly, we terminated our 2G services in the Seoul metropolitan area and began the termination process for the rest of Korea on January 3, 2012. On January 12, 2012, the 2G subscribers filed an appeal of the Seoul High Court’s decision with the Supreme Court of Korea, and on February 1, 2012, the Supreme Court of Korea denied such appeal. On January 17, 2012, trial for the original class-action suit filed by the 2G subscribers began in the Seoul Administrative Court. On May 8, 2012, the Seoul Administrative court ruled in our favor on all claims and the plaintiffs subsequently filed an appeal with the Seoul High Court. On September 15, 2012, the Seoul High Court denied the plaintiffs’ appeal, and the plaintiffs appealed the decision to the Supreme Court of Korea. On February 15, 2013, the Supreme Court of Korea denied the plaintiffs’ appeal. On May 24, 2013, three other appeals by plaintiffs involving the termination of our 2G services were denied by the Supreme Court of Korea. Currently, there are no other pending disputes with respect to these claims.

In July 2012, the Fair Trade Commission issued to us an administrative fine of approximately5 billion as well as certain corrective orders, after investigating certain pricing and subsidy practices of mobile service carriers and handset manufacturers. Samsung Electronics Co., Ltd., LG Electronics Co., Ltd., Pantech Curitel Co., Ltd., SK Telecom and LG U+ were also issued administrative fines as a result of the investigation. We filed for a stay of execution of the Fair Trade Commission’s decision, and on January 18, 2013, the Supreme Court of Korea granted a stay of execution with respect to the corrective order, and denied the stay of execution with respect to the administrative fine. We paid the entire fine in September 2012. In September 2012, we filed a lawsuit with the Seoul High Court against the Fair Trade Commission to appeal the administrative fine and the corrective order, and on February 6, 2014, the Seoul High Court ruled against us on our appeal. On February 18, 2014, we filed another appeal with respect to the administrative fine with the Supreme Court of Korea and plan to file for a stay of execution with respect to the corrective order. The outcome of this case will not result in any fine in addition to the fine we already paid in September 2012.

Based on investigations conducted in December 2012 and January 2013, the KCC imposed a combined fine of approximately12 billion on SK Telecom, LG U+ and us in January 2013 (our fine being approximately2.9 billion), for providing subsidies that were higher than those allowed under current regulations to new mobile phone purchasers and subscribers, and also imposed temporary suspensions from recruiting new subscribers ranging from 20 days to 24 days. In March 2013, the KCC again imposed a combined fine of approximately5 billion on SK Telecom, LG U+ and us (our fine being approximately1.6 billion) for continuing to offer subsidies during the suspension period. In July 2013, the KCC imposed a combined fine of approximately67 billion on SK Telecom, LG U+ and us (our fine being approximately20 billion) and also imposed a seven day suspension on us from recruiting new subscribers, also in connection with providing excessive handset subsidies to new subscribers. In December 2013, the KCC again imposed a combined fine of approximately106 billion on SK Telecom, LG U+ and us (our fine being approximately30 billion), which is the largest fine ever imposed by the KCC on local mobile operators for providing excessive subsidies to new subscribers. On March 7, 2014, the MSIP imposed a temporary suspension on us for 45 days (from March 13, 2014 to April 26, 2014), SK Telecom for 45 days (from April 5, 2014 to May 19, 2014), and LG U+ for 45 days (from March 13, 2014 to April 4, 2014 and again from April 27, 2014 to May 18, 2014) from recruiting new subscribers as a result of continuing to offer excessive handset subsidies to

new subscribers, despite the order from the KCC prohibiting such subsidies. Additionally, the MSIP announced that it plans to bring criminal charges with fines of up to150 million and imprisonment of less than three years against any carrier and responsible personnel that fails to adhere to the suspension or continues to offer illegal subsidies after the suspension is completed.

In July 2012, the police arrested two individuals in connection with the alleged theft of personal account information relating to approximately 8.7 million of our mobile phone subscribers. The individuals in question stole personal information through a series of hackings starting from February 2012 into our New Service and Technology Evolution Program (“N-STEP”), our mobile customer information system. Since the incident, approximately 30,000 mobile phone subscribers filed lawsuits against us in connection with the N-STEP hackings, alleging that we failed to protect their personal information, and are seeking a total of approximately15 billion in damages. The trials are currently ongoing at various district courts.

Furthermore, in March 2014, the police arrested three individuals in connection with their alleged theft of personal information relating to approximately 9.8 million of our subscribers. The individuals in question stole the personal information of our subscribers through a series of hackings into our main homepage starting from February 2014. On March 19, 2014, approximately 100 individuals collectively filed a lawsuit against us in Seoul Central District Court, seeking damages of approximately200,000 per person. According to news reports, several other subscribers and third party organizations have filed lawsuits against us in connection with the incident, which we are not yet able to confirm as we have not yet received any official notice from the courts regarding these additional lawsuits. As part of an ongoing public-private task force investigation into the recent hacking incidents, the MSIP announced in March 2014 that it confirmed that hackers accessed our websites more than 12 million times using automated hacking programs in the three months prior to the announcement. On March 17, 2014, the KCC announced and the MSIP further announced that we may be fined up to100 million in light of the most recent hacking incident.

In December 2013, the MSIP declared that the contract over our sale of Mugunghwa 3 was null and void, on the grounds that the satellite was sold without obtaining proper government approval, and ordered us to take corrective measures. We are currently involved in arbitration proceedings against ABS at the International Court of Arbitration of the International Chamber of Commerce and the American Arbitration Association over the Mugunghwa 3 satellite ownership rights and contract violation claims.

We are a defendant in various other court proceedings involving claims for civil damages arising in the ordinary course of our business. While we are unable to predict the ultimate disposition of these claims, in the opinion of our management, the ultimate disposition of these claims will not have a material adverse effect on our business, financial condition and results of operations.

Dividends

The table below sets out the annual dividends declared on the outstanding common stock to shareholders of record on December 31 of the years indicated and the interim dividends declared on the outstanding common stock to shareholders of record on June 30 of the years indicated.indicated:

 

Year

  Annual Dividend per
Common Stock
   Interim Dividend per
Common Stock
   Average Total
Dividend per Common
Stock
   Annual Dividend per
Common Stock
   Interim Dividend per
Common Stock
   Average Total
Dividend per Common
Stock
 
  (In Won)   (In Won)   (In Won)   (In Won)   (In Won)   (In Won) 

2006

   2,000          2,000  

2007

   2,000          2,000  

2008

   1,120          1,120  

2009

   2,000          2,000     2,000          2,000  

2010

   2,410          2,410     2,410          2,410  

2011

   2,000          2,000  

2012

   2,000          2,000  

2013

   800          800  

If sufficient profits are available, the Board of Directors may propose annual dividends on the outstanding common stock, which our shareholders must approve by a resolution at the ordinary general meeting of shareholders. This meeting is generally held in March of the following year and if our shareholders at such ordinary general meeting of shareholders approve the annual dividend, we must pay such dividend within one month following the date of such resolution. Typically, we pay such dividends shortly after the meeting. The declaration of annual dividends is subject to the vote of our shareholders, and consequently, there can be no assurance as to the amount of dividends per common stock or that any such dividends will be declared. Interim dividends paid in cash can be declared by a resolution of the board of directors. See “Item 10. Additional Information—Item 10.B.

Memorandum and Articles of Association—Dividends” and “Item 12. Description of Securities Other than Equity Securities—Description of American Depositary Shares—Dividends and Distributions.”

The Commercial Code provides that shares of a company of the same class must receive equal treatment. However, major shareholders may consent to receive dividend distributions at a lesser rate than minor shareholders.Previously,shareholders. Previously, the Government consented to receiving a smaller dividend compared to other shareholders. The Government no longer holds any interest in us.

Any cash dividends relating to the shares held in the form of ADSs will be paid to the depositary bank in Won. The deposit agreement provides that, except in certain circumstances, cash dividends received by the depositary bank will be converted by the depositary bank into Dollars and distributed to the holders of the ADRs, less withholding tax, other governmental charges and the depositary bank’s fees and expenses. See “Item 12. Description of Securities Other than Equity Securities—Description of the American Depositary Shares—Dividends and Distributions.”

Item 8.B.  Significant Changes

Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.

Item 9.  The Offer and Listing

Item 9.A.  Offer and Listing Details

Market Price Information

Common Stock

Our shares were listed on the KRX KOSPI Market on December 23, 1998. The price of the shares on the KRX KOSPI Market as of the close of trading on JuneApril 28, 20112014 was(Won)39,30032,600 per share. The table below shows the high and low closing prices and the average daily volume of trading activity on the KRX KOSPI Market for the shares.shares since January 2009:

 

  Price   Average Daily
Trading Volume
   Price   Average Daily
Trading  Volume
 
  High   Low     High   Low   
  (In Won)   (Number of shares)   (In Won)   (Number of shares) 

2006

   49,350     37,600     539,707  

2007

   56,100     40,150     917,274  

2008

   52,200     29,500     1,019,430  

2009

   42,000     33,100     1,371,110     42,000     33,100     1,371,110  

2010

   50,600     39,150     1,343,486  

2011

   45,500     34,200     1,063,506  

2012

   39,750     27,700     1,067,315  

First quarter

   42,000     35,800     1,275,616     35,450     31,450     1,031,595  

Second quarter

   39,000     33,100     1,710,969     31,600     27,700     1,056,858  

Third quarter

   41,050     36,650     1,474,130     36,350     30,650     1,181,895  

Fourth quarter

   40,600     39,100     1,015,789     39,750     34,500     993,862  

2010

   50,600     39,150     1,343,486  

First quarter

   50,600     39,150     1,838,430  

Second quarter

   49,350     44,650     1,353,466  

Third quarter

   45,700     41,100     1,148,613  

Fourth quarter

   49,200     43,500     1,033,436  

2011 (through June 28)

   45,500     36,350     989,721  

First quarter

   45,500     37,850     1,131,917  

January

   45,500     41,800     1,450,595  

February

   42,050     39,100     1,082,810  

March

   39,900     37,850     865,669  

Second quarter (through June 28)

   40,500     36,350     847,525  

April

   40,500     37,500     883,324  

May

   39,850     37,450     943,658  

June (through June 28)

   39,300     36,350     706,764  

   Price   Average Daily
Trading  Volume
 
   High   Low   
   (In Won)   (Number of shares) 

2013

   40,850     29,850     1,149,143  

First quarter

   38,750     34,600     1,037,037  

Second quarter

   40,850     34,000     1,112,465  

Third quarter

   37,300     33,900     1,018,216  

Fourth quarter

   36,900     29,850     1,427,046  

2014 (through April 28)

   32,650     28,300     1,230,056  

First quarter

   31,900     28,300     981,580  

January

   31,900     29,850     1,007,246  

February

   31,900     29,100     1,121,649  

March

   29,900     28,300     823,737  

Second quarter (through April 28)

   32,650     28,700     1,987,907  

April (through April 28)

   32,650     28,700     1,987,907  

 

 

Source:KRX KOSPI Market.

ADSs

The outstanding ADSs, each of which represents one-half of one share of our common stock, have been traded on the New York Stock Exchange and the London Stock Exchange since May 25, 1999.

The price of the ADSs on the New York Stock Exchange as of the close of trading on June 28, 2011April 25, 2014 was $18.86$15.36 per ADS. The table below shows the high and low trading prices and the average daily volume of trading activity on the New York Stock Exchange for our ADSs since January 2006.2009:

 

  Price   Average Daily
Trading  Volume
   Price   Average Daily
Trading  Volume
 
  High   Low     High   Low   
  (In US$)   (Number of ADSs)   (In US$)   (Number of ADSs) 

2006

   26.66     20.11     562,859  

2007

   29.22     21.51     592,205  

2008

   27.10     10.10     819,733  

2009

   17.64     11.42     639,566     17.64     11.42     639,566  

2010

   22.62     17.12     784,905  

2011

   20.86     14.49     1,124,692  

2012

   18.23     11.65     1,004,064  

First quarter

   15.74     11.42     973,548     15.49     13.69     1,436,411  

Second quarter

   15.09     13.14     704,511     13.90     11.65     938,943  

Third quarter

   17.38     14.18     390,295     16.24     13.38     887,720  

Fourth quarter

   17.64     16.05     489,908     18.23     15.38     756,111  

2010

   22.62     17.12     784,905  

2013

   18.16     14.33     528,291  

First quarter

   21.43     17.12     718,461     18.07     15.65     766,282  

Second quarter

   22.62     18.61     744,727     18.16     14.92     518,995  

Third quarter

   20.46     17.79     868,906     17.25     15.00     368,603  

Fourth quarter

   22.07     20.29     803,784     17.24     14.33     474,159  

2010 (through June 28)

   20.86     17.75     1,291,515  

2014 (through April 25)

   15.73     13.24     527,105  

First quarter

   20.72     18.34     1,380,642     14.75     13.24     515,373  

January

   20.72     19.66     1,554,945     14.75     13.41     711,009  

February

   20.30     19.59     1,555,063     14.19     13.56     443,384  

March

   19.77     18.34     1,084,987     13.89     13.24     384,870  

Second quarter (through June 28)

   20.86     17.75     1,200,926  

April

   20.32     19.31     837,350  

May

   20.86     18.22     1,539,710  

June (through June 28)

   18.86     17.75     1,210,370  

Second quarter (through April 25)

   15.73     13.45     566,862  

April (through April 25)

   15.73     13.45     566,862  

 

Source:New York Stock Exchange.

Source:New York Stock Exchange.

Item 9.B.  Plan of Distribution

Not applicable.

Item 9.C.Markets

The KRX KOSPI Market

On January 27, 2005, the Korea Exchange was established pursuant to the Korea Securities and Futures Exchange Act through the consolidation of the Korea Stock Exchange, the Korea Futures Exchange, the KOSDAQ Stock Market, Inc. (the “KOSDAQ”) and the KOSDAQ Committee within the Korea Securities Dealers Association, which was in charge of the management of the KOSDAQ. There are threefour different markets operated by the Korea Exchange: the KRX KOSPI Market, the KRX KOSDAQ Market, the KRX KONEX Market and the KRX Derivatives Market. The Korea Exchange has twothree trading floors located in Seoul, one for the KRX KOSPI Market, and one for the KRX KOSDAQ Market, one for the KRX KONEX Market, and one trading floor in Busan for the KRX Derivatives Market. The Korea Exchange is a limited liability company, the shares of which are held by (i) securities companies and futures companies that were formerly members of the Korea Stock Exchange or the Korea Futures Exchange, (ii) the Small & Medium Business

Corporation, (iii) the Korea Securities Finance Corporation and (iv) the Korea Securities DealersFinancial Investment Association. Currently, the Korea Exchange is the only stock exchange in Korea and is operated by membership, having as its members most of the Korean securities companies and some Korean branches of foreign securities companies.

The KRX KOSPI Market has the power in some circumstances to suspend trading in the shares of a given company or to de-list a security. The KRX KOSPI Market also restricts share price movements. All listed companies are required to file accounting reports annually and quarterly and to release immediately all information that may affect trading in a security.

The Government has in the past exerted, and continues to exert, substantial influence over many aspects of the private sector business community which can have the intention or effect of depressing or boosting the market. In the past, the Government has informally both encouraged and restricted the declaration and payment of dividends, induced mergers to reduce what it considers excess capacity in a particular industry and induced private companies to offer publicly their securities.

The KRX KOSPI Market publishes the Korea Composite Stock Price Index every twoten seconds, which is an index of all equity securities listed on the KRX KOSPI Market. The Korea Composite Stock Price Index is calculated using the aggregate value method, in which the market capitalizations of all listed companies are aggregated, subject to certain adjustments, and this aggregate is expressed as a percentage of the aggregate market capitalization of all listed companies as of the base date, January 4, 1980.

Movements in Korea Composite Stock Price Index are set out in the following table together with the associated dividend yields and price earnings ratios.ratios:

 

Year

  Opening   High   Low   Closing   Period Average 
                  Period Average 

Year

Opening   High   Low   Closing   Dividend
Yield (1) (2)
(Percent)
   Price
Earnings
Ratio (2) (3)
   Opening   High   Low   Closing   Dividend
Yield (1) (2)
(Percent)
   Price
Earnings
Ratio (2) (3)
 
   5.3     5.2     139.53     163.37     131.40     163.37     5.3     5.2  

1986

   161.40     279.67     153.85     272.61     4.3     7.6     161.40     279.67     153.85     272.61     4.3     7.6  

1987

   264.82     525.11     264.82     525.11     2.6     10.9     264.82     525.11     264.82     525.11     2.6     10.9  

1988

   532.04     922.56     527.89     907.20     2.4     11.2     532.04     922.56     527.89     907.20     2.4     11.2  

1989

   919.61     1,007.77     844.75     909.72     2.0     13.9     919.61     1,007.77     844.75     909.72     2.0     13.9  

1990

   908.59     928.82     566.27     696.11     2.2     12.8     908.59     928.82     566.27     696.11     2.2     12.8  

1991

   679.75     763.10     586.51     610.92     2.6     11.2     679.75     763.10     586.51     610.92     2.6     11.2  

1992

   624.23     691.48     459.07     678.44     2.2     10.9     624.23     691.48     459.07     678.44     2.2     10.9  

1993

   697.41     874.10     605.93     866.18     1.6     12.7     697.41     874.10     605.93     866.18     1.6     12.7  

1994

   879.32     1,138.75     855.37     1,027.37     1.2     16.2     879.32     1,138.75     855.37     1,027.37     1.2     16.2  

1995

   1,027.45     1,016.77     847.09     882.94     1.2     16.4     1,027.45     1,016.77     847.09     882.94     1.2     16.4  

1996

   882.29     986.84     651.22     651.22     1.3     17.8     882.29     986.84     651.22     651.22     1.3     17.8  

1997

   647.67     792.29     350.68     376.31     1.5     17.0     647.67     792.29     350.68     376.31     1.5     17.0  

1998

   374.41     579.86     280.00     562.46     1.9     10.8     374.41     579.86     280.00     562.46     1.9     10.8  

1999

   565.10     1,028.07     498.42     1,028.07     1.1     13.5     565.10     1,028.07     498.42     1,028.07     1.1     13.5  

2000

   1,028.33     1,059.04     500.60     504.62     2.1     12.9     1,028.33     1,059.04     500.60     504.62     2.1     12.9  

2001

   503.31     704.50     468.76     693.70     1.7     16.4  

2002

   698.00     937.61     584.04     627.55     1.6     15.2  

2003

   633.03     822.16     515.24     810.71     2.0     11.8  

2004

   821.26     936.06     719.59     895.92     2.0     13.8  

2005

   896.00     1,379.37     870.84     1,379.37     1.8     10.6  

2006

   1,383.32     1,464.70     1,203.86     1,434.46     1.6     11.1  

2007

   1,438.89     2,064.85     1,355.79     1,897.13     1.4     15.8  

2008

   1,891.45     1,888.88     938.75     1,124.47     2.6     8.9  

2009

   1,132.87     1,718.88     1,018.81     1,682.77     1.6     22.9  

2010

   1,696.14     2,051.00     1,552.79     2,051.00     1.1     17.8  

2011 (through June 28)

   2,070.08     2,228.96     1,923.92     2,062.91     1.2     16.1  

                   Period Average 

Year

  Opening   High   Low   Closing   Dividend
Yield (1) (2)
(Percent)
   Price
Earnings
Ratio (2) (3)
 

2001

   503.31     704.50     468.76     693.70     1.7     16.4  

2002

   698.00     937.61     584.04     627.55     1.6     15.2  

2003

   633.03     822.16     515.24     810.71     2.0     11.8  

2004

   821.26     936.06     719.59     895.92     2.0     13.8  

2005

   896.00     1,379.37     870.84     1,379.37     1.8     10.6  

2006

   1,383.32     1,464.70     1,203.86     1,434.46     1.6     11.1  

2007

   1,438.89     2,064.85     1,355.79     1,897.13     1.4     15.8  

2008

   1,891.45     1,888.88     938.75     1,124.47     2.6     8.9  

2009

   1,132.87     1,718.88     1,018.81     1,682.77     1.6     22.9  

2010

   1,696.14     2,051.00     1,552.79     2,051.00     1.1     17.8  

2011

   2,078.08     2,228.96     1,652.71     1,825.74     1.5     10.5  

2012

   1,826.37     2,049.28     1,769.31     1,997.05     1.3     12.3  

2013

   2,031.10     2,059.58     1,780.63     2,011.34     1.2     13.5  

2014 (through April 25)

   1,967.19     2,008.61     1,886.85     1,971.66     1.2     14.7  

 

 

Source:The KRX KOSPI Market

 

(1)Dividend yields are based on daily figures. Dividend yields after January 3, 1984 include cash dividends only.

(2)Starting in April 2000, dividend yield and price earnings ratio are calculated based on KOSPI 200, an index of 200 equity securities listed on the KRX KOSPI Market. Starting in April 2000, KOSPI 200 excludes classified companies, companies which did not submit annual reports to the KRX KOSPI Market, and companies which received qualified opinion from external auditors.

 

(3)The price earnings ratio is based on figures for companies that record a profit in the preceding year.

Shares are quoted “ex-dividend” on the first trading day of the relevant company’s accounting period; since the calendar year is the accounting period for the majority of listed companies, this may account for the drop in the Korea Composite Stock Price Index between its closing level at the end of one calendar year and its opening level at the beginning of the following calendar year.

With certain exceptions, principally to take account of a share being quoted “ex-dividend” and “ex-rights,” permitted upward and downward movements in share prices of any category of shares on any day are limited under the rules of the KRX KOSPI Market to 15% of the previous day’s closing price of the shares, rounded down as set out below:

 

Previous Days’ Closing Price

  Rounded Down To 

Less than(Won)5,000

  (Won)5  

(Won)5,000 to less than(Won)10,000

  (Won)10  

(Won)10,000 to less than(Won)50,000

  (Won)50  

(Won)50,000 to less than(Won)100,000

  (Won)100  

(Won)100,000 to less than(Won)500,000

  (Won)500  

(Won)500,000 or more

  (Won)1,000  

As a consequence, if a particular closing price is the same as the price set by the fluctuation limit, the closing price may not reflect the price at which persons would have been prepared, or would be prepared to continue, if so permitted, to buy and sell shares. Orders are executed on an auction system with priority rules to deal with competing bids and offers.

Due to a deregulation of restrictions on brokerage commission rates, the brokerage commission rate on equity securities transactions may be determined by the parties, subject to commission schedules being filed with the KRX KOSPI Market by the securities companies. In addition, a securities transaction tax will generally be imposed on the transfer of shares or certain securities representing rights to subscribe for shares at the rate of 0.15% if such transfer is made through the KRX KOSPI Market. A special agricultural and fishery tax of 0.15% of the sales prices will

also be imposed on transfer of these shares and securities on the KRX KOSPI Market. See “Item 10. Additional Information—Item 10.A. Taxation—Korean Taxation.”

The number of companies listed on the KRX KOSPI Market, the corresponding total market capitalization at the end of the periods indicated and the average daily trading volume for those periods are set forth in the following table:

 

   Market Capitalization
on the Last Day of Each Period
   Average Daily Trading Volume, Value 

Year

  Number of
Listed
Companies
   (Billions
of Won)
   (Millions of
Dollars)(1)
   Thousands
of Shares
   (Millions
of Won)
   (Thousands of
Dollars) (1)
 

1985

   342     6,570     7,381     18,925     12,315     13,834  

1986

   355     11,994     13,924     31,755     32,870     38,159  

1987

   389     26,172     33,033     20,353     70,185     88,583  

1988

   502     64,544     94,348     10,367     198,364     289,963  

1989

   626     95,477     140,490     11,757     280,967     414,430  

1990

   669     79,020     110,301     10,866     183,692     256,411  

1991

   686     73,118     96,107     14,022     214,263     281,629  

1992

   688     84,712     107,448     24,028     308,246     390,977  

1993

   693     112,665     139,420     35,130     574,048     710,367  

  Market Capitalization
on the Last Day of Each Period
   Average Daily Trading Volume, Value   Market Capitalization
on the Last Day of Each Period
   Average Daily Trading Volume, Value 

Year

  Number of
Listed
Companies
   (Billions
of Won)
   (Millions of
Dollars)(1)
   Thousands
of Shares
   (Millions
of Won)
   (Thousands of
Dollars) (1)
   Number of
Listed
Companies
   (Billions
of Won)
   (Millions of
Dollars) (1)
   Thousands
of Shares
   (Millions
of Won)
   (Thousands of
Dollars) (1)
 

1985

   342     6,570     7,381     18,925     12,315     13,834  

1986

   355     11,994     13,924     31,755     32,870     38,159  

1987

   389     26,172     33,033     20,353     70,185     88,583  

1988

   502     64,544     94,348     10,367     198,364     289,963  

1989

   626     95,477     140,490     11,757     280,967     414,430  

1990

   669     79,020     110,301     10,866     183,692     256,411  

1991

   686     73,118     96,107     14,022     214,263     281,629  

1992

   688     84,712     107,448     24,028     308,246     390,977  

1993

   693     112,665     139,420     35,130     574,048     710,367  

1994

   699     151,217     191,730     36,862     776,257     984,223     699     151,217     191,730     36,862     776,257     984,223  

1995

   721     141,151     182,201     26,130     487,762     629,613     721     141,151     182,201     26,130     487,762     629,613  

1996

   760     117,370     139,031     26,571     486,834     575,680     760     117,370     139,031     26,571     486,834     575,680  

1997

   776     70,989     50,162     41,525     555,759     392,707     776     70,989     50,162     41,525     555,759     392,707  

1998

   748     137,799     114,091     97,716     660,429     546,803     748     137,799     114,091     97,716     660,429     546,803  

1999

   725     349,504     305,137     278,551     3,481,620     3,039,655     725     349,504     305,137     278,551     3,481,620     3,039,655  

2000

   704     188,042     149,275     306,163     2,602,211     2,065,739     704     188,042     149,275     306,163     2,602,211     2,065,739  

2001

   689     253,843     191,421     473,241     1,997,420     1,506,237     689     253,843     191,421     473,241     1,997,420     1,506,237  

2002

   683     258,681     215,496     857,245     3,041,598     2,533,815     683     258,681     215,496     857,245     3,041,598     2,533,815  

2003

   684     355,363     296,679     542,010     2,216,636     1,850,589     684     355,363     296,679     542,010     2,216,636     1,850,589  

2004

   683     412,588     395,275     372,895     2,232,109     2,138,445     683     412,588     395,275     372,895     2,232,109     2,138,445  

2005

   702     655,075     646,668     467,629     3,157,662     3,117,139     702     655,075     646,668     467,629     3,157,662     3,117,139  

2006

   731     704,588     757,948     279,096     3,435,180     3,695,332     731     704,588     757,948     279,096     3,435,180     3,695,332  

2007

   746     951,887     1,014,589     363,732     5,539,588     5,904,485     746     951,887     1,014,589     363,732     5,539,588     5,904,485  

2008

   765     576,888     458,757     355,205     5,189,644     4,126,953     765     576,888     458,757     355,205     5,189,644     4,126,953  

2009

   770     887,316     759,949     483,902     5,783,552     4,953,367     770     887,316     759,949     483,902     5,783,552     4,953,367  

2010

   777     1,141,885     1,002,621     380,859     5,619,768     4,934,382     777     1,141,885     1,002,621     380,859     5,619,768     4,934,382  

2011 (through June 28)

   782     1,158,897     1,066,437     325,590     7,344,163     6,758,225  

2011

   791     1,041,999     903,493     353,760     6,863,146     5,950,877  

2012

   784     1,154,294     1,077,672     486,480     4,823,643     4,503,448  

2013

   777     1,185,974     1,123,826     328,325     3,993,422     3,784,158  

2014 (through April 25)

   770     1,174,879     1,131,541     233,289     3,721,007     3,583,749  

 

 

Source:The KRX KOSPI Market

 

(1)Converted at the Concentration Base Rate of The Bank of Korea or the Market Average Exchange Rate as announced by Seoul Money Brokerage Services Limited, as the case may be, at the end of the periods indicated.

The Korean securities markets are principally regulated by the Financial Services Commission of Korea and the Financial Investment Services and Capital Markets Act. The Securities and Exchange Act which regulated the securities markets in the past was replaced with the Financial Investment Services and Capital Markets Act on February 4, 2009. The new law, as did the Securities and Exchange Act, imposes restrictions on insider trading and price manipulation, requires specified information to be made available by listed companies to investors and establishes rules regarding margin trading, proxy solicitation, takeover bids, acquisition of treasury shares and reporting requirements for shareholders holding substantial interests.

Further Opening of the Korean Securities Market

A stock index futures market was opened on May 3, 1996 and a stock index option market was opened on July 7, 1997, in each case at the KRX KOSPI Market. Remittance and repatriation of funds in connection with investment in stock index futures and options are subject to regulations similar to those that govern remittance and repatriation in the context of foreign investment in Korean stocks.

Starting from May 1, 1996, foreignForeign investors wereare permitted to invest in warrants representing the right to subscribe for shares of a company listed on the KRX KOSPI Market or registered on the KRX KOSDAQ Market, subject to certain investment limitations. A foreign investor may not acquire such warrants with respect to shares of a class of a company for which the ceiling on aggregate investment by foreigners has been reached or exceeded.

As of December 30, 1997, foreignForeign investors wereare permitted to invest in all types of corporate bonds, bonds issued by national or local governments and bonds issued in accordance with certain special laws without being subject to any aggregate or individual investment ceiling. The Financial Services Commission sets forth procedural requirements for such investments. The Government announced on February 8, 1998 its plans for the liberalization of the money market with respect to investment in money market instruments by foreigners in 1998. According to the plan, foreigners have been permitted to invest in money market instruments issued by corporations, including commercial

paper, starting February 16, 1998 with no restrictions as to the amount. Starting May 25, 1998, foreigners have beenForeigners are permitted to invest in certificates of deposit and repurchase agreements.

Currently, foreigners are permitted to invest in securities including shares of all Korean companies which are not listed on the KRX KOSPI Market nor registered on the KRX KOSDAQ Market and in bonds which are not listed.

Protection of Customer’s Interest in Case of Insolvency of Securities Companies

Under Korean law, the relationship between a customer and a securities company in connection with a securities sell or buy order is deemed to be consignment and the securities acquired by a consignment agent (i.e., the securities company) through such sell or buy order are regarded as belonging to the customer in so far as the customer and the consignment agent’s creditors are concerned. Therefore, in the event of a bankruptcy or reorganization procedure involving a securities company, the customer of the securities company is entitled to the proceeds of the securities sold by the securities company.

When a customer places a sell order with a securities company which is not a member of the KRX KOSPI Market and this securities company places a sell order with another securities company which is a member of the KRX KOSPI Market, the customer is still entitled to the proceeds of the securities sold received by the non-member company from the member company regardless of the bankruptcy or reorganization of the non-member company.

Under the Financial Investment Services and Capital Markets Act, the KRX KOSPI Market is obliged to indemnify any loss or damage incurred by a counterparty as a result of a breach by its members. If a securities company which is a member of the KRX KOSPI Market breaches its obligation in connection with a buy order, the KRX KOSPI Market is obliged to pay the purchase price on behalf of the breaching member. Therefore, the customer can acquire the securities that have been ordered to be purchased by the breaching member.

When a customer places a buy order with a non-member company and the non-member company places a buy order with a member company, the customer has the legal right to the securities received by the non-member company from the member company because the purchased securities are regarded as belonging to the customer in so far as the customer and the non-member company’s creditors are concerned.

As the cash deposited with a securities company is regarded as belonging to the securities company, which is liable to return the same at the request of its customer, the customer cannot take back deposited cash from the securities company if a bankruptcy or reorganization procedure is instituted against the securities company and, therefore, can suffer from loss or damage as a result. However, the Depositor Protection Act provides that Korea Deposit Insurance Corporation will, upon the request of the investors, pay investors up to(Won)50 million in case of the securities company’s bankruptcy, liquidation, cancellation of securities business license or other insolvency events. Pursuant to the Financial Investment Services and Capital Markets Act, securities companies are required to deposit the cash received from its customers to the extent the amount not covered by the insurance with the Korea Securities Finance Corporation, a special entity established pursuant to the Securities and Exchange ActAct.

Set-off or attachment of cash deposits by securities companies is prohibited. The premiums related to this insurance are paid by securities companies.

Item 9.D.  Selling Shareholders

Not applicable.

Item 9.E.  Dilution

Not applicable.

Item 9.F.  Expenses of the Issuer

Not applicable.

Item 10.  Additional Information

Item 10.A.Share Capital

Currently, our authorized share capital is 1,000,000,000 shares, which consists of shares of common stock, par value(Won)5,000 per share (“Common Shares”) and shares of non-voting preferred stock, par value(Won)5,000 per share (“Non-Voting Shares”). Common Shares and Non-Voting Shares together are referred to as “Shares.” Under our articles of incorporation, we are authorized to issue Non-Voting Shares up to one-fourth of our total issued capital stock. As of December 31, 2010,2013, 261,111,808 Common Shares were issued, of which 17,895,96417,308,160 shares were held by the treasury stock fund or us as treasury shares. We have never issued any Non-Voting Shares. All of the issued Common Shares are fully-paid and non-assessable and are in registered form. We issue share certificates in denominations of 1, 5, 10, 50, 100, 500, 1,000 and 10,000 shares.

Item 10.B.  Memorandum and Articles of Association

This section provides information relating to our capital stock, including brief summaries of material provisions of our articles of incorporation, the Financial Investment Services and Capital Markets Act, the Commercial Code and related laws of Korea, all as currently in effect. The following summaries are subject to, and are qualified in their entirety by reference to, our articles of incorporation and the applicable provisions of the Financial Investment Services and Capital Markets Act and the Commercial Code. We have filed a copy of our articles of incorporation as an exhibit to registration statements under the Securities Act or the Securities Exchange Act previously filed by us.

Dividends

We distribute dividends to our shareholders in proportion to the number of shares owned by each shareholder. No dividends are distributed with respect to shares held by us or our treasury stock fund. The Common Shares represented by the ADSs have the same dividend rights as other outstanding Common Shares.

Holders of Non-Voting Shares are entitled to receive dividends in priority to the holders of Common Shares in an amount of not less than 9% of the par value of the Non-Voting Shares as determined by the board of directors at the time of their issuance, provided that if the dividends on the Common Shares exceed those on the Non-Voting Shares, the Non-Voting Shares will also participate in the distribution of such excess dividend amount in the same proportion as the Common Shares. If the amount available for dividends is less than the aggregate amount of such minimum dividend, the holders of Non-Voting Shares will be entitled to receive such accumulated unpaid dividend in priority to the holders of Common Shares from the dividends payable in respect of the next fiscal year.

We declare dividends annually at the annual general meeting of shareholders which is held within three months after the end of the fiscal year. We pay the annual dividend shortly after the annual general meeting to the shareholders of record as of the end of the preceding fiscal year. We may distribute the annual dividend in cash or in Shares. However, a dividend of Shares must be distributed at par value. If the market price of the Shares is less than their par value, dividends in Shares may not

exceed one-half of the annual dividend. We may pay interim dividends in cash once a year to shareholders or registered pledgees who are registered in the registry of shareholders as of June 30 of each fiscal year by a resolution of the board of directors. We have no obligation to pay any annual dividend unclaimed for five years from the payment date.

Under the Commercial Code, we may pay our dividend only out of the excess of our net assets, on a non-consolidated basis, over the sum of (1) our stated capital and (2) the total amount of our capital surplus reserve and legalearned surplus reserve (the “Legal Reserve”) accumulated up to the end of the relevant dividend period. In addition, we may not pay any dividend unless we have set aside as legalearned surplus reserve an amount equal to at least 10% of the cash portion of the dividend or unless we have accumulated a legalan earned surplus reserve of not less than one-half of our stated capital. We may not use legal reservethe Legal Reserve to pay cash dividends but may transfer amounts from legal reservethe Legal Reserve to capital stock or use legal reservethe Legal Reserve to reduce an accumulated deficit.

Distribution of Free Shares

In addition to paying dividends in Shares out of our retained or current earnings, we may also distribute to our shareholders an amount transferred from our capital surplus or legal reservethe Legal Reserve to our stated capital in the form of free shares. We must distribute such free shares to all our shareholders in proportion to their existing shareholdings.

Preemptive Rights and Issuance of Additional Shares

We may issue authorized but unissued shares at times and, unless otherwise provided in the Commercial Code, on terms our board of directors may determine. Subject to the limitation described in “Limitation on Shareholdings” below, all our shareholders are generally entitled to subscribe for any newly issued Shares in proportion to their existing shareholdings. We must offer new Shares on uniform terms to all shareholders who have preemptive rights and are listed on our shareholders’ register as of the relevant record date. Under the Commercial Code, we may vary, without shareholders’ approval, the terms of these preemptive rights for different classes of shares. We must give notice to all persons who are entitled to exercise preemptive rights regarding new Shares and

their transferability at least two weeks before the relevant record date. Our board of directors may determine how to distribute Shares for which preemptive rights have not been exercised or where fractions of Shares occur.

Under the Commercial Code, it is required that the new Shares, convertible bonds or bonds with warrants be issued to persons other than the existing shareholders solely for the purpose of achieving managerial objectives. Under our articles of incorporation, we may issue new Shares pursuant to a board resolution to persons other than existing shareholders, who in these circumstances will not have preemptive rights, if the new Shares are:

 

publicly offered pursuant to Articles 4 and 119 of the Financial Investment Services and Capital Markets Act;

 

issued to members of our employee stock ownership association;

 

represented by depositary receipts;

 

issued upon exercise of stock options granted to our officers and employees;

 

issued through an offering to public investors pursuant to Article 165-6 of the Financial Investment Services and Capital Markets Act, the amount of which is no more than 10% of the issued Shares;

issued in order to satisfy specific needs such as strategic alliance, inducement of foreign funds or new technology, improvement of financial structure or other capital raising requirement; or

 

issued to domestic or foreign financial institutions when necessary for raising funds in emergency cases.

In addition, we may issue convertible bonds or bonds with warrants, each up to an aggregate principal amount of(Won)2,000 billion, to persons other than existing shareholders in the situations described above.

Members of our employee stock ownership association, whether or not they are our shareholders, generally have a preemptive right to subscribe for up to 20.0% of the Shares publicly offered pursuant to the Financial Investment Services and Capital Markets Act. This right is exercisable only to the extent that the total number of Shares so acquired and held by members of our employee stock ownership association does not then exceed 20.0% of the total number of Shares then issued (including in such total both: (i) all issued and outstanding Shares at the time the preemptive rights are exercised; and (ii) all Shares to be newly issued in the applicable share issuance transaction in connection with which such preemptive rights are exercised). As of December 31, 2010, 1.56%2013, 1.05% of the issued Shares were held by members of our employee stock ownership association.

Limitation on Shareholdings

The Telecommunications Business Act permits maximum aggregate foreign shareholding in us to be 49.0% of our total issued and outstanding Shares with voting rights (including equivalent securities with voting rights, e.g., depositary certificates and certain other equity interests). For the purposes of the foregoing, a shareholder is a “foreign shareholder” if such shareholder is: (1) a foreign person; (2) a foreign government; or (3) a company whose largest shareholder is a foreign person (including any “specially related persons” as determined under the Financial Investment Services and

Capital Markets Act) or a foreign government, in circumstances where (i) such foreign person or foreign government holds, in aggregate, 15.0% or more of such company’s total voting shares, and (ii) such company holds at least 1.0% of our total issued and outstanding Shares with voting rights. For the avoidance of doubt, allboth of conditions (i) toand (ii) in the foregoing item (3) must exist for such a company to be counted as a “foreign shareholder” for the purposes of calculating whether the 49.0% foreign shareholding threshold is reached under the Telecommunications Business Act. In addition, the Telecommunications Business Act prohibits a foreign shareholder from being our largest shareholder if such shareholder owns 5.0% or more of our Shares with voting rights. For the purposes of this restriction, any two or more foreign persons or foreign governments who enter into an agreement to act in concert in the exercise of their voting rights will be counted together and prohibited from becoming our largest shareholder in the event that they collectively hold 5.0% or more of our Shares. The Foreign Investment Promotion Act also prohibits any foreign shareholder from being our largest shareholder, if such shareholder owns 5.0% or more of our Shares with voting rights. For the purposes of this restriction under the Foreign Investment Promotion Act, a “foreign shareholder” is defined in the same manner as described above with respect to the foreign shareholding restriction under the Telecommunications Business Act, provided, however, that no exception is made under the Foreign Investment Promotion Act regulations for companies that own less than 1.0% of our Shares (see item (3)(ii) above in this paragraph). A foreigner who has acquired the Shares in excess of such ceiling described above may not exercise its voting rights for shares in excess of such limitation, and the Korea Communications CommissionMSIP may require corrective measures to comply with the ownership restrictions.

General Meeting of Shareholders

We hold the annual general meeting of shareholders within three months after the end of each fiscal year. Subject to a board resolution or court approval, we may hold an extraordinary general meeting of shareholders:

 

as necessary;

 

at the request of shareholders of an aggregate of 3.0% or more of our issued Common Shares;

 

at the request of shareholders holding an aggregate of 1.5% or more of our issued Shares for at least six months; or

 

at the request of our audit committee.

Holders of Non-Voting Shares may request a general meeting of shareholders only after the Non-Voting Shares become entitled to vote or are enfranchised, as described under “—Voting Rights” below.

We must give shareholders written notice setting out the date, place and agenda of the meeting at least two weeks before the date of the general meeting of shareholders. However, for holders of less than 1.0% of the total number of issued and outstanding Common Shares, we may give notice by placing at least two public notices in at least two daily newspapers at least two weeks in advance of the meeting. Currently, we use Seoul Shinmun, Maeil Business Newspaper and The Korea Economic Daily published in Seoul for this purpose. Shareholders not on the shareholders’ register as of the record date are not entitled to receive notice of the general meeting of shareholders or attend or vote at the meeting. Holders of Non-Voting Shares unless enfranchised, are not entitled to receive notice of general meetings of shareholders, but may attend such meetings.

Our general meetings of shareholders are held at our head office, in Sungnam, or if necessary, may be held anywhere near our head office or in Seoul.

Voting Rights

Holders of our Common Shares are entitled to one vote for each Common Share, except that voting rights of Common Shares held by us, or by a corporate shareholder that is more than 10.0%

owned by us either directly or indirectly, may not be exercised. The Commercial Code permits cumulative voting, under which voting method each shareholder has multiple voting rights corresponding to the number of directors to be appointed in the voting and may exercise all voting rights cumulatively to elect one director. Our articles of incorporation permit cumulative voting at our shareholders’ meeting. Under the Commercial Code of Korea, any shareholder holding shares equivalent to not less than 1/100 of the total number of shares issued may apply to us for selecting and appointing such directors by cumulative voting.

Our shareholders may adopt resolutions at a general meeting by an affirmative majority vote of the voting shares present or represented at the meeting, where the affirmative votes also represent at least one-fourth of our total voting shares then outstanding. However, under the Commercial Code and our articles of incorporation, the following matters, among others, require approval by the holders of at least two-thirds of the voting shares present or represented at a meeting, where the affirmative votes also represent at least one-third of our total voting shares then outstanding:

 

amending our articles of incorporation;

 

removing a director;

 

reduction of our capital stock;

 

effecting any dissolution, merger or consolidation of us;

 

transferring the whole or any significant part of our business;

 

effecting our acquisition of all of the business of any other company or our acquisition of a part of the business of any other company which will significantly affect our business; or

 

issuing any new Shares at a price lower than their par value.

In general, holders of Non-Voting Shares are not entitled to vote on any resolution or receive notice of any general meeting of shareholders. However, in the case of amendments to our articles of incorporation, any merger or consolidation of us, or in some other cases that affect the rights or interests of the Non-Voting Shares, approval of the holders of Non-Voting Shares is required. We may obtain such approval by a resolution of holders of at least two-thirds of the Non-Voting Shares present or represented at a class meeting of the holders of Non-Voting Shares, where the affirmative votes also represent at least one-third of our total outstanding Non-Voting Shares. In addition, if we are unable to pay dividends on Non-Voting Shares as provided in our articles of incorporation, the holders of Non-Voting Shares will become enfranchised and will be entitled to exercise voting rights until those dividends are paid. The holders of enfranchised Non-Voting Shares have the same rights as holders of Common Shares to request, receive notice of, attend and vote at a general meeting of shareholders.

Shareholders may exercise their voting rights by proxy. The proxy must present a document evidencing an appropriate power of attorney prior to the start of the general meeting of shareholders. Additionally, shareholders may exercise their voting rightsin absentiaby submission of signed write-in voting forms. To make it possible for our shareholders to proceed with voting on a write-in basis, we are required to attach the appropriate write-in voting form and related informational material to the notices distributed to shareholders for convening the relevant general meeting of shareholders. Any of our shareholders who desires to vote on such write-in basis must submit their completed and signed write-in voting forms to us no later than one day prior to the date that the relevant general meeting of shareholders is convened.

Holders of ADRs exercise their voting rights through the ADR depositary, an agent of which is the record holder of the underlying Common Shares. Subject to the provisions of the deposit agreement, ADR holders are entitled to instruct the ADR depositary how to vote the Common Shares underlying their ADSs. See “Item 12. Description of Securities Other than Equity Securities—Description of American Depositary Shares—Voting Rights.”

Appraisal Rights of Dissenting Shareholders

In some limited circumstances, including the transfer of the whole or any significant part of our business and our merger or consolidation with another company, dissenting shareholders have the right to require us to purchase their Shares. To exercise this right, shareholders must submit to us a written notice of their intention to dissent before the general meeting of shareholders. Within 20 days after the relevant resolution is passed at a meeting, the dissenting shareholders must request us in writing to purchase their Shares. We are obligated to purchase the Shares of dissenting shareholders within one month after the expiration of the 20-day period. The purchase price for the Shares is required to be determined through negotiation between the dissenting shareholders and us. If we cannot agree on a price through negotiation, the purchase price will be the average of (1) the weighted average of the daily Share prices on the KRX KOSPI Market for the two-month period before the date of the adoption of the relevant board resolution, (2) the weighted average of the daily Share price on the KRX KOSPI Market for the one month period before the date of the adoption of the relevant board resolution and (3) the weighted average of the daily Share price on the KRX KOSPI Market for the one week period before the date of the adoption of the relevant board resolution. However, if we or any of the dissenting shareholders do not accept the purchase price calculated using the above method, the rejecting party may request the court to determine the purchase price. Holders of ADSs will not be able to exercise dissenter’sappraisal rights unless they have withdrawn the underlying common stock and become our direct shareholders.

Register of Shareholders and Record Dates

Our transfer agent, Kookmin Bank, maintains the register of our shareholders at its office in Seoul, Korea. It registers transfers of Shares on the register of shareholders on presentation of the Share certificates.

The record date for annual dividends is December 31. For the purpose of determining the shareholders entitled to annual dividends, the register of shareholders may be closed for the period from the day after the record date to January 31 of the following year. Further, for the purpose of determining the shareholders entitled to some other rights pertaining to the Shares, we may, on at least two weeks’ public notice, set a record date and/or close the register of shareholders for not more than three months. The trading of Shares and the delivery of share certificates may continue while the register of shareholders is closed.

Annual Reports

At least one week before the annual general meeting of shareholders, we must make our annual report and audited non-consolidatedconsolidated financial statements available for inspection at our principal office and at all of our branch offices. In addition, copies of annual reports, the audited non-consolidatedconsolidated financial statements and any resolutions adopted at the general meeting of shareholders will be available to our shareholders.

Under the Financial Investment Services and Capital Markets Act, we must file with the Financial Services Commission and the KRX KOSPI Market (1) an annual report within 90 days after the end of our fiscal year and (2) interim reports with respect to the three month period, six month period and nine month period from the beginning of each fiscal year within 45 calendar days following the end of each period. Copies of these reports are or will be available for public inspection at the Financial Services Commission and the KRX KOSPI Market.

Transfer of Shares

Under the Commercial Code, the transfer of Shares is effected by delivery of share certificates. However, to assert shareholders’ rights against us, the transferee must have his name and address registered on our register of shareholders. For this purpose, a shareholder is required to file his name, address and seal with our transfer agent. A non-Korean shareholder may file a specimen signature in place of a seal, unless he is a citizen of a country with a sealing system similar to that of Korea. In addition, a non-resident shareholder must appoint an agent authorized to receive notices on his behalf in Korea and file a mailing address in Korea. The above requirements do not apply to the holders of ADSs.

Under current Korean regulations, Korean securities companies and banks, including licensed branches of non-Korean securities companies and banks, investment management companies, futures trading companies, internationally recognized foreign custodians and the Korea Securities Depository may act as agents and provide related services for foreign shareholders. Certain foreign exchange controls and securities regulations apply to the transfer of Shares by non-residents or non-Koreans. See “Item 10. Additional Information—Item 10.D. Exchange Controls.”

Our transfer agent is Kookmin Bank, located at 24-3, Yoido-dong, Youngdungpo-ku,24, Gukjegeumyung-ro, Yeongdeungpo-gu, Seoul, Korea.

Acquisition of Shares by Us

WeUnder the Commercial Code, we may not acquire our own Shares exceptby (i) purchasing on the KRX KOSPI Market, or (ii) purchasing from shareholders on a pro rata basis in limited circumstances, such as a reduction in capital. In addition, pursuant toaccordance with the number of shares held by each shareholder. The aggregate purchase price for the Shares may not exceed the total amount available for distribution of dividends at the end of the preceding fiscal year. Moreover, we must acquire our own Shares from dissenting shareholders who exercise their appraisal rights.

Under the Financial Investment Services and Capital Markets Act, we may acquire Shares only by (i) purchasing on the KRX KOSPI Market, (ii) purchasing from shareholders on a tender offer,pro rata basis in accordance with the number of shares held by each shareholder, or (iii) receiving Shares returned to us upon the cancellation or termination of a trust agreement with a trustee who acquired the Shares by either of the methods indicated above. The aggregate purchase price for the Shares may not exceed the total amount available for distribution of dividends at the end of the preceding fiscal year, subject to certain procedural requirements, provided that, in case of acquisition of our own Shares by us for the purpose of cancellation, the aggregate purchase price may not exceed the total amount available for distribution of dividends at the end of the preceding fiscal year minus certain reserves.year.

In general, corporate entities in which we own a 50.0% or more equity interest may not acquire our Shares.

As of December 31, 2010,2013, there were 17,895,96417,221,575 treasury shares including shares held by our treasury stock fund.

Liquidation Rights

In the event of our liquidation, after payment of all debts, liquidation expenses and taxes, our remaining assets will be distributed among shareholders in proportion to their shareholdings. Holders of Non-Voting Shares have no preference in liquidation.

Item 10.C.  Material Contracts

The Merger Agreement between KT Corporation and KTF

On January 20, 2009, KTF and KT CorporationWe have not entered into a merger agreement, pursuant to which KTF merged into KT Corporation on Juneany material contracts since January 1, 2009. KTF common stockholder received 0.7192335 share2010, other than in the ordinary course of KT Corporation common stock for every one share of KTF common stock that they owned. KT Corporation waived issuance of any merger consideration in respect of all of the outstanding shares of KTF common stock held by KT Corporation immediately priorour business. For information regarding our agreements and transactions with

certain related parties, see “Item 7.B. Related Party Transactions” and Note 34 to the merger.

PursuantConsolidated Financial Statements. For a description of certain agreements entered into during the past two years related to the merger agreement, all of the assets, liabilities, rightsour capital commitments and obligations, (including contractual rightssee “Item 5.B. Liquidity and obligations) of KTF were comprehensively succeeded by KT Corporation. The employees of KTF became employees of KT Corporation as a result of the merger, and the obligations to pay severance payments to those employees were succeeded by KT Corporation.

Under Korean law, holders of shares of KT Corporation or KTF common stock who opposed the merger were entitled to exercise their appraisal rights to purchase their shares, which were set at(Won)38,535 for each share of KT Corporation common stock properly submitted to KT Corporation for appraisal and(Won)29,284 for each share of KTF common stock properly submitted to KTF for appraisal.

KT Corporation delivered 700,108 shares of its newly issued common stock (par value(Won)5,000) and 45,629,480 shares of its treasury shares (par value(Won)5,000) to KTF stockholders listed on the stockholder registry of KTF as of the date of the merger. See “Item 5. Operating and Financial Review and Prospects—Item 5.A. Operating Result—Overview—Merger of KTF into KT Corporation.Capital Resources.

Item 10.D.  Exchange Controls

General

The Foreign Exchange Transaction Act and the Presidential Decree and regulations under that Act and Decree (collectively the “Foreign Exchange Transaction Laws”) regulate investment in Korean securities by non-residents and issuance of securities outside Korea by Korean companies. Under the Foreign Exchange Transaction Laws, non-residents may invest in Korean securities only in compliance with the provisions of, and to the extent specifically allowed by, these laws or otherwise permitted by the Ministry of Strategy and Finance. The Financial Services Commission has also adopted, pursuant to its authority under the Korean Financial Investment Services and Capital Markets Act, regulations that control investment by foreigners in Korean securities and regulate the issuance of securities outside Korea by Korean companies.

Under the Foreign Exchange Transaction Laws, if the Government deems that certain emergency circumstances, including, but not limited to, the outbreak of natural calamities, wars or grave and sudden changes in domestic or foreign economies, are likely to occur, the Ministry of Strategy and Finance may temporarily suspend the transactions where Foreign Exchange Transaction Laws are applicable, or impose an obligation to deposit or sell capital to certain Korean governmental agencies or financial institutions. In addition, if the Government deems that it is confronted or is likely to be confronted with serious difficulty in movement of capital between Korea and abroad which will bring serious obstacles in carrying out its currency policies, exchange rate policies and other macroeconomic policies, the Ministry of Strategy and Finance may take measures to require any person who performs transactions to deposit such capital to certain Korean governmental agencies or financial institutions.

Government Review of Issuance of ADSs

In order for us to issue shares represented by ADSs, we are required to file a prior report of the issuance with the Ministry of Strategy and Finance if our securities and borrowings denominated in foreign currencies issued during the one-year period preceding such filing date exceed US$30 million in aggregate. No further Korean governmental approval is necessary for the initial offering and issuance of the ADSs.

Under current Korean laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit which exceeds the difference between (1) the aggregate number of shares deposited by us or with the consent of us for the issuance of ADSs (including deposits in connection with the initial and all subsequent offerings of

ADSs and stock dividends or other distributions related to these ADSs) and (2) the number of shares on deposit with the depositary bank at the time of such proposed deposit. We can give no assurance that we would grant our consent, if our consent is required. Therefore, a holder of ADRs who surrenders ADRs and withdraws shares may not be permitted subsequently to deposit those shares and obtain ADRs.

Reporting Requirements for Holders of Substantial Interests

Any person whose direct or beneficial ownership of shares, whether in the form of shares or ADSs, certificates representing the rights to subscribe for Shares and equity-related debt securities

including convertible bonds and bonds with warrants (collectively, the “Equity Securities”) together with the Equity Securities beneficially owned by certain related persons or by any person acting in concert with the person accounts for 5.0% or more of the total issued Equity Securities is required to report the status of the holdings to the Financial Services Commission and the KRX KOSPI Market within five business days after reaching the 5.0% ownership interest. In addition, any change in the ownership interest subsequent to the report which equals or exceeds 1.0% of the total issued Equity Securities is required to be reported to the Financial Services Commission and the KRX KOSPI Market within five business days from the date of the change. The required information to be included in the 5.0% report may be different if the acquisition of such shareholding interest is for the purpose of exercising influence over the management, as opposed to an acquisition for investment purposes. Any person reporting the holding of 5.0% or more of the total issued Equity Securities and any person reporting the change in the ownership interest which equals or exceeds 1.0% of the total issued Equity Securities pursuant to the requirements described above must also deliver a copy of such reports to us.

Violation of these reporting requirements may subject a person to criminal sanctions such as fines or imprisonment and may result in a loss of voting rights with respect to the unreported ownership of Equity Securities exceeding 5.0%. Furthermore, the Financial Services Commission may issue an order to dispose of non-reported Equity Securities.

Restrictions Applicable to ADSs

No Korean governmental approval is necessary for the sale and purchase of ADSs in the secondary market outside Korea or for the withdrawal of shares underlying ADSs and the delivery inside Korea of shares in connection with the withdrawal, provided that a foreigner who intends to acquire the shares must obtain an investment registration certificate from the Financial Supervisory Service as described below. In general, the acquisition of the shares by a foreigner must be reported by the foreigner or his standing proxy in Korea immediately to the Governor of the Financial Supervisory Service; provided, however, that in cases where a foreigner acquires shares through the exercise of rights as a holder of ADSs (or other depositary certificates), the foreigner must cause such report to the Governor of the Financial Supervisory Service to be filed by the Korea Securities Depository.

Persons who have acquired shares as a result of the withdrawal of shares underlying the ADSs may exercise their preemptive rights for new shares, participate in free distributions and receive dividends on shares without any further governmental approval.

Restrictions Applicable to Shares

As a result of amendments to the Foreign Exchange Transaction Laws and Financial Services Commission regulations adopted in connection with the stock market opening from January 1992, which we refer to collectively as the Investment Rules, foreigners may invest, with limited exceptions and subject to procedural requirements, in all shares of Korean companies, whether listed on the KRX KOSPI Market or the KRX KOSDAQ Market, unless prohibited by specific laws. Foreign investors may

trade shares listed on the KRX KOSPI Market or the KRX KOSDAQ Market only through the KRX KOSPI Market or the KRX KOSDAQ Market, except in limited circumstances, including:

 

odd-lot trading of shares;

 

acquisition of shares (“Converted Shares”) by exercise of warrant, conversion right under convertible bonds or withdrawal right under depositary receipts issued outside of Korea by a Korean company;

acquisition of shares as a result of inheritance, donation, bequest or exercise of shareholders’ rights, including preemptive rights or rights to participate in free distributions and receive dividends;

 

over-the-counter transactions between foreigners of a class of shares for which the ceiling on aggregate acquisition by foreigners, as explained below, has been reached or exceeded;

 

shares acquired by foreign direct investment as defined in the Foreign Investment Promotion Law;Act;

 

disposal of shares pursuant to the exercise of appraisal rights of dissenting shareholders;

 

disposal of shares in connection with a tender offer;

 

acquisition of shares by a foreign depositary in connection with the issuance of depositary receipts;

 

acquisition and disposal of shares through overseas stock exchange market if such shares are simultaneously listed on the KRX KOSPI Market or the KRX KOSDAQ Market and such overseas stock exchange;

acquisition and disposal of shares through alternative trading systems (ATS);

 

arm’s length transactions between foreigners, if all of such foreigners belong to an investment group managed by the same person.

For over-the-counter transactions of shares between foreigners outside the KRX KOSPI Market or the KRX KOSDAQ Market for shares with respect to which the limit on aggregate foreign ownership has been reached or exceeded, an investment broker licensed in Korea must act as an intermediary. Odd-lot trading of shares outside the KRX KOSPI Market or the KRX KOSDAQ Market must involve a licensed investment trader in Korea as the other party. Foreign investors are prohibited from engaging in margin transactions through borrowing shares from a securities company with respect to shares which are subject to a foreign ownership limit.

The Investment Rules require a foreign investor who wishes to invest in shares on the KRX KOSPI Market or the KRX KOSDAQ Market (including Converted Shares) to register its identity with the Financial Supervisory Service prior to making any such investment; however, the registration requirement does not apply to foreign investors who acquire Converted Shares with the intention of selling such Converted Shares within three months from the date of acquisition of the Converted Shares or who acquire the shares in an over-the-counter transaction or dispose of shares where such acquisition or disposal is deemed to be a foreign direct investment pursuant toas defined in the FinancialForeign Investment Services and Capital MarketsPromotion Act. Upon registration, the Financial Supervisory Service will issue to the foreign investor an investment registration certificate that must be presented each time the foreign investor opens a brokerage account with a financial investment business entity. Foreigners eligible to obtain an investment registration certificate include foreign nationals who are individuals residing abroad for more than six months, foreign governments, foreign municipal authorities, foreign

public institutions, corporations incorporated under foreign laws, international organizations, funds and associations as defined under the Financial Investment Services and Capital Markets Act. All Korean offices of a foreign corporation as a group are treated as a separate entity from the offices of the corporation outside Korea. However, a foreign corporation or depositary bank issuing depositary receipts may obtain one or more investment registration certificates in its name in certain circumstances as described in the relevant regulations.

Upon a foreign investor’s purchase of shares through the KRX KOSPI Market or the KRX KOSDAQ Market, no separate report by the investor is required because the investment registration certificate system is designed to control and oversee foreign investment through a computer system. However, a foreign investor’s acquisition or sale of shares outside the KRX KOSPI Market or the KRX KOSDAQ Market (as discussed above) must be reported by the foreign investor or his standing proxy to the Governor of the Financial Supervisory Service at the time of each such acquisition or sale; provided, however, that in cases where a foreigner acquires shares through the exercise of rights as a holder of ADSs (or other depositary certificates), the foreigner must cause such report to the Governor of the Financial Supervisory Service to be filed by the Korea Securities Depository; and further provided that a foreign investor must ensure that any acquisition or sale by it of shares outside the KRX KOSPI Market or the KRX KOSDAQ Market in the case of trades in connection with a tender offer, odd-lot trading of shares or trades of a class of shares for which the aggregate foreign ownership limit has been reached or exceeded, is reported to the Governor of the Financial Supervisory Service by the investment trader, the investment broker, the Korea Securities Depository or the financial securities company engaged to facilitate such transaction. A foreign investor mustmay appoint one or more standing proxies from among the Korea Securities Depository, foreign exchange banks, including domestic branches of foreign banks, investment traders, investment brokers, the Korea Securities Depository, financial securities companies and internationally recognized custodians that satisfies all relevant requirements under the Financial Investment Services and Capital Markets Act and will act as a standing proxy to exercise shareholders’ rights or perform any matters related to the foregoing activities if the foreign investor does not perform these activities himself. However, a foreign investor may be exempted from complying with these standing proxy rules with the approval of the Governor of the Financial Supervisory Service in cases deemed inevitable by reason of conflict between laws of Korea and the home country of the foreign investor.Act.

Certificates evidencing shares of Korean companies must be kept in custody with an eligible custodian in Korea. Only the Korea Securities Depository, foreign exchange banks including domestic branches of foreign banks, investment traders, investment brokers, collective investment business entities and internationally recognized custodians satisfying the relevant requirements under the Financial Investment Services and Capital Markets Act are eligible to act as a custodian of shares for a non-resident or foreign investor. A foreign investor must ensure that his custodian deposits its shares with the Korea Securities Depository. However, a foreign investor may be exempted from complying with this deposit requirement with the approval of the Governor of the Financial Supervisory Service in circumstances where compliance with that requirement is made impracticable, including cases where compliance would contravene the laws of the home country of such foreign investor.

Under the Investment Rules, with certain exceptions, foreign investors may acquire shares of a Korean company without being subject to any foreign investment ceiling. As one such exception, designated public corporations are subject to a 40.0% ceiling on the acquisition of shares by foreigners in the aggregate and a ceiling on the acquisition of shares by a single foreign investor pursuant to the articles of incorporation of such corporation. Currently, Korea Electric Power Corporation is the only designated public corporation which has set such a ceiling. Furthermore, an investment by a foreign investor of not less than 10.0% of the issued shares with voting rights of a Korean company is defined as a direct foreign investment under the Foreign Investment Promotion Act, which is, in general, subject to the report to, and acceptance, by the Ministry of Knowledge Economy. The acquisition of

shares of a Korean company by a foreign investor may also be subject to certain foreign shareholding restrictions in the event that the restrictions are prescribed in each specific law which regulates the business of the Korean company. A foreigner who has acquired shares of our common stock in excess of this ceiling may not exercise his voting rights with respect to the shares of our common stock exceeding the limit.

Under the Foreign Exchange Transaction Laws, a foreign investor who intends to acquire shares must designate a foreign exchange bank at which he must open a foreign currency account and a Won account exclusively for stock investments. No approval is required for remittance into Korea and deposit of foreign currency funds in the foreign currency account. Foreign currency funds may be transferred from the foreign currency account at the time required to place a deposit for, or settle the

purchase price of, a stock purchase transaction to a Won account opened at an investment broker or an investment trader. Funds in the foreign currency account may be remitted abroad without any governmental approval.

Dividends on Shares are paid in Won. No governmental approval is required for foreign investors to receive dividends on, or the Won proceeds of the sale of, any shares to be paid, received and retained in Korea. Dividends paid on, and the Won proceeds of the sale of, any shares held by a non-resident of Korea must be deposited either in a Won account with the investor’s investment broker or investment trader or his Won Account. Funds in the investor’s Won Account may be transferred to his foreign currency account or withdrawn for local living expenses up to certain limitations. Funds in the Won Account may also be used for future investment in shares or for payment of the subscription price of new shares obtained through the exercise of preemptive rights.

Investment brokers and investment traders are allowed to open foreign currency accounts with foreign exchange banks exclusively for accommodating foreign investors’ stock investments in Korea. Through these accounts, these investment brokers and investment traders may enter into foreign exchange transactions on a limited basis, such as conversion of foreign currency funds and Won funds, either as a counterparty to or on behalf of foreign investors, without the investors having to open their own accounts with foreign exchange banks.

Item 10.E.Taxation

The following summary is based upon tax laws of the United States and the Republic of Korea as in effect on the date of this annual report on Form 20-F, and is subject to any change in United States or Korean law that may come into effect after such date. Investors in the shares of common stock or ADSs are advised to consult their own tax advisers as to the United States, Korean or other tax consequences of the purchase, ownership and disposition of such securities, including the effect of any national, state or local tax laws.

Korean Taxation

The following summary of Korean tax considerations applies to you as long as you are not:

 

a resident of Korea;

 

a corporation organized under Korean law; or

 

engaged in a trade or business in Korea through a permanent establishment or a fixed base.

Shares or ADSs

Dividends on Shares of Common Stock or ADSs

Unless an applicable tax treaty provides otherwise, we will deduct Korean withholding tax from dividends paid to you either in cash or shares at a rate of 22.0% (including local income tax). If you are a resident of a country that has entered into a tax treaty with Korea, you may qualify for a reduced rate of Korean withholding tax under such a treaty. For example, if you are a qualified resident of the United States for purposes of the US-Korea Tax Treaty (the “Treaty”) and you are the beneficial owner of a dividend, a reduced withholding tax rate of 16.5% (including local income tax) generally will apply. You will not be entitled to claim treaty benefits if you are not the beneficial owner of a dividend.

In order to obtain the benefits of a reduced withholding tax rate under a tax treaty, you must submit to us, prior to the dividend payment date, such evidence of tax residence as may be required by the Korean tax authorities. In the case of ADSs, evidence of tax residence may be submitted to us through the depositary. Excess taxes withheld may be recoverable if you subsequently produce satisfactory evidence that you were entitled to have tax withheld at a lower rate.

If we distribute to you free shares representing a transfer of certain capital reserves or asset revaluation reserves into paid-in capital, that distribution may be a deemed dividend subject to Korean tax.

Capital Gains

Capital gain from a sale of shares of common stock will generally be exempt from Korean taxation if you have owned, together with certain related parties, less than 25.0% of our total issued shares during the year of sale and the five calendar years before the year of sale, and the sale is made through the KRX KOSPI Market, and you have no permanent establishment in Korea. Capital gain earned by a non-Korean holder from a sale of ADSs outside of Korea are exempt from Korean taxation by virtue of the Special Tax Treatment Control Law of Korea (the “STTCL”), provided that the issuance of the ADSs is deemed to be an overseas issuance under the STTCL.

If you are subject to taxKorean taxation on capital gain from a sale of ADSs, or shares of common stock that you acquired as a result of a withdrawal, your gain will be calculated based on your cost of acquiring the ADSs representing the shares of common stock, although there are no specific Korean tax provisions or rulings on this issue. In the absence of the application of a tax treaty that exempts tax on capital gain, the amount of Korean tax imposed on such capital gains will be the lesser of 11.0% (including local income tax) of the gross realization proceeds or, subject to the production of satisfactory evidence of the acquisition cost and the transaction costs of the ADSs, 22.0% (including local income tax) of the net capital gain.

If you are subject to Korean taxation on capital gains from a sale of ADSs, shares of common stock that you acquire as a result of a withdrawal, and you sell your shares of common stock or ADSs, the purchaser or, in the case of a sale of shares of common stock on the KRX KOSPI Market or through a licensed securities company in Korea, the licensed securities company, is required to withhold Korean tax from the sales price in an amount equal to 11% (including local income tax) of the gross realization proceeds and to make payment thereof to the Korean tax authorities, unless you establish your entitlement to an exemption of taxation under an applicable tax treaty or produce satisfactory evidence of your acquisition cost and the transaction costs for the shares of common stock or ADSs. In order to obtain the benefit of an exemption of tax pursuant to a tax treaty, you must submit to the purchaser or the securities company (or through the depositary), as the case may be, prior to the first payment, an exemption application, together with a certificate of your tax residence issued by a competent authority of your residence country. This requirement will not apply to exemptions under Korean tax law. Excess taxes withheld may be recoverable if you subsequently produce satisfactory evidence that you were entitled to have taxes withheld at a lower rate.

Most tax treaties that Korea has entered into provide exemptions for capital gains tax for capital gains from sale and purchase of shares of common stock. However, Korea’s tax treaties with Japan, Austria, Spain and a few other countries do not provide an exemption from such capital gains tax. For example, Article 13 of Korea’s tax treaty with Japan provides that if a taxpayer holding 25% or more (including those shares held by any related party of the taxpayer) of total issued shares of a company in a taxable year sells 5% or more (including those sold by any related party of the taxpayer) of total issued shares of the same company in the same taxable year, the country where the company is a resident may impose tax on such taxpayer.

Inheritance Tax and Gift Tax

Korean inheritance tax is imposed upon (a) all assets (wherever located) of the deceased if at the time of his death he was domiciled in Korea and (b) all property located in Korea which passes on death (irrespective of the domicile of the deceased). Gift tax is imposed in similar circumstances to the above. Taxes are currently imposed at the rate of 10% to 50% if the value of the relevant property is above a certain limit and vary according to the identity of the parties involved.

Under Korean Inheritance and Gift Tax Law, shares issued by a Korean corporation are deemed located in Korea irrespective of where they are physically located or by whom they are owned. It remains unclear whether, for Korean inheritance and gift tax purposes, a non-resident holder of ADSs will be treated as the owner of the shares underlying the ADSs. If such non-resident is treated as the owner of the shares, the heir or donee of such non-resident (or in certain circumstances, the non-resident as the donor) will be subject to Korean inheritance or gift tax at the same rate as described above.

Securities Transaction Tax

If you transfer shares of common stock on the KRX KOSPI Market, you will be subject to the securities transaction tax at a rate of 0.15% and an agriculture and fishery special tax at a rate of 0.15%, calculated based on the sales price of the shares. If you transfer shares of common stock and your transfer is not made on the KRX KOSPI Market you will generally be subject to the securities transaction tax at a rate of 0.5% and will generally not be subject to the agriculture and fishery special tax.

With respect to transfers of ADSs, a tax ruling recently issued in 2004 by the Korean tax authority appears to hold that depositary receipts (such as the ADSs) constitute share certificates subject to the securities transaction tax. In May 2007, the Seoul Administrative Court held that depositary receipts do not constitute share certificates subject to the securities transaction tax. In 2008, the caseSeoul Administrative Court’s holding was upheld by the Seoul High Court and was further upheld by the Supreme Court. However, asSubsequent to this series of rulings, however, the Supreme Court dismissed the tax authorities’ appeal without ruling on the substantive law issue, it is not clear if the Supreme Court’s decision for this case will serve as the Supreme Court’s precedent on this issue. Even ifSecurities Transaction Tax Law was amended to expressly provide that depositary receipts (such as the ADSs) constituteconstituted a form of share certificates subject to the securities transaction tax undertax. However, the Securities Transaction Tax Law, sale price of ADSs from a transfer of depositary receipts listed on the New York Stock Exchange, the Nasdaq National Market or other qualified foreign exchanges are exempt from the securities transaction tax.

United States Federal Income Taxation

This summary describes the material U.S. federal income tax consequences to you, if you are a U.S. holder (as defined below), of owning our shares of common stock or ADSs. This summary applies to you only if you hold shares of common stock or ADSs as capital assets for tax purposes. This summary does not apply to you if you are a member of a class of holders subject to special rules, such as:

 

a dealer in securities or currencies;

a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings;

 

a bank;

 

an insurance company;

a tax-exempt organization;

 

a person that holds shares of common stock or ADSs that are a hedge or that are hedged against interest rate or currency risks;

 

a person that holds shares of common stock or ADSs as part of a straddle or conversion transaction for tax purposes;

 

a person whose functional currency for tax purposes is not the U.S. dollar; or

 

a person that owns or is deemed to own 10% or more of any class of our stock.

Further, this summary does not address the alternative minimum tax, the Medicare tax on net investment income or other aspects of U.S. federal income or state and local taxation that may be relevant to a holder in light of such holder’s particular circumstances.

This summary is based on laws, treaties and regulatory interpretations in effect on the date hereof, all of which are subject to change, possibly on a retroactive basis.

Please consult your own tax advisers concerning the U.S. federal, state, local and other national tax consequences of purchasing, owning and disposing of shares of common stock or ADSs in your particular circumstances.

For purposes of this summary, you are a “U.S. holder” if you are a beneficial owner of shares of common stock or ADSs and are:

 

a citizen or resident of the United States;

 

an entity treated as a U.S. domestic corporation; or

 

otherwise subject to U.S. federal income tax on a net income basis with respect to income from the shares of common stock or ADSs.

If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds shares of common stock or ADSs, the U.S. federal income tax treatment of a partner will depend upon the status of the partnership and the activities of the partner. A partner of a partnership holding shares of common stock or ADSs should consult its own tax adviser regarding the U.S. federal income tax consequences to the partner of the acquisition, ownership and disposition by the partnership of shares of common stock or ADSs.

Shares of Common Stock and ADSs

In general, if you hold ADSs, you will be treated as the holder of the shares of common stock represented by those ADSs for U.S. federal income tax purposes, and no gain or loss will be recognized if you exchange an ADS for the shares of common stock represented by that ADS.

Dividends

The gross amount of cash dividends that you receive (prior to deduction of Korean taxes) generally will be subject to U.S. federal income taxation as foreign source dividend income. Dividends paid in Won will be included in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of your (or, in the case of ADSs, the depositary’s) receipt of the

dividend, regardless of whether the payment is in fact converted into U.S. dollars. If such a dividend is converted into U.S. dollars on the date of receipt, you generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. U.S. holders should consult their own tax advisers regarding the treatment of any foreign currency gain or loss on any Won received by U.S. holders that are converted into U.S. dollars on a date subsequent to receipt.

Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual prior to January 1, 2013 with respect to the ADSs and common stock will be subject to taxation at a maximum rate of 15%the reduced rates applicable to capital gains if the dividends are “qualified dividends.” Dividends paid on the ADSs and common stock will be treated as qualified dividends if (i) we are eligible for the benefits of a comprehensive income tax treaty with the United States that the Internal Revenue Service has approved for the purposes of the qualified dividend rules and (ii) we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign investment company (“PFIC”). The income tax treaty between Korea and the United States (the “Treaty”) has been approved for the purposes of the qualified dividend rules, and we believe we are eligible for benefits under the Treaty. Based on our audited financial statements and relevant market and shareholder data, we do not anticipate being classified as a PFIC. You should consult your own tax advisers regarding the availability of the reduced dividend tax rate in light of your own particular circumstances.

Distributions of additional shares in respect of shares of common stock or ADSs that are made as part of a pro-rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax.

Sales and Other Dispositions

For U.S. federal income tax purposes, gain or loss that you realize on the sale or other disposition of shares of common stock or ADSs will be capital gain or loss, and will be long-term capital gain or loss if the shares of common stock or ADSs were held for more than one year.

Foreign Tax Credit Considerations

You should consult your own tax advisers to determine whether you are subject to any special rules that limit your ability to make effective use of foreign tax credits, including the possible adverse impact of failing to take advantage of benefits under the income tax treaty between the United States and Korea. If no such rules apply, you generally may claim a credit, up to any applicable reduced rates provided under the Treaty, against your U.S. federal income tax liability for Korean taxes withheld from dividends on shares of common stock or ADSs, so long as you have owned the shares of common stock or ADSs (and not entered into certain kinds of hedging transactions) for at least a 16-day period that includes the ex-dividend date. Instead of claiming a credit, you may generally elect to deduct such Korean taxes in computing your taxable income provided that you do not elect to claim a foreign tax credit for any foreign income taxes paid or accrued for the relevant tax year. Foreign tax credits will not be allowed for withholding taxes imposed in respect of certain hedged positions in securities and may not be allowed in respect of arrangements in which your expected economic profit is insubstantial. You may not be able to use the foreign tax credit associated with any Korean withholding tax imposed on a distribution of additional shares that is not subject to U.S. tax unless you can use the credit against United States tax due on other foreign-source income.

Any Korean securities transaction tax or agriculture and fishery special tax that you pay will not be creditable for foreign tax credit purposes.

The calculation of foreign tax credits and, in the case of a U.S. holder that elects to deduct foreign taxes, the availability of deductions involve the application of complex rules that depend on a U.S. holder’s particular circumstances. You should consult your own tax advisers regarding the creditability or deductibility of such taxes.

U.S. Information Reporting and Backup Withholding Rules

Payments in respect of the shares of common stock or ADSs that are made within the United States or through certain U.S.-related financial intermediaries are subject to information reporting and may be subject to backup withholding unless the holder (1) is a corporation or other exempt recipient or (2) provides a taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. Holders that are not U.S. persons generally are not subject to information reporting or backup withholding. However, such a holder may be required to provide a certification of its non-U.S. status in connection with payments received within the United States or through aU.S.-related financial intermediary.

Item 10.F.  Dividends and Paying Agents

See “Item 8. Financial Information—Consolidated Statements and Other Financial Information—Dividends” for information concerning our dividend policies and our payment of dividends. See “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association—Dividends” for a discussion of the process by which dividends are paid on our common shares. See “Item 12. Description of Securities Other than Equity Securities—Description of American Depositary Shares—Dividends and Distributions” for a discussion of the process by which dividends are paid on our ADSs. The paying agent for payment of our dividends on ADSs in the United States is Citibank, N.A.

Item 10.G.  Statements by Experts

Not applicable.

Item 10.H.  Documents on Display

We are subject to the information requirements of the U.S. Securities Exchange Act of 1934, as amended, and, in accordance therewith, are required to file reports, including annual reports on Form 20-F, and other information with the U.S. Securities and Exchange Commission. These materials, including this annual report and the exhibits thereto, may be inspected and copied at the Commission’s public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further information on the public reference rooms. We are required to make filings with the Commission by electronic means, which will be available to the public over the Internet at the Commission’s web site at http://www.sec.gov.

Item 10.I.  Subsidiary Information

Not applicable.

Item 11.  Quantitative and Qualitative Disclosures About Market Risk

We are exposed to foreign exchange rate and interest rate risks primarily associated with underlying liabilities, and to equity price risk as a result of our investment in equity-linkedequity securities. FollowingOur long-term financial policies are annually reported to our Board of Directors, and our Finance Office conducts financial risk management and assessment. Upon identification and evaluation of these positions, our risk exposures,

we, selectivelyhaving considered various circumstances, enter into derivative financial instruments to try to manage the related risk exposures.some of such risks. These contracts are entered into with major financial institutions, thereby minimizing the risk of credit loss. The activities of our finance division are subject to policies approved by our foreign exchange and interest rate risk management committee. These policies address the use of derivative financial instruments, including the approval of counterparties, setting of limits and investment of excess liquidity. Our general policy is to hold or issue derivative financial instruments onlylargely for hedging purposes.

For our trading financial instruments, we recognized a valuation gain of13 billion and a valuation loss of0 billion in 2011, a valuation gain of0 billion and a valuation loss of0 billion in 2012 and a valuation gain of4 billion and a valuation loss of10 billion in 2013. For our hedging derivative contracts, we recognized a valuation gain of53 billion, a valuation loss of9 billion and accumulated other comprehensive income of83 billion in 2011, a valuation gain of0 billion, a valuation loss of241 billion and accumulated other comprehensive expense of171 billion in 2012 and a valuation gain of0 billion, a valuation loss of97 billion and accumulated other comprehensive expense of95 billion in 2013. For further details ofregarding the assets, liabilities, gains and liabilitieslosses recorded relating to our derivative contracts outstanding as of December 31, 20092011, 2012 and 2010,2013, see Note 138 to the Consolidated Financial Statements. We recognized a valuation gain of(Won)18 billion and a valuation loss of(Won)191 billion in 2009 and a valuation gain of(Won)40 billion and a valuation loss of(Won)48 billion in 2010.

Exchange Rate Risk

Substantially all of our cash flow is denominated in Won. We are exposed to foreign exchange risk related to foreign currency denominated liabilities and anticipated foreign exchange payments. Anticipated foreign exchange payments, mostly in Dollars, relate primarily to payments of foreign currency denominated debt, net settlements paid to foreign telecommunication carriers and payments for equipment purchased from foreign suppliers.

In 2009 and 2010 we We have entered into various currency-related derivativeseveral currency swap contracts, with various financial institutions, including the following:combined interest currency swap contracts and currency forward contracts to hedge our foreign currency risks.

The following table shows our assets and liabilities denominated in foreign currency as of December 31, 2011, 2012 and 2013:

 

   As of December 31, 
   2011   2012   2013 

(in thousands of foreign currencies)

  Financial
assets
   Financial
liabilities
   Financial
assets
   Financial
liabilities
   Financial
assets
   Financial
liabilities
 

U.S. Dollar

   235,435     2,323,677     217,488     2,377,137     254,917     2,225,700  

Special Drawing Right

   1,160     744     494     1,130     1,105     1,211  

Japanese Yen

   1,080,822     35,451,398     657,947     35,102,877     190,520     30,054,316  

British Pound

   7     131     1     9          134  

Euro

   1,239     3,357     5,395     2,614     1,342     4,943  

Algerian Dinar

   18,714          3,770          2,798       

Chinese Yuan

   14,495     700     10,236     197            

Uzbekistani Som

   13,534,203     44,788,561     7,920,825     38,727,985     1,805,565       

Rwandan Franc

                       11,962       

Indonesian Rupiah

   411,687     10,000     347,447                 

As of December 31, 2011, 2012 and 2013, a 10% increase in the exchange rate between the Won and all foreign currencies, with all other variables held constant, would have decreased our income before income tax by57 billion,65 billion and46 billion, respectively, and total equity by50 billion,52 billion and48 billion, respectively, with a 10% decrease in the exchange rate having the opposite effect. The foregoing sensitivity analysis assumes that all variables other than foreign exchange rates are held constant, and as such, does not reflect any correlation between foreign exchange rates and other variables, nor our decision to decrease the risk. See Note 35 to the Consolidated Financial Statements.

Transaction Type

Financial Institution

Description

Interest rate swap contracts

Merrill Lynch and othersExchange fixed interest rate payments for variable interest rate payments for a specified period

Currency swap contracts

Merrill Lynch and othersExchange foreign currency cash flow for local currency cash flow for a specified period

Combined interest rate currency swap contracts

Merrill Lynch and othersExchange foreign currency-denominated variable interest rate payments for local currency-denominated fixed interest rate payments

Currency forward contracts

Kookmin Bank and othersExchange a specified currency at an agreed exchange rate at a specified date

Interest Rate Risk

We are also subject to market risk exposure arising from changing interest rates. A reduction of interest rates increases the fair value of our debt portfolio, which is primarily of a fixed interest nature. We use, to a limited extent, interest rate swap contracts and combined interest rate and currency swap contracts to reduce interest rate volatility on some of our debt and manage our interest expense by achieving a balanced mixture of floating and fixed rate debt. We entered into several interest rate swap contracts with Merrill Lynch and others in which we exchange fixed interest rate payments with variable interest rate payments for a specified period, as well as entered into the combined interest rate and currency swap contracts described above.to hedge our interest rate risk.

The following table summarizes the principal amounts, fair values, principal cash flows by maturity date and weighted average interest rates of our short-term and long-term liabilities as of December 31, 20102013 which are sensitive to exchange rates and/or interest rates. The information is presented in Won, which is our reporting currency.currency:

 

  Maturities 
  2011  2012  2013  2014  2015  Thereafter  December 31, 2010 
 Total Fair
Value
   

 

 

 

 

 

 

 

 

 

 December 31, 2013 
  (In Won millions except rates)   2014 2015 2016 2017 Thereafter Total Fair Value 

Local currency:

                 

Fixed rate

   1,644,615    1,500,373    1,550,160    890,653    510,532    535,429    6,631,762    6,583,632     2,171,414    1,269,235    1,900,179    707,493    2,826,023    8,874,344    8,913,379  

Average weighted rate (1)

   5.99  5.24  5.53  5.23  5.32  5.51  5.52       4.47  4.33  4.06  4.00  3.91  4.15  

Variable rate

   101,656    60,457    6,848    4,508    1,540        175,009    170,498     101,640    41,280    20,000            162,920    164,686  

Average weighted rate (1)

   4.80  4.38  4.29  4.29  0.00      4.61       3.66  3.08  3.09  0.00  0.00  3.44  
                           

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Sub-total

   1,746,271    1,560,830    1,557,008    895,161    512,072    535,429    6,806,771    6,754,130     2,273,054    1,310,515    1,920,179    707,493    2,826,023    9,037,264    9,078,065  
                           

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Foreign currency:

                 

Fixed rate

       227,780        683,340    455,560    341,670    1,708,350    1,723,872     635,495    472,353    393,908    369,355    173,847    2,044,958    2,018,733  

Average weighted rate (1)

       5.13      5.88  5.48  6.09  5.55       5.86  4.42  3.48  3.88  4.28  4.58  

Variable rate

   690,863    134,150    345,313                1,170,326    1,102,093     107,852                316,590    424,442    402,847  

Average weighted rate (1)

   1.68  1.63  1.63              1.66       1.32  0.00  0.00  0.00  1.40  1.38  0.00
                           

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Subtotal

   690,863    361,930    345,313    683,340    455,560    341,670    2,878,676    2,825,965     743,347    472,353    393,908    369,355    490,437    2,469,400    2,421,580  
                           

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

   2,437,134    1,922,760    1,902,321    1,578,501    967,632    877,099    9,685,447    9,580,095     3,016,401    1,782,868    2,314,087    1,076,848    3,316,460    11,506,664    11,499,645  
                           

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

 

(1)Weighted average rates of the portfolio at the period end.

As of December 31, 2011 and 2012 a 100 basis point increase in the market interest rates, with all other variables held constant, would have decreased our profit before income tax by2 billion and562 million, respectively and increased our profit before income tax by10 billion, as of December 31, 2013. As of December 31, 2011 and 2012, a 100 basis point increase in the market interest rates, with all other variables held constant would have decreased total equity by581 million and368 million, respectively and increased our total equity by13 billion, as of December 31, 2013.

As of December 31, 2011, 2012 and 2013, a 100 basis point decrease in the market interest rates, with all other variables held constant, would have decreased our profit before income tax by13 billion,5 billion and17 billion, respectively, and total equity by14 billion,5 billion and19 billion, respectively. The foregoing sensitivity analysis assumes that all variables other than market interest rates are held constant, and as such, does not reflect any correlation between market interest rates and other variables, nor our decision to decrease the risk, but reflects the effects of derivative contracts in place at the time of conducting the analysis.

Equity Price Risk

We are also subject to market risk exposure arising from changes in the equity securities market, which affect the fair value of our equity portfolio. As of December 31, 2011, 2012 and 2013, a

10% increase in the equity indices where our marketable equity securities are listed, with all other variables held constant, would have increased our total equity by10 billion,5 billion and6 billion, respectively, with a 10% decrease in the equity index having the opposite effect. The foregoing sensitivity analysis assumes that all variables other than changes in the equity index are held constant, and that our marketable equity instruments had moved according to the historical correlation to the index, and as such, does not reflect any correlation between the equity index and other variables.

Item 12.  Description of Securities Other than Equity Securities

Item 12.A.  Debt Securities

Not applicable.

Item 12.B.  Warrants and Rights

Not applicable.

Item 12.C.  Other Securities

Not applicable.

Item 12.D.  American Depositary Shares

Fees and Charges

Under the terms of the deposit agreement, holders of our ADSs are required to pay the following service fees to the depositary:

 

Services

  

Fees

Issuance of ADSs upon deposit of shares

  Up to $0.05 per ADS issued

Delivery of deposited shares against surrender of ADSs

  Up to $0.05 per ADS surrendered

Distribution delivery of ADSs pursuant to sale or exercise of rights

  Up to $0.02 per ADS held

Distributions of dividends

  None

Distribution of securities other than ADSs

  Up to $0.02 per ADS held

Other corporate action involving distributions to shareholders

  Up to $0.02 per ADS held

Holders of our ADSs are also responsible for paying certain fees and expenses incurred by the depositary and certain taxes and governmental charges such as:

 

  

fees for the transfer and registration of shares charged by the registrar and transfer agent for the shares in Korea (i.e., upon deposit and withdrawal of shares);

 

expenses incurred for converting foreign currency into U.S. dollars;

 

expenses for cable, telex and fax transmissions and for delivery of securities;

 

  

taxes and duties upon the transfer of securities (i.e., when shares are deposited or withdrawn from deposit); and

 

fees and expenses incurred in connection with the delivery or servicing of shares on deposit.

Depositary fees payable upon the issuance and surrender of ADSs are typically paid to the depositary by the brokers (on behalf of their clients) receiving the newly issued ADSs from the depositary and by the brokers (on behalf of their clients) delivering the ADSs to the depositary for surrender. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary to the holders of record of ADSs as of the applicable ADS record date.

The depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e., stock dividend, rights), the depositary charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via the Depository Trust Company, or DTC), the depositary generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary.

In the event of refusal to pay the depositary fees, the depositary may, under the terms of the deposit agreement, refuse to provide the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to such holder of ADSs.

The fees and charges that holders of our ADSs may be required to pay may vary over time and may be changed by us and by the depositary. Holders of our ADSs will receive prior notice of such changes.

Fees and Payments from the Depositary to Us

In 2010,2013, we received the following payments, after deduction of applicable U.S. taxes, from the depositary:

 

Reimbursement of NYSE listing fees:

  $142,645.00  

Reimbursement of SEC filing fees:

  $9,865.00  

Reimbursement of settlement infrastructure fees (including maintenance fees):

  $161,258.73  

Reimbursement of proxy process expenses (printing, postage and distribution):

  $66,045.72  

Reimbursement of legal fees:

  $369,631.00  

Contributions toward our investor relations efforts (including non-deal roadshows, investor conferences and investor relations agency fees):

  $441,720.07  

Reimbursement of NYSE listing fees

  $131,492.00  

Reimbursement of SEC filing fees

  $49,303.74  

Reimbursement of settlement infrastructure fees (including maintenance fees)

  $118,320.88  

Reimbursement of proxy process expenses (printing, postage and distribution)

  $47,025.36  

Reimbursement of legal fees (reimbursement received in April 2014 in respect of 2013)

  $610,673.92  

Contributions toward our investor relations efforts (including non-deal roadshows, investor conferences and investor relations agency fees)

  $210,566.24  

PART II

Item 13.  Defaults, Dividend Arrearages and Delinquencies

Not applicable.

Item 14.  Material Modifications to the Rights of Security Holders and Use of Proceeds

Not applicable.

Item 15. Controls and Procedures

Disclosure Controls and Procedures

Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2010.2013. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.December 31, 2013. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms,forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that itinformation required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed by, and under the supervision of, our principal executive, principal operating and principal financial officers, and

effected by our board of directors, management and other personnel, 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.

Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records, that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Originally issued in 1992, the “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “1992 Framework”) was amended in May 2013 (as amended, the “2013 Framework”), with application of the 1992 Framework available until December 15, 2014, after which only the 2013 Framework will be available. Our management has completed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 20102013 based on criteria in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).1992 Framework. Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2010.2013. We expect to conduct our assessment of the effectiveness of our internal control over financial reporting based on the 2013 Framework for the year ended December 31, 2014.

Samil PricewaterhouseCoopers, an independent registered public accounting firm, which also audited our consolidated financial statements as of, and for the year ended December 31, 2010,2013, as stated in their report which is included herein, has issued an attestation report on the effectiveness of our internal control over financial reporting.

Attestation Report of the Registered Public Accounting Firm

The attestation report of our independent registered public accounting firm on the effectiveness of our internal control over financial reporting is furnished in Item 18 of this Form 20-F.

Changes in Internal Control Over Financial Reporting

There has been no changeWe completed the implementation of the New ERP System in July 2012, and changed, established or reevaluated any related parts in our internal control over financial reporting duringaccordingly. We also conducted evaluations prior to and after the year covered by this annual reportimplementation of the New ERP System, and confirmed that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.reporting remains effective.

Item 16.  [Reserved]

Item 16A.  Audit Committee Financial Expert

At our annual shareholders’ meetings inIn March 2011,2014, our shareholders elected Hyun-Nak LeeKeuk Je Sung, Jong-Goo Kim and Byong-Won BahkPil Hwa Yoo as members of the Audit Committee.Committee at our annual shareholders’ meeting. Our Audit Committee is comprised of E. HanSang Kyun Cha, Keuk Je Sung, Jong-Goo Kim Hae-Bang Chung, Hyun-Nak Lee and Byong Won Bahk.Pil Hwa Yoo. The board of directors has determined that E. Han KimPil Hwa Yoo is the audit committee financial expert.

Item 16B.  Code of Ethics

We have adopted a code of ethics, as defined in Item 16B. of Form 20-F under the Securities Exchange Act of 1934, as amended. Our code of ethics applies to our Chief Executive Officer, Chief Financial Officer and persons performing similar functions, as well as to our directors, other officers and employees. Our code of ethics is available on our web site at www.kt.com. If we amend the provisions of our code of ethics that apply to our Chief Executive Officer, Chief Financial Officer and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our web site.website.

Item 16C.  Principal Accountant Fees and Services

Audit and Non-Audit Fees

The following table sets forth the fees billed to us by Samil PricewaterhouseCoopers, our independent auditorsregistered public accounting firm, during the fiscal year ended December 31, 20092012 and 2010:2013:

 

  Year Ended
December 31,
   Year Ended
December 31,
 
  2009   2010   2012   2013 
  (In millions)   (In millions) 

Audit fees(1)

  (Won)3,952    (Won)3,503    2,830    2,840  

Audit-related fees

   62     70     0     0  

Tax fees(2)

   66     96     188     1,778  

Other fees

   854     95     0     0  
          

 

   

 

 

Total fees

  (Won)4,934    (Won)3,764    3,018    4,621  
          

 

   

 

 

Audit fees in the above table are the aggregate fees billed by our auditors in connection with the audit of our annual financial statements and the review of our interim financial statements.

(1)Audit fees consist of fees for the annual audit and quarterly review services engagement and the comfort letters.

(2)Tax fees consist of fee for tax services which are mainly the preparation or non-recurring tax compliance review of original or amended tax returns.

Audit Committee Pre-Approval Policies and Procedures

Our audit committee has established pre-approval policies and procedures to pre-approve all audit services to be provided by Samil PricewaterhouseCoopers, our independent registered public accounting firm. Our audit committee’s policy regarding the pre-approval of non-audit services to be provided to us by our independent auditorsregistered public accounting firm is that all such services shall be pre-approved by our audit committee. Non-audit services that are prohibited to be provided to us by our independent auditorsregistered public accounting firm under the rules of the SEC and applicable law may not be pre-approved. In addition, prior to the granting of any pre-approval, our audit committee must be satisfied that the performance of the services in question will not compromise the independence of our independent registered public accounting firm and does not include delegation of the audit committee’s responsibilities to the management under the Securities Exchange Act of 1934, as amended.

Our audit committee did not pre-approve any non-audit services under thede minimis exception of Rule 2-01 (c)(7)(i)(C) of Regulation S-X as promulgated by the SEC.

Item 16D.  Exemptions from the Listing Standards for Audit Committees

Not applicable.

Item 16E.  Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table sets forth the repurchases of common shares by us or any affiliated purchasers during the fiscal year ended December 31, 2010:2013:

 

Period

  Total Number
of Shares
Purchased
   Average Price
Paid per Share
(In Won)
   Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
   Maximum Number of
Shares that May Yet
be Purchased

Under the Plans
 

January 1 to January 31

           0             0             0             0  

February 1 to February 29

   0     0     0     0  

March 1 to March 31

   0     0     0     0  

April 1 to April 30

   0     0     0     0  

May 1 to May 31

   0     0     0     0  

June 1 to June 30

   0     0     0     0  

July 1 to July 31

   0     0     0     0  

August 1 to August 31

   0     0     0     0  

September 1 to September 30

   0     0     0     0  

October 1 to October 31

   0     0     0     0  

November 1 to November 30

   0     0     0     0  

December 1 to December 31

   0     0     0     0  
                    

Total

   0     0     0     0  
                    

Period

Total Number
of Shares
Purchased
Average Price
Paid per Share
(In Won)
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
Maximum Number of
Shares that May Yet
be Purchased

Under the Plans

January 1 to January 31

    —    —    —    —

February 1 to February 29

March 1 to March 31

April 1 to April 30

May 1 to May 31

June 1 to June 30

July 1 to July 31

August 1 to August 31

September 1 to September 30

October 1 to October 31

November 1 to November 30

December 1 to December 31

Total

Neither we nor any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, purchased any of our equity securities during the period covered by this annual report.

Item 16F.  Change in Registrant’s Certifying Accountant

Not Applicableapplicable.

Item 16G.  Corporate Governance

The following is a summary of the significant differences between the New York Stock Exchange’s corporate governance standards and those that we follow under Korean law.law:

 

NYSE Corporate Governance Standards

  

KT Corporation’s Corporate Governance Practice

Director Independence

  

Independent directors must comprise a majority of the board.

  

The Commercial Code of Korea requires that our board of directors must comprise no less than a majority of outside directors. Our outside directors must meet the criteria for outside directorship set forth under the Commercial Code of Korea.

 

The majority of our board of directors is independent (as defined in accordance with the New York Stock Exchange’s standards), and 8 out of 11 directors are outside directors.

Nomination/Nominating/Corporate Governance Committee

  
Listed companies must have a nomination/nominating/corporate governance committee composed entirely of independent directors.  We have not established a separate nomination/nominating/corporate governance committee.committee composed entirely of independent directors. However, we maintain an Outside Director Candidate Nominating Committee composed of all of our outside directors and one non-independent director. We also maintain a Corporate Governance Committee comprised of four outside directors and one non-independent director. The committee is responsible for the review of matters with respect to our Corporate Governance Guidelines and our performance under such guidelines to monitor effectiveness of our corporate governance.

NYSE Corporate Governance Standards

KT Corporation’s Corporate Governance Practice

Compensation Committee

  
Listed companies must have a compensation committee composed entirely of independent directors.  We maintain an Evaluation and Compensation Committee composed of four outside directors.

Executive Session

  
Listed companiesNon-management directors must hold meetings solely attended by non-management directors to more effectively check and balance management directors.meet in regularly scheduled executive sessions without management.  Our outside directors hold meetings solely attended by outside directors in accordance with the charter of our board of directors.

Audit Committee

  
Listed companies must have an audit committee that is composed of more than three directors and satisfy the requirements of Rule 10A-3 under the Exchange Act.  We maintain an Audit Committee comprised of four outside directors who meet the applicable independence criteria set forth under Rule 10A-3 under the Exchange Act.

Shareholder Approval of Equity Compensation Plan

  
Listed companies must allow their shareholders to exercise their voting rights with respect to any material revision to the company’s equity compensation plan.  

We currently have two equity compensation plans: one providing for the grant of stock options to officers and non-independent directors; and an employee stock ownership association program.

 

All material matters related to the granting stock options are provided in our articles of incorporation, and any amendments to the articles of incorporation are subject to shareholders’ approval. Matters related to the employee stock ownership association program are not subject to shareholders’ approval under Korean law.

NYSE Corporate Governance Standards

KT Corporation’s Corporate Governance Practice

Corporate Governance Guidelines

  
Listed companies must adopt and disclose corporate governance guidelines.  We have adopted Corporate Governance Guidelines in March 2007 setting forth our practices with respect to corporate governance matters. Our Corporate Governance Guidelines are in compliance with Korean law but do not meet all requirements established by the New York Stock Exchange for U.S. companies listed on the exchange. A copy of our Corporate Governance Guidelines in Korean is available on our website at www.kt.com.

Code of Business Conduct and Ethics

  
Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for executive officers.  We have adopted a Code of Ethics for all directors, officers and employees. A copy of our Code of Ethics in Korean is available on our website at www.kt.com

Item 16H.  Mine Safety Disclosure

Not applicable.

PART III

Item 17.  Financial Statements

Not applicable.

Item 18.  Financial Statements

AUDITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS OF KT CORPORATION

 

   Page 

Report of Independent Registered Public Accounting Firm

   F-1F-2  

ReportConsolidated Statements of Independent Registered Public Accounting FirmFinancial Position as of December 31, 2012 and 2013

   F-3  

Consolidated Statements of Financial Position as ofOperations for the Years Ended December 31, 20092011, 2012 and 20102013

   F-4F-5  

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2008, 20092011, 2012 and 20102013

   F-7F-6  

Consolidated Statements of Changes in Shareholders’Shareholder’s Equity for the Years Ended December  31, 2011, 2012 and 2013

   F-8F-7  

Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 20092011, 2012 and 20102013

   F-12F-11  

Notes to Consolidated Financial Statements

   F-15F-12  

Item 19.  Exhibits

 

1  Articles of Incorporation of KT Corporation (English translation)
2.1*2.1  Deposit Agreement dated as of May 25, 1999 entered into among KT Corporation, Citibank, N.A., as depositary, and all Holders and Beneficial Owners of American Depositary Shares evidenced by the American Depositary Receipts issued thereunder, including the form of American depositary receipt (incorporated herein by reference to Exhibit (a)(i) of the Registrant’s Registration Statement (Registration No. 333-13578) on Form F-6)
2.2*2.2  Form of Amendment No. 1 Deposit Agreement dated as of May 25, 1999 entered into among KT Corporation, Citibank, N.A., as depositary, and all Holders and Beneficial Owners of American Depositary Shares evidenced by the American Depositary Receipts issued thereunder, including the form of American depositary receipt (incorporated herein by reference to Exhibit (a)(ii) of the Registrant’s Registration Statement (Registration No.
333-13578) on Form F-6)
2.3*2.3  Letter from Citibank, N.A., as depositary, to the Registrant relating to the pre-release of the American depositary receipts (incorporated herein by reference to the Registrant’s Registration Statement (Registration No. 333-10330) on Form F-6)
2.4*2.4  Letter from Citibank, N.A., as depositary, to the Registrant relating to the establishment of a direct registration system for ADSs and the issuance of uncertified ADSs as part of the direct registration system. (incorporated herein by reference to Exhibit 2.4 of the Registrant’s Annual Report on Form 20-F filed on June 30, 2008)
4.1*8.1  The Merger Agreement dated January 20, 2009, entered into by and between KT Corporation and KT Freetel Co., Ltd. (incorporated herein by reference to Annex I of the Registrant’s Registration Statement (Registration No. 333-156817) on Form F-4)
8.1  List of subsidiaries of KT Corporation

12.1  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1  Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

15.1  The Framework Act on Telecommunications (English translation)
15.2  Enforcement Decree of the Framework Act on Telecommunications (English translation)
15.3  The Telecommunications Business Act (English translation)
15.4  Enforcement Decree of the Telecommunications Business Act (English translation)

 

* Filed previously.

LOGOINDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

F-2

Consolidated Statements of Financial Position as of December 31, 2012 and 2013

F-3

Consolidated Statements of Operations for the years ended December 31, 2011, 2012 and 2013

F-5

Consolidated Statements of Comprehensive Income for the years ended December 31, 2011, 2012 and 2013

F-6

Consolidated Statements of Changes in Shareholder’s Equity for the years ended December  31, 2011, 2012 and 2013

F-7

Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2012 and 2013

F-11

Notes to Consolidated Financial Statements

F-12

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

KT Corporation

In our opinion, the accompanying consolidated statementstatements of financial position and the related consolidated statements of operations, of comprehensive income, of changes in shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of KT Corporation and its subsidiaries at December 31, 20102013 and 2012 , and the results of their operations and their cash flows for each of the year thenthree years in the period ended December 31, 2013 in conformity with accounting principles generally accepted inInternational Financial Reporting Standards as issued by the Republic of Korea.International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010,2013, based on criteria established inInternal Control—Integrated Framework 1992 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Management’s Annual Report on Internal Control over Financial Reporting in Item 15 of Form 20-F. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audit.audits. We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our auditaudits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.

Accounting principles generally accepted in the Republic of Korea vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 38 to the consolidated financial statements.opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are

Samil PricewaterhouseCoopers

LS Yongsan Tower, 191, Hangangno 2-ga, Yongsan-gu, Seoul 140-702, Korea (Yongsan P.O Box 266, 140-600) www.samil.com

Samil PricewaterhouseCoopers is the Korean network firm of PricewaterhouseCoopers International Limited (PwCIL). “PricewaterhouseCoopers” and “PwC” refer to the network of member firms of PwCIL. Each member firm is a separate legal entity and does not act as an agent of PwCIL or any other member firm.

being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Samil PricewaterhouseCoopers

Seoul Korea

JuneApril 28, 20112014

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

KT Corporation

Sungnam, Korea

We have audited the accompanying consolidated Statements of Financial Position of KT Corporation and subsidiaries (the “Company”) as of December 31, 2009, and the related consolidated statements of income, cash flows and change in shareholders’ equity for the years ended December 31, 2009 and 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such 2009 and 2008 consolidated financial statements present fairly, in all material respects, the financial position of KT Corporation and subsidiaries at December 31, 2009, and the results of their operations and their cash flows for the years ended December 31, 2009 and 2008, in conformity with accounting principles generally accepted in the Republic of Korea.

Accounting principles generally accepted in the Republic of Korea vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 38 to the consolidated financial statements.

As discussed in Note 27 to the consolidated financial statements, the accompanying 2009 and 2008 financial statements have been retrospectively adjusted for discontinued operations.

/s/ Deloitte Anjin LLC

Seoul, Korea

June 16, 2010

(June 28, 2011 as to the effects of discontinued operations discussed in Note 27)

KT Corporation and Subsidiaries

Consolidated Statements of Financial Position

December 31, 20102012 and 20092013

 

   (in millions of Korean won)   (in thousands
of U.S dollars)
 
   2010   2009   2010 

Assets

      

Current Assets

      

Cash and cash equivalents, net (Notes 4, 19 and 31)

  (Won)1,193,348    (Won)1,538,122    $1,047,808  

Short-term investment assets (Notes 4, 7 and 19)

   166,200     443,934     145,930  

Trade accounts receivable, net (Notes 19 and 32)

   3,843,287     3,621,844     3,374,561  

Short-term loans receivable, net (Notes 6, 19 and 32)

   755,016     484,926     662,934  

Current finance lease receivables, net (Notes 11, 17 and 32)

   240,414     203,406     211,093  

Other receivables, net (Note 19)

   408,392     281,609     358,585  

Accrued revenues

   18,393     22,506     16,150  

Advance payments

   125,025     91,737     109,777  

Prepaid expenses

   145,317     119,065     127,594  

Income taxes receivable

   5,796     27,037     5,089  

Current derivative instruments assets (Note 13)

   151,243     288     132,797  

Current deferred income tax assets (Note 26)

   363,492     437,525     319,161  

Inventories, net (Notes 5 and 11)

   655,831     699,402     575,846  

Other current assets (Note 19)

   877     448     769  
               

Total current assets

   8,072,631     7,971,849     7,088,094  
               

Long-term financial instruments (Note 4)

   3,054     3,037     2,682  

Available-for-sale securities (Note 7)

   199,515     117,290     175,182  

Equity-method investments (Note 8)

   429,148     287,989     376,809  

Held-to-maturity securities (Note 7)

   66     65     58  

Long-term loans receivable to employees, net

   71,982     62,758     63,203  

Other investment assets

   79,426     90,231     69,739  

Property and equipment, net (Notes 9, 11, 12, 17 and 33)

   15,227,858     14,774,560     13,370,672  

Intangible assets, net (Notes 10, 33 and 36)

   1,232,866     1,279,500     1,082,506  

Long-term trade accounts and notes receivable, net (Note 32)

   800,365     402,259     702,753  

Long-term loans receivable, net (Note 6)

   415,087     414,981     364,463  

Non-current finance lease receivables, net (Notes 11, 17, and 32)

   453,848     311,795     398,497  

Leasehold rights and deposits

   321,179     353,992     282,008  

Long-term other receivables, net

   40     11,596     35  

Non-current derivative instruments assets (Note 13)

   97,166     295,058     85,316  

Non-current deferred income tax assets (Note 26)

   185,724     113,266     163,073  

Exclusive memberships

   101,574     103,522     89,186  

Other non-current assets

   21,930     26,569     19,255  
               

Total non-current assets

   19,640,828     18,648,468     17,245,437  
               

Total assets

  (Won)27,713,459    (Won)26,620,317    $24,333,531  
               
               (in thousands of
U.S dollars)
 

(in millions of Korean won)

  Notes  2012   2013   2013 
      (Restated)       (Unaudited) (Note 2) 

Assets

        

Current assets

        

Cash and cash equivalents

  4, 5  2,057,613    2,070,869    $1,962,350  

Trade and other receivables, net

  4, 6   5,907,508     5,239,569     4,965,004  

Short-term loans, net

  4, 7   668,113     838,724     794,773  

Current finance lease receivables, net

  4, 21   339,846     294,208     278,791  

Other financial assets

  4, 8   245,985     480,062     454,906  

Current income tax assets

     862     35,273     33,425  

Inventories, net

  9   935,033     673,618     638,319  

Other current assets

  10   362,459     339,596     321,800  
    

 

 

   

 

 

   

 

 

 

Total current assets

     10,517,419     9,971,919     9,449,368  
    

 

 

   

 

 

   

 

 

 

Non-current assets

        

Trade and other receivables, net

  4, 6   1,072,966     813,471     770,843  

Long-term loans, net

  4, 7   512,587     509,873     483,155  

Non-current finance lease receivables, net

  4, 21   521,809     415,729     393,944  

Other financial assets

  4, 8   672,475     672,645     637,397  

Property and equipment, net

  11, 21   15,806,366     16,386,964     15,528,252  

Investment property, net

  12   1,155,213     1,105,495     1,047,565  

Intangible assets, net

  13   3,213,638     3,827,393     3,626,829  

Investments in jointly controlled entities and associates

  14   379,495     363,903     344,834  

Deferred income tax assets

  29   610,762     706,977     669,930  

Other non-current assets

  10   95,178     75,748     71,779  
    

 

 

   

 

 

   

 

 

 

Total non-current assets

     24,040,489     24,878,198     23,574,528  
    

 

 

   

 

 

   

 

 

 

Total assets

    34,557,908    34,850,117    $33,023,896  
    

 

 

   

 

 

   

 

 

 

KT Corporation and Subsidiaries

Consolidated Statements of Financial Position (Continued)(continued)

December 31, 20102012 and 20092013

 

   (in millions of Korean won)   (in thousands
of U.S dollars)
 
    2010   2009   2010 

Liabilities and Shareholders’ Equity

      

Current liabilities

      

Current portion of bond and long-term borrowings, net (Notes 14 and 19)

  (Won)2,434,985    (Won)1,689,546    $2,138,015  

Trade accounts payable (Notes 19 and 32)

   1,530,981     1,484,943     1,344,263  

Short-term borrowings

   468,710     367,505     411,546  

Other accounts payable (Notes 17, 19 and 32)

   1,620,470     2,438,674     1,422,838  

Advances received

   153,599     152,654     134,866  

Withholdings (Note 19)

   176,299     98,099     154,798  

Accrued expenses (Notes 18 and 19)

   553,583     483,366     486,068  

Income taxes payable

   287,843     12,942     252,738  

Unearned revenue

   14,665     9,251     12,876  

Deposits received (Notes 19 and 32)

   95,196     158,799     83,586  

Current portion of accrued provisions (Note 16)

   89,181     39,841     78,305  

Current derivative instruments liabilities (Note 13)

   228     5,124     200  

Current deferred income tax liabilities (Note 26)

   1,817     1     1,595  

Other current liabilities

   2,073     478     1,820  
               

Total current liabilities

   7,429,630     6,941,223     6,523,514  
               

Bonds payable, net (Notes 14 and 19)

   6,745,673     7,337,399     5,922,972  

Long-term borrowings, net (Notes 14 and 19)

   473,014     198,273     415,325  

Provisions for severance benefits, net (Note 15)

   360,028     337,524     316,119  

Non-current accrued provisions (Note 16)

   114,453     103,576     100,494  

Refundable deposits for telephone installation

   615,809     696,396     540,705  

Long-term deposits received

   255,807     101,924     224,609  

Non-current derivative instruments liabilities (Note 13)

   20,243     6,155     17,774  

Long-term other accounts payable, net (Notes 17 and 32)

   171,596     164,696     150,668  

Long-term trade accounts payable, net (Note 32)

   25,521     14,603     22,408  

Non-current deferred income tax liabilities (Note 26)

   2,657     1,065     2,333  

Other non-current liabilities

   3,356     50,044     2,948  
               

Total non-current liabilities

   8,788,157     9,011,655     7,716,355  
               

Total liabilities

  (Won)16,217,787    (Won)15,952,878    $14,239,869  
               

Commitments and Contingencies (Note 18)

KT Corporation and Subsidiaries

Consolidated Statements of Financial Position (Continued)

December 31, 2010 and 2009

  (in millions of Korean won)  (in thousands
of U.S dollars)
 
   2010  2009  2010 

Capital stock

   

Common stock (Notes 20 and 36)

 (Won)1,564,499   (Won)1,564,499   $1,373,693  
            

Total capital stock

  1,564,499    1,564,499    1,373,693  
            

Capital surplus

   

Paid-in capital in excess of par value

  1,440,258    1,440,258    1,264,604  

Other capital surplus

  9,519    8,311    8,358  
            

Total capital surplus

  1,449,777    1,448,569    1,272,962  
            

Capital adjustments

   

Treasury stock (Note 21)

  (955,083  (956,159  (838,601

Loss on disposal of treasury stock

  (295  (890,650  (259

Stock options (Note 22)

  875    1,500    768  

Other capital adjustments (Notes 22 and 36)

  (308,031  (320,419  (270,464
            

Total capital adjustment

  (1,262,534  (2,165,728  (1,108,556
            

Accumulated other comprehensive income and expense (Note 28)

   

Gain on translation of foreign operations

  12,989    5,571    11,405  

Loss on translation of foreign operations

  (39,199  (18,763  (34,418

Unrealized gain on valuation of available-for-sale securities

  7,927    5,310    6,960  

Unrealized loss on valuation of available-for-sale securities

  (801  (83  (703

Accumulated comprehensive income of equity-method investees (Note 8)

  785    438    689  

Accumulated comprehensive expense of equity-method investees (Note 8)

  (5,916  (13,736  (5,194

Gain on valuation of derivatives for cash flow hedge (Note 13)

  4,699    11,468    4,126  

Loss on valuation of derivatives for cash flow hedge (Note 13)

  (63,131  (34,747  (55,432
            

Total accumulated other comprehensive income and expense

  (82,647  (44,542  (72,567
            

Retained earnings (Note 23)

   

Legal reserve

  780,499    780,499    685,310  

Voluntary reserves

  4,651,362    4,758,013    4,084,083  

Unappropriated retained earnings

  3,932,870    4,035,257    3,453,218  
            

Total retained earnings.

  9,364,731    9,573,769    8,222,611  
            

Minority interest in consolidated subsidiaries

  461,846    290,872    405,519  
            

Total shareholders’ equity

  11,495,672    10,667,439    10,093,662  
            

Total liabilities and shareholders’ equity

 (Won)27,713,459   (Won)26,620,317   $24,333,531  
            
           (in thousands of
U.S dollars)
 

(in millions of Korean won)

 Notes 2012  2013  2013 
    (Restated)     (Unaudited) (Note 2) 

Liabilities and Equity

    

Current liabilities

    

Trade and other payables

 4, 15 7,221,302   7,413,823   $7,025,323  

Current finance lease liabilities, net

 4, 21  14,033    19,487    18,466  

Borrowings

 4, 16  3,197,029    3,020,706    2,862,414  

Other financial liabilities

 4, 8, 20  71,983    63,820    60,476  

Current income tax liabilities

   143,741    99,848    94,616  

Provisions

 17  205,591    114,755    108,742  

Deferred revenue

   170,682    143,601    136,076  

Other current liabilities

 10  242,405    348,076    329,836  
  

 

 

  

 

 

  

 

 

 

Total current liabilities

   11,266,766    11,224,116    10,635,949  
  

 

 

  

 

 

  

 

 

 

Non-current liabilities

    

Trade and other payables

 4, 15  701,360    1,058,884    1,003,396  

Non-current finance lease liabilities, net

 4, 21  27,613    48,723    46,170  

Borrowings

 4, 16  8,239,090    8,463,187    8,019,698  

Other financial liabilities

 4, 8, 20  69,813    178,812    169,442  

Defined benefit liabilities, net

 18  549,243    586,083    555,371  

Provisions

 17  149,940    133,561    126,562  

Deferred revenue

   157,395    147,837    140,090  

Deferred income tax liabilities

 29  137,287    169,498    160,616  

Other non-current liabilities

 10  41,426    2,000    1,895  
  

 

 

  

 

 

  

 

 

 

Total non-current liabilities

   10,073,167    10,788,585    10,223,240  
  

 

 

  

 

 

  

 

 

 

Total liabilities

   21,339,933    22,012,701    20,859,189  
  

 

 

  

 

 

  

 

 

 

Equity attributable to owners of the Parent Company

    

Capital stock

 22  1,564,499    1,564,499    1,482,516  

Share premium

   1,440,258    1,440,258    1,364,785  

Retained earnings

 23  10,646,383    10,019,389    9,494,351  

Accumulated other comprehensive income

 24  1,325    24,538    23,252  

Other components of equity

 24, 25  (1,343,286  (1,320,943  (1,251,723
  

 

 

  

 

 

  

 

 

 
   12,309,179    11,727,741    11,113,181  
  

 

 

  

 

 

  

 

 

 

Non-controlling interest

   908,796    1,109,675    1,051,526  
  

 

 

  

 

 

  

 

 

 

Total equity

   13,217,975    12,837,416    12,164,707  
  

 

 

  

 

 

  

 

 

 

Total liabilities and equity

  34,557,908   34,850,117   $33,023,896  
  

 

 

  

 

 

  

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

KT Corporation and Subsidiaries

Consolidated Statements of IncomeOperations

Years Endedended December 31, 2010, 20092011, 2012 and 20082013

 

  (in millions of Korean won,
except per share amounts)
  (in thousands
of U.S dollars)
 
  2010  2009  2008  2010 

Operating revenues (Notes 24, 32 and 33)

 (Won)21,331,313   (Won)19,643,812   (Won)19,587,242   $18,729,751  

Operating expenses (Notes 25 and 32)

  19,156,231    18,673,265    18,144,427    16,819,941  
                

Operating income (Note 33)

  2,175,082    970,547    1,442,815    1,909,810  
                

Non-operating income

    

Interest income

  143,165    197,367    151,291    125,705  

Foreign currency transaction gain

  23,051    42,125    66,508    20,240  

Foreign currency translation gain (Note 19)

  65,793    240,925    40,409    57,769  

Gain on valuation of equity-method investments (Note 8)

  37,597    19,672    16,061    33,012  

Gain on disposal of property and equipment

  13,653    5,531    4,368    11,988  

Reversal of accrued provisions

  17,215    4,988    4,069    15,115  

Gain on settlement of derivatives

  744    2,249    17,182    653  

Gain on valuation of derivatives (Note 13)

  39,920    17,643    650,679    35,051  

Other non-operating revenues

  181,679    276,991    99,786    159,521  
                
  522,817    807,491    1,050,353    459,054  
                

Non-operating expenses

    

Interest expense

  529,364    505,496    480,315    464,803  

Other bad debts expense

  9,261    46,872    22,144    8,132  

Foreign currency transaction loss

  25,968    46,171    63,054    22,801  

Foreign currency translation loss (Note 19)

  31,871    17,893    802,298    27,984  

Loss on valuation of equity-method investments (Note 8)

  11,067    33,300    27,026    9,717  

Donations

  81,096    39,320    79,544    71,206  

Loss on disposal of property and equipment

  178,963    124,689    94,290    157,137  

Loss on impairment of property and equipment

  9,297    1,236    20,676    8,163  

Loss on disposal of intangible assets

  19,620    4,247    1,653    17,227  

Loss on settlement of derivatives

  2,156    1,031    9,666    1,893  

Loss on valuation of derivatives (Note 13)

  47,721    191,268    10,936    41,901  

Other non-operating expenses

  189,742    47,240    171,390    166,601  
                
  1,136,126    1,058,763    1,782,992    997,565  
                

Income from continuing operations before income taxes

  1,561,773    719,275    710,176    1,371,299  

Income tax expense on continuing operations (Note 26)

  371,843    107,763    167,859    326,493  
                

Income from continuing operations

  1,189,930    611,512    542,317    1,044,806  
                

Income (loss) from discontinued operations (Note 27)

  2,612    (1,817  (29,027  2,293  
                

Net income

 (Won)1,192,542   (Won)609,695   (Won)513,290   $1,047,099  
                

Controlling interest net income

 (Won)1,168,005   (Won)494,846   (Won)449,810   $1,025,555  
                

Minority interest net income

 (Won)24,537   (Won)114,849   (Won)63,480   $21,544  
                

Earnings per share attributable to controlling interest (Note 29)

    

Basic income per share from continuing operations (in won)

 (Won)4,797   (Won)2,225   (Won)2,319   $4.212  

Basic net income per share (in won)

 (Won)4,803   (Won)2,254   (Won)2,217   $4.217  

Diluted income per share from continuing operations (in won)

 (Won)4,797   (Won)2,199   (Won)2,319   $4.212  

Diluted net income per share (in won)

 (Won)4,802   (Won)2,227   (Won)2,217   $4.216  

(in millions of Korean won, except
per share amounts)

             (in thousands
of U.S dollars)
 
 Notes  2011  2012  2013  2013 
     (Restated)  (Restated)     (Unaudited) (Note 2) 

Continuing Operations

     

Operating revenue

  4, 14, 26   22,087,830   24,643,772   24,057,881   $22,797,196  
  

 

 

  

 

 

  

 

 

  

 

 

 

Revenue

   21,310,805    23,856,375    23,728,673    22,485,239  

Others

   777,025    787,397    329,208    311,957  

Operating expenses

  4, 14, 27    20,100,734    22,963,673    23,734,497    22,490,758  
  

 

 

  

 

 

  

 

 

  

 

 

 

Operating profit

   1,987,096    1,680,099    323,384    306,438  

Finance income

  28    269,992    498,657    279,349    264,711  

Finance costs

  28    (642,355  (781,993  (647,500  (613,570

Income(loss) from jointly controlled entities and associates

  14    (5,511  18,079    6,601    6,255  
  

 

 

  

 

 

  

 

 

  

 

 

 

Profit(loss) from continuing operationsbefore income tax

   1,609,222    1,414,842    (38,166  (36,166

Income tax expense

  29    318,459    277,869    49,579    46,982  
  

 

 

  

 

 

  

 

 

  

 

 

 

Profit(loss) for the year from the continuing operations

   1,290,763    1,136,973    (87,745  (83,148
  

 

 

  

 

 

  

 

 

  

 

 

 

Discontinued Operations

     

Profit(loss) from discontinued operations

   164,594    (31,534        
  

 

 

  

 

 

  

 

 

  

 

 

 

Profit(loss) for the year

  1,455,357   1,105,439   (87,745 $(83,148
  

 

 

  

 

 

  

 

 

  

 

 

 

Profit(loss) for the year attributable to:

     

Equity holders of the Parent Company

  1,445,690   1,046,127   (189,931 $(179,978

Profit(loss) from continuing operations

   1,280,015    1,075,694    (189,931  (179,978

Profit(loss) from discontinued operations

   165,675    (29,567        

Non-controlling interest

  9,667   59,312   102,186   $96,830  

Profit from continuing operations

   10,748    61,279    102,186    96,830  

Loss from discontinued operations

   (1,081  (1,967        

Earnings(loss) per share attributable to the equity holders of the Parent Company during the year (in won):

     

Basic earnings(loss) per share

  30   5,943   4,296   (779 $(1

From continuing operations

   5,262    4,417    (779  (1

From discontinued operations

   681    (121        

Diluted earnings(loss) per share

  30   5,942   4,296   (782 $(1

From continuing operations

   5,261    4,417    (782  (1

From discontinued operations

   681    (121        

The accompanying notes are an integral part of these consolidated financial statements.

KT Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

Years Ended December 31, 2010, 2009 and 2008

  Capital
stock
  Capital
surplus
  Capital
adjustments
  Accumulated
other
comprehensive
income and
expense
  Retained
earnings
  Minority
interests
  Total 
  (in millions of Korean won) 

Balances as of January 1, 2008 (as reported)

 (Won)1,560,998   (Won)1,272,634   (Won)(3,815,786 (Won)142   (Won)9,843,775   (Won)2,276,003   (Won)11,137,766  

Cumulative effect of changes in accounting policies

      168,143    (168,143      1,711    2,141    3,852  
                            

As restated

  1,560,998    1,440,777    (3,983,929  142    9,845,486    2,278,144    11,141,618  

Dividends

                  (407,374  (1,896  (409,270
                

Retained earnings after appropriation

                  9,438,112    2,276,248    10,732,348  

Net income for the year

                  449,810    63,480    513,290  

Acquisition of treasury stock

          (73,807              (73,807

Disposal of treasury stock

          807                807  

Retirement of treasury stock

          73,807        (73,807        

Loss on disposal of treasury stock

      (144                  (144

Other share-based payments

          398                398  

Other capital adjustments

          986            221    1,207  

Acquisition of subsidiaries’ stock and changes in consolidated entities

          (944          14,754    13,810  

Changes in the interest in the subsidiaries

          (12,054          (98,730  (110,784

Gain on translation of foreign operations

              8,612        4,947    13,559  

Loss on translation of foreign operations

              8,308        3,471    11,779  

Unrealized gain on valuation of available-for-sale securities

              (5,831      (3,108  (8,939

Unrealized loss on valuation of available-for-sale securities

              (4,345      (3,200  (7,545

Changes in equity-method investees with accumulated comprehensive income

              7,603        2,351    9,954  

Changes in equity-method investees with accumulated comprehensive expense

              988        (27  961  

Gain on valuation of derivatives for cash flow hedge

              9,112        262    9,374  

Loss on valuation of derivatives for cash flow hedge

              (13,710      (4,660  (18,370
                            

Balances as of December 31, 2008

 (Won)1,560,998   (Won)1,440,633   (Won)(3,994,736 (Won)10,879   (Won)9,814,115   (Won)2,256,009   (Won)11,087,898  
                            

KT Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity (Continued)Comprehensive Income

Years Endedended December 31, 2010, 20092011, 2012 and 20082013

 

  Capital
stock
  Capital
surplus
  Capital
adjustments
  Accumulated
other
comprehensive
income and
expense
  Retained
earnings
  Minority
interests
  Total 
  (in millions of Korean won) 

Balances as of January 1, 2009

 (Won)1,560,998   (Won)1,440,633   (Won)(3,994,736 (Won)10,879   (Won)9,814,115   (Won)2,256,009   (Won)11,087,898  

Dividends

                  (226,280  (3,080  (229,360
                

Retained earnings after appropriation

                  9,587,835    2,252,929    10,858,538  

Issuance of common stock

  3,501                        3,501  

Net income for the year

                  494,846    114,849    609,695  

Consideration for exchange rights

      18,442                    18,442  

Exercise of exchange rights of exchangeable bonds

      (18,442  451,157                432,715  

Acquisition of treasury stock

          (528,144              (528,144

Disposal of treasury stock

          2,436,797                2,436,797  

Retirement of treasury stock

          508,912        (508,912        

Loss on disposal of treasury stock

      (375  (890,650              (891,025

Stock options

      8,311    (7,380              931  

Other share-based payments

          700                700  

Other capital adjustments

          1,059            (811  248  

Other capital adjustments by merger

          (89,375          (1,553,491  (1,642,866

Acquisition of subsidiaries’ stock and changes in consolidated entities

          (24,105          (268,373  (292,478

Changes in the interest in the subsidiaries

          (29,963          (243,849  (273,812

Gain on translation of foreign operations

              (4,891      (3,751  (8,642

Loss on translation of foreign operations

              (14,497      (4,159  (18,656

Unrealized gain on valuation of available-for-sale securities

              497        (610  (113

Unrealized loss on valuation of available-for-sale securities

              4,262        3,425    7,687  

Changes in equity-method investees with accumulated comprehensive income

              (9,931      (273  (10,204

Changes in equity-method investees with accumulated comprehensive expense

              (10,155      17    (10,138

Gain on valuation of derivatives for cash flow hedge

              331        155    486  

Loss on valuation of derivatives for cash flow hedge

              (21,037      (5,186  (26,223
                            

Balances as of December 31, 2009

 (Won)1,564,499   (Won)1,448,569   (Won)(2,165,728 (Won)(44,542 (Won)9,573,769   (Won)290,872   (Won)10,667,439  
                            

KT Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity (Continued)

Years Ended December 31, 2010, 2009 and 2008

  Capital
stock
  Capital
surplus
  Capital
adjustments
  Accumulated
other
comprehensive
income and
expense
  Retained
earnings
  Minority
interests
  Total 
  (in millions of Korean won) 

Balances as of January 1, 2010

 (Won)1,564,499   (Won)1,448,569   (Won)(2,165,728 (Won)(44,542 (Won)9,573,769   (Won)290,872   (Won)10,667,439  

Dividends

                  (486,393  (7,708  (494,101
                

Retained earnings after appropriations

                  9,087,376    283,164    10,173,338  

Net income for the year

                  1,168,005    24,537    1,192,542  

Appropriations of loss on disposal of treasury stock

          890,650        (890,650        

Acquisition of treasury stock

          (349              (349

Disposal of treasury stock

          (295              (295

Stock options

      140    (183              (43

Other share-based payments

      1,068    5,658                6,726  

Acquisition of subsidiaries’ stock and changes in consolidated entities

          5,879            158,750    164,629  

Changes in the interest in the subsidiaries

          809            (345  464  

Other capital adjustments

          1,025            (872  153  

Gain on translation of foreign operations

              7,418        (533  6,885  

Loss on translation of foreign operations

              (20,436      (2,762  (23,198

Unrealized gain on valuation of available-for-sale securities

              2,617        199    2,816  

Unrealized loss on valuation of available-for-sale securities

              (718      (30  (748

Changes in equity-method investees with accumulated comprehensive income

              347        (262  85  

Changes in equity-method investees with accumulated comprehensive expense

              7,820            7,820  

Gain on valuation of derivatives for cash flow hedge

              (6,769          (6,769

Loss on valuation of derivatives for cash flow hedge

              (28,384          (28,384
                            

Balances as of December 31, 2010

 (Won)1,564,499   (Won)1,449,777   (Won)(1,262,534 (Won)(82,647 (Won)9,364,731   (Won)461,846   (Won)11,495,672  
                            

KT Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity (Continued)

Years Ended December 31, 2010, 2009 and 2008

  Capital
stock
  Capital
surplus
  Capital
adjustments
  Accumulated
other
comprehensive
income and
expense
  Retained
earnings
  Minority
interests
  Total 
  (in thousands of U.S dollars) 

Balances as of January 1, 2010

 $1,373,693   $1,271,902   $(1,901,596 $(39,110 $8,406,154   $255,397   $9,366,440  

Dividends

                  (427,073  (6,768  (433,841
                

Retained earnings after appropriations

                  7,979,081    248,629    8,932,599  

Net income for the year

                  1,025,555    21,544    1,047,099  

Appropriations of loss on disposal of treasury stock

          782,027        (782,027        

Acquisition of treasury stock

          (306              (306

Disposal of treasury stock

          (259              (259

Stock options

      123    (161              (38

Other share-based payments

      938    4,968                5,906  

Acquisition of subsidiaries’ stock and changes in consolidated entities

          5,162            139,389    144,551  

Changes in the interest in the subsidiaries

          710            (303  407  

Other capital adjustments

          900            (766  134  

Gain on translation of foreign operations

              6,513        (468  6,045  

Loss on translation of foreign operations

              (17,944      (2,425  (20,369

Unrealized gain on valuation of available-for-sale securities

              2,298        175    2,473  

Unrealized loss on valuation of available-for-sale securities

              (630      (26  (656

Changes in equity-method investees with accumulated comprehensive income

              305        (230  75  

Changes in equity-method investees with accumulated comprehensive expense

              6,866            6,866  

Gain on valuation of derivatives for cash flow hedge

              (5,943          (5,943

Loss on valuation of derivatives for cash flow hedge

              (24,922          (24,922
                            

Balances as of December 31, 2010

 $1,373,693   $1,272,963   $(1,108,555 $(72,567 $8,222,609   $405,519   $10,093,662  
                            
                (In thousands
of U.S dollars)
 

(in millions of Korean won)

  Notes   2011  2012  2013  2013 
       (Restated)  (Restated)     (Unaudited) (Note 2) 

Profit(loss) for the year

    1,455,357   1,105,439   (87,745 $(83,148

Other comprehensive income

       

Items not reclassifiable subsequently to profit or loss:

       

Remeasurements of the net defined benefit liability

   18     (104,327  (130,492  56,583    53,617  

Shares of remeasurement loss from jointly controlled entities and associates

     (1,911  (1,131  (455  (431

Items reclassifiable subsequently to profit or loss:

       

Changes in value of available-for-sale financial assets

   4, 8     60,834    23,952    49,778    47,170  

Other comprehensive income from available-for salefinancial assets reclassified to income

     (1,376  (4,865  6,554    6,211  

Net gains(losses) on cashflow hedges

   4, 8     63,204    (129,290  (72,303  (68,514

Other comprehensive income from cashflow hedges reclassified to income

     (35,033  154,867    67,607    64,064  

Shares of other comprehensive income from jointly controlled entities and associates

     (5,735  (8,730  2,896    2,744  

Currency translation differences

     28,545    (6,645  (2,053  (1,945
    

 

 

  

 

 

  

 

 

  

 

 

 

Other comprehensive income after income tax for the year

     4,201    (102,334  108,607    102,916  
    

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive income for the year

    1,459,558   1,003,105   20,862   $19,768  
    

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive income for the year attributable to:

       

Equity holders of the Parent Company

     1,396,415    937,542    (109,539  (103,800

Non-controlling interest

     63,143    65,563    130,401    123,568  

The accompanying notes are an integral part of these consolidated financial statements.

KT Corporation and Subsidiaries

Consolidated Statements of Cash FlowsChanges in Shareholder’s Equity

Years Endedended December 31, 2010, 20092011, 2012 and 20082013

 

   (in millions of Korean won)  (in thousands
of U.S dollars)
 
   2010  2009  2008  2010 

Cash flows from operating activities

     

Net income

  (Won)1,192,542   (Won)609,695   (Won)513,290   $1,047,100  
                 

Adjustments to reconcile net income to net cash provided by operating activities

     

Share-based payments

   6,969    1,049    1,922    6,119  

Provision for severance benefits

   248,053    1,128,370    362,342    217,801  

Depreciation

   2,895,499    2,935,448    3,264,291    2,542,365  

Amortization of intangible assets

   389,960    426,018    438,544    342,401  

Provision for doubtful accounts

   164,799    104,977    150,583    144,700  

Interest expense

   34,722    25,994    45,581    30,487  

Interest income

   (46,891  (22,126  (20,964  (41,172

Other bad debts expense

   9,261    46,872    22,355    8,132  

Loss (Gain) on foreign currency translation, net

   (33,346  (224,104  760,867    (29,279

Loss (Gain) on valuation of equity-method investments, net

   (27,037  13,628    10,965    (23,740

Gain on disposal of equity-method investments, net

   (1,318  (62,076  136    (1,157

Loss on impairment of available-for-sale securities

   2,792    10,102    3,826    2,451  

Gain on disposal of available-for-sale securities

   (257  (9,496  (3,996  (226

Loss on disposal of property and equipment, net

   165,310    119,158    88,917    145,149  

Loss on impairment of property and equipment

   9,297    1,236    20,676    8,163  

Loss on disposal of intangible assets

   19,620    4,247    1,653    17,227  

Loss on impairment of intangible assets

   3,443    7,742    17,435    3,023  

Loss on valuation of derivatives, net

   7,801    173,625    (639,744  6,850  

Others

   132,529    (8,635  21,893    116,366  
                 
   3,981,206    4,672,029    4,547,282    3,495,660  
                 
    Attributable to equity holders of the Parent Company       

(in millions of Korean won)

 Notes Capital
stock
  Share
premium
  Retained
earnings
  Accumulated
Other Comprehensive
income (loss)
  Other
Components
of equity
  Total  Non-controlling
interest
  Total equity 

Balance at January 1, 2011

  1,564,499   1,440,258   9,466,168   (79,370 (1,258,293 11,133,262   220,793   11,354,055  

Effect of the retrospective application of IFRS 10

 2.2                          45,842    45,842  

Adjusted balances

   1,564,499    1,440,258    9,466,168    (79,370  (1,258,293  11,133,262    266,635    11,399,897  

Comprehensive income

         

Profit for the year

           1,445,690            1,445,690    9,667    1,455,357  

Changes in value of available-for-sale financial assets

 4              5,090        5,090    54,368    59,458  

Remeasurements of the net defined benefit liability

 18          (103,869          (103,869  (458  (104,327

Valuation gains(losses) on cashflow hedge

 4              28,171        28,171        28,171  

Shares of other comprehensive income of jointly controlled entities and associates

               (5,277      (5,277  (458  (5,735

Shares of gain on remeasurements of jointly controlled entities and associates

           (1,911          (1,911      (1,911

Currency translation differences

               28,521        28,521    24    28,545  

Transactions with equity holders

         

Dividends

           (586,150          (586,150  (9,235  (595,385

Appropriations of loss on disposal of treasury stock

           (295      295              

Changes in consolidation scope

                           503,588    503,588  

Change in ownership interest in subsidiaries

                   (253,445  (253,445  36,457    (216,988

Others

                   14,154    14,154    22,936    37,090  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2011

  1,564,499   1,440,258   10,219,633   (22,865 (1,497,289 11,704,236   883,524   12,587,760  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

KT Corporation and Subsidiaries

Consolidated Statements of Cash FlowsChanges in Shareholder’s Equity (Continued)

Years Endedended December 31, 2010, 20092011, 2012 and 20082013

 

   (in millions of Korean won)  (in thousands
of U.S dollars)
 
   2010  2009  2008  2010 

Changes in operating assets and liabilities

     

Decrease (increase) in trade accounts and notes receivable

  (Won)69,456   (Won)(465,422 (Won)(367,263 $60,985  

Short-term loans granted

   (278,531  (180,572  (71,188  (244,561

Decrease in current finance lease receivables

   13,955    5,834    78,103    12,253  

Decrease(increase) in other accounts receivable

   (90,253  (120,762  20,460    (79,246

Decrease(increase) in accrued revenue

   5,722    (1,201  (7,676  5,024  

Increase in advance payments

   (51,579  (27,294  (6,919  (45,288

Increase in prepaid expenses

   (4,677  (19,928  (44,282  (4,107

Decrease(increase) in income taxes receivable

   25,984    (25,538  (107  22,815  

Decrease(increase) in guarantee deposits

   (532  1,049    8,026    (467

Decrease(increase) in derivative instruments assets

   19,148    (30,838  554    16,813  

Decrease(increase) in other current assets

   (354  275    (173  (311

Decrease(increase) in inventories

   36,850    (274,851  (131,305  32,356  

Dividend received

   11,306    1,332    1,047    9,927  

Increase in long-term trade accounts and notes receivable

   (781,407  (387,630  (253,257  (686,107

Long-term loans granted

       (147,602  (113,229  0  

Increase in non-current finance lease receivables

   (169,991  (16,555  (299,257  (149,259

Decrease(increase) in leasehold rights and deposits

   37,133    (2,484  (3,804  32,604  

Decrease(increase) in deferred income tax assets and liabilities

   11,691    (68,054  (126,811  10,265  

Decrease(increase) in long-term other accounts receivable

   9,748    (890  (8,146  8,559  

Decrease(increase) in other non-current assets

   44,099    (8,827  (19,536  38,721  

Increase in trade accounts payable

   21,213    645,925    (262,733  18,626  

Increase(decrease) in other accounts payable

   (286,700  869,594    (160,717  (251,734

Increase(decrease) in advances received

   (11,572  52,277    31,905    (10,161

Increase(decrease) in withholdings

   76,042    (129,398  26,901    66,768  

Increase(decrease) in accrued expenses

   75,844    (42,864  44,402    66,594  

Increase(decrease) in income taxes payable

   275,554    (107,361  (152,286  241,947  

Increase in unearned revenue

   5,220    81    1,363    4,583  

Increase(decrease) in other current liabilities

   716    376    (6,782  629  

Increase in deposits received

   18,932    39,232    77,868    16,623  

Increase(decrease) in derivative instruments liabilities

   (11,490  35,423    (388  (10,089

Payment of severance benefits

   (1,249,246  (1,345,331  (220,800  (1,096,888

Decrease(increase) in deposits for severance benefits

   278,332    48,917    (148,848  244,387  

Increase(decrease) in contribution to National Pension Fund

   (193  135    122    (169

Increase(decrease) in accrued provisions

   (49,051  (11,257  18,500    (43,069

Decrease in refundable deposits for telephone installation

   (80,585  (85,129  (59,437  (70,757

Increase in long-term accounts payable

   2,902    17,494    30,794    2,548  

Increase(decrease) in long-term other payables

   105,594    (99,864  (24,833  92,716  

Increase(decrease) in other non-current liabilities

   (8,496  (1,151  8,949    (7,460
                 
   (1,929,216  (1,882,859  (2,140,783  (1,693,930
                 

Net cash provided by operating activities

   3,244,532    3,398,865    2,919,789    2,848,830  
                 

KT Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Continued)

Years Ended December 31, 2010, 2009 and 2008

   (in millions of Korean won)  (in thousands
of U.S dollars)
 
   2010  2009  2008  2010 

Cash flows from investing activities

     

Decrease in short-term investment assets

   668,313    657,223    544,946    586,806  

Disposal of available-for-sale securities

   12,338    12,609    614,822    10,833  

Disposal in equity-method investments

   25,021    111,901    1,580    21,969  

Decrease in long-term financial instruments

   10,481    13    2,819    9,203  

Collection of held-to-maturity securities

   16    14,093    65    14  

Collection of long-term loans

   3    89,603    10,001    3  

Disposal of property and equipment

   27,159    69,947    56,365    23,847  

Increase in customers’ contribution to construction costs

   5,522    16,440    74,228    4,849  

Disposal of intangible assets

   4,253    1,326    17,013    3,734  

Disposal of other investment assets

   1,378    189    5,630    1,210  

Increase in short-term investment assets

   (320,100  (685,809  (343,115  (281,061

Acquisition of available-for-sale securities

   (88,981  (52,962  (714,831  (78,129

Acquisition of held-to-maturity securities

       (5  (13,988    

Acquisition of equity-method investments

   (135,539  (38,191  (123,371  (119,009

Increase in long-term financial instruments

   (9  (3,006  (11  (8

Long-term loans granted

   (50,234  (71,810  (50,421  (44,107

Acquisition of property and equipment

   (3,239,396  (2,774,426  (3,362,469  (2,844,320

Acquisition of intangible assets

   (352,033  (215,115  (189,772  (309,099

Acquisition of other investment assets

   (4,182  (3,782  (6,245  (3,672

Acquisition of subsidiaries’ assets and liabilities

           55,655      
                 

Net cash used in investing activities

   (3,435,990  (2,871,762  (3,532,409  (3,016,937
                 

Cash flows from financing activities

     

Increase in short-term borrowings, net

   211,012    99,395    42,538    185,277  

Issuance of bonds

   1,606,224    1,421,091    2,405,577    1,410,329  

Increase in long-term borrowings

   429,082    77,539    1,374,480    376,751  

Inflows from capital transactions of consolidated entities

   61,281    4,124    7,951    53,807  

Decrease in capital lease liabilities

   (37,648  (48,723  (29,764  (33,056

Payment of current portion of bond and long-term borrowings

   (1,894,942  (1,445,857  (2,147,487  (1,663,835

Payment of dividends

   (502,185  (229,360  (409,270  (440,939

Acquisition of treasury stock

   (300  (528,143  (73,807  (263

Outflows from capital transactions of consolidated entities

   (1,504  (280,512  (118,868  (1,321
                 

Net cash used in financing activities

   (128,980  (930,446  1,051,350    (113,250
                 

Effect of changes in consolidated entities

   (21,879  59,714    48,482    (19,211
                 

Effect of exchange rate on cash

   (2,457  (9,167  18,721    (2,157
                 

Net increase(decrease) in cash and cash equivalents

   (344,774  (352,796  505,933    (302,725

Cash and cash equivalents (Note 31)

     

Beginning of the year

   1,538,122    1,890,918    1,384,985    1,350,533  
                 

End of the year

  (Won)1,193,348   (Won)1,538,122   (Won)1,890,918   $1,047,808  
                 
    Attributable to equity holders of the Parent Company       

(in millions of Korean won)

 Notes Capital
stock
  Share
premium
  Retained
earnings
  Accumulated
Other Comprehensive
income (loss)
  Other
Components
of equity
  Total  Non-controlling
interest
  Total equity 

Balance at January 1, 2012

   1,564,499    1,440,258    10,219,633    (22,865  (1,497,289  11,704,236    883,524    12,587,760  

Comprehensive income

         

Profit for the year

           1,046,127            1,046,127    59,312    1,105,439  

Changes in value of available-for-sale financial assets

 4              12,019        12,019    7,068    19,087  

Remeasurements of the net defined benefit liability

 18          (131,644          (131,644  1,152    (130,492

Valuation gains(losses) on cashflow hedge

 4              25,628        25,628    (51  25,577  

Shares of other comprehensive income of jointly controlled entities and associates

               (8,440      (8,440  (290  (8,730

Shares of gain on remeasurements of jointly controlled entities and associates

           (1,131          (1,131      (1,131

Currency translation differences

               (5,017      (5,017  (1,628  (6,645

Transactions with equity holders

         

Dividends

           (486,602          (486,602  (11,455  (498,057

Disposal of treasury stock

                   13,353    13,353        13,353  

Changes in consolidation scope

                           133,767    133,767  

Change in ownership interest in subsidiaries

                   141,303    141,303    (163,404  (22,101

Others

                   (653  (653  801    148  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2012

  1,564,499   1,440,258   10,646,383   1,325   (1,343,286 12,309,179   908,796   13,217,975  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

KT Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholder’s Equity (Continued)

Years ended December 31, 2011, 2012 and 2013

    Attributable to equity holders of the Parent Company       

(in millions of Korean won)

 Notes Capital
stock
  Share
premium
  Retained
earnings
  Accumulated
Other Comprehensive
income (loss)
  Other
Components
of equity
  Total  Non-controlling
interest
  Total equity 

Balance at January 1, 2013

  1,564,499   1,440,258   10,646,383   1,325   (1,343,286 12,309,179   908,796   13,217,975  

Comprehensive income

         

Profit for the year

           (189,931          (189,931  102,186    (87,745

Changes in value of available-for-sale financial assets

 4              32,098        32,098    24,234    56,332  

Remeasurements of the net defined benefit liability

 18          57,641            57,641    (1,058  56,583  

Valuation gains(losses) on cashflow hedge

 4              (4,711      (4,711  15    (4,696

Shares of other comprehensive income of jointly controlled entities and associates

               2,570        2,570    326    2,896  

Shares of gain on remeasurements of jointly controlled entities and associates

           (463          (463  7    (456

Currency translation differences

               (6,744      (6,744  4,691    (2,053

Transactions with equity holders

         

Dividends

           (487,445          (487,445  (23,830  (511,275

Appropriations of loss on disposal of treasury stock

           (6,796      6,796              

Changes in consolidation scope

                           9,452    9,452  

Change in ownership interest in subsidiaries

                   14,150    14,150    85,971    100,121  

Others

                   1,397    1,397    (1,115  282  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2013

  1,564,499   1,440,258   10,019,389   24,538   (1,320,943 11,727,741   1,109,675   12,837,416  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

KT Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholder’s Equity (Continued)

Years ended December 31, 2011, 2012 and 2013

    Attributable to equity holders of the Parent Company       

(in thousands of U.S dollars)
(Unaudited), (Note 2)

 Notes Capital
stock
  Share
premium
  Retained
earnings
  Accumulated
Other Comprehensive
income (loss)
  Other
Components
of equity
  Total  Non-controlling
interest
  Total equity 

Balance at January 1, 2013

  $1,482,516   $1,364,785   $10,088,489   $1,256   $(1,272,896 $11,664,150   $861,174   $12,525,324  

Comprehensive income

         

Profit for the year

           (179,978          (179,978  96,830    (83,148

Changes in value of available-for-sale financial assets

 4              30,416        30,416    22,965    53,381  

Remeasurements of the net defined benefit liability

 18          54,620            54,620    (1,003  53,617  

Valuation gains(losses) on cashflow hedge

 4              (4,464      (4,464  14    (4,450

Shares of other comprehensive income of jointly controlled entities and associates

               2,435        2,435    309    2,744  

Shares of gain on remeasurements of jointly controlled entities and associates

           (438          (438  7    (431

Currency translation differences

               (6,391      (6,391  4,446    (1,945

Transactions with equity holders

         

Dividends

           (461,902          (461,902  (22,581  (484,483

Appropriations of loss on disposal of treasury stock

           (6,440      6,440              

Changes in consolidation scope

                           8,957    8,957  

Change in ownership interest in subsidiaries

                   13,409    13,409    81,466    94,875  

Others

                   1,324    1,324    (1,058  266  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2013

  $1,482,516   $1,364,785   $9,494,351   $23,252   $(1,251,723 $11,113,181   $1,051,526   $12,164,707  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

KT Corporation and Subsidiaries

Consolidated Statements of Cash Flows

Years ended December 31, 2011, 2012 and 2013

(in millions of Korean won)

 Notes  2011  2012  2013  (in thousands
of U.S dollars)
 
     2013 
     (Restated)  (Restated)     

(Unaudited)

(Note 2)

 

Cash flows from operating activities

     

Cash generated from operations

  32   2,919,255   6,439,692   4,677,260   $4,432,161  

Interest paid

   (513,418  (561,378  (546,802  (518,148

Interest received

   157,442    208,640    194,065    183,896  

Dividends received

   15,224    17,742    24,641    23,350  

Income tax paid

   (414,471  (379,211  (238,091  (225,615
  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash generated from operating activities

   2,164,032    5,725,485    4,111,073    3,895,644  
  

 

 

  

 

 

  

 

 

  

 

 

 

Cash flows from investing activities

     

Collection of loans

   66,732    106,896    70,451    66,759  

Origination of loans

   (71,468  (130,425  (31,279  (29,640

Disposal of available-for-sale financial assets

   65,760    113,068    78,811    74,681  

Acquisition of available-for-sale financial assets

   (188,752  (86,622  (127,052  (120,394

Disposal of investments in jointly controlled entities and associates

   102,563    21,818    22,455       21,278  

Acquisition of investments in jointly controlled entities and associates

   (65,055  (59,464  (16,338  (15,482

Disposal of current and non-current financial instruments

   262,965    362,481    319,465    302,724  

Acquisition of current and non-current financial instruments

   (269,619  (511,914  (588,893  (558,034

Disposal of property, equipment and investment property

   594,257    618,786    100,469    95,204  

Acquisition of property and equipment and investment property

   (3,235,956  (3,760,255  (3,088,185  (2,926,357

Disposal of intangible assets

   14,763    7,061    18,336    17,375  

Acquisition of intangible assets

   (477,106  (526,878  (549,967  (521,148

Increase in cash due to exclusion from consolidation scope

   727,351    25,857    7,498    7,105  

Cash inflow (outflow) from changes in scope of consolidation

   (192,075  (31,588  1,646    1,560  
  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash used in investing activities

   (2,665,640  (3,851,179  (3,782,583  (3,584,369
  

 

 

  

 

 

  

 

 

  

 

 

 

Cash flows from financing activities

     

Proceeds from borrowings and bonds

   7,261,735    4,258,995    6,199,601    5,874,729  

Repayments of borrowings and bonds

   (6,057,987  (4,590,608  (5,956,340  (5,644,215

Settlement of derivative assets and liabilities, net

   130,119    39,001    (67,413  (63,880

Disposal of treasury stock

       11,369          

Cash inflow from consolidated capital transaction

   83,855    7,232    34,581    32,769  

Cash outflow from consolidated capital transaction

   (2,213  (315,356  (4,107  (3,892

Dividends paid to shareholders

   (595,385  (498,057  (511,275  (484,483

Decrease in finance leases liabilities

   (47,701  (190,380  (6,841  (6,483
  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash provided by (used in) financing activities

   772,423    (1,277,804  (311,794  (295,455
  

 

 

  

 

 

  

 

 

  

 

 

 

Effect of exchange rate change on cash and cash equivalents

   12,795    (1,038  (3,440  (3,260
  

 

 

  

 

 

  

 

 

  

 

 

 

Net increase in cash and cash equivalents

   283,610    595,464    13,256    12,560  

Cash and cash equivalents

     

Beginning of the year

  5    1,178,539    1,462,149    2,057,613    1,949,790  
  

 

 

  

 

 

  

 

 

  

 

 

 

End of the year

  5   1,462,149   2,057,613   2,070,869   $1,962,350  
  

 

 

  

 

 

  

 

 

  

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2010, 20092011, 2012 and 20082013

1.    General informationInformation

The consolidated financial statements include the accounts of KT Corporation, which is the controlling company as defined under IFRS 10,Consolidated Financial Statements, and its 68 controlled subsidiaries as described in Note 1.2 (collectively referred to as the “Group”).

The Controlling Company

KT Corporation (the “Controlling Company”“Company”) commenced operations on January 1, 1982, when it spun off from the Korea Communications Commission (formerly the Korean Ministry of Information and Communications) to provide telephone services and to engage in the development of advanced communications services under the Act of Telecommunications of Korea. The headquarters are located in Seongnam City, Gyeonggi Province, Republic of Korea, and the address of its registered head office is 90, Buljeong-ro, Bundang-gu, Seongnam City, Gyeonggi Province.

On October 1, 1997, upon the announcement of the Government-Investment Enterprises Management Basic Act and the Privatization Law, the Controlling Company became a government-funded institution under the Commercial Code of Korea.

On December 23, 1998, the Controlling Company’s shares were listed on the Korea Exchange.

On May 29, 1999, the Controlling Company issued 24,282,195 additional shares and issued American Depository Shares (ADS), representing new shares and government-owned shares, at the New York Stock Exchange and the London Stock Exchange. On July 2, 2001, the additional ADS representing 55,502,161 government-sharesgovernment-owned shares were issued.issued at the New York Stock Exchange and London Stock Exchange.

In 2002, the Controlling Company acquired 60,294,575the entire government-owned shares in accordance with the Korean government’s privatization plan. As of December 31, 2010,the end of the reporting period, the Korean government diddoes not own any shareshares in the Controlling Company.

On June 1, 2009, the Controlling Company, as the surviving entity, merged with KT Freetel Co., Ltd. to have competitive advantages in the global trends of convergence between fixed and mobile communication.

The Controlling Company’s shares as of December 31, 2010 are owned as follows:

   Number of shares   Percentage of
ownership(%)
 

National Pension Service

   21,557,950     8.26

NTTDoCoMo, Inc.

   14,257,813     5.46

Employee Stock Ownership Association

   4,069,147     1.56

Others

   203,330,934     77.87
          
   243,215,844     93.15

Treasury stock

   17,895,964     6.85
          
   261,111,808     100.00
          

2.    Consolidated Subsidiaries

The consolidated subsidiaries as of December 31, 2010, are as follows:

Subsidiary

 

Type of Business

 Total issued
shares
  Shares owned by  Percentage
of
ownership
(%)
  Financial
year end
 
   Parent  Subsidiaries  Total   

Domestic subsidiaries

       

KT Powertel Co., Ltd. (“KTP”)

 Trunk radio system business  17,329,432    7,771,418        7,771,418    44.85    12.31  

Subsidiary

 

Type of Business

 Total issued
shares
  Shares owned by  Percentage
of
ownership
(%)
  Financial
year end
 
   Parent  Subsidiaries  Total   

KT Networks Corporation (“KTN”)

 

Group telephone management

  2,000,000    2,000,000        2,000,000    100.00    12.31  

KT Linkus Co., Ltd. (“KTL”)

 

Public telephone maintenance

  3,135,554    2,941,668        2,941,668    93.82    12.31  

KT Submarine Co., Ltd. (“KTSC”)

 

Submarine cable construction and maintenance

  4,380,000    1,617,000        1,617,000    36.92    12.31  

KT Capital Co., Ltd. (“KT Capital”)

 

Financing service

  27,394,245    20,200,000    7,194,245    27,394,245    100.00    12.31  

KT Telecop Co., Ltd. (“KT Telecop”)

 

Security service

  6,491,353    5,765,911    84,544    5,850,455    90.13    12.31  

KT Internal Venture Fund No.2

 

Investment fund

  (*2  (*2  (*2  (*2  94.34    2.28  

Sofnics, Inc. (“Sofnics”)

 

Software development and sales

  225,000    120,000    15,000    135,000    60.00    12.31  

KT Edui Co., Ltd. (formerly, JungBoPremiumEdu Co., Ltd.) (“KT Edui”)

 

Online education business

  768,000    540,000        540,000    70.31    12.31  

KT New Business Fund No. 1

 

Investment fund

  (*2  (*2  (*2  (*2  100.00    12.31  

KT DataSystems Co., Ltd. (“KTDS”)

 

System integration and maintenance

  2,518,044    2,400,000        2,400,000    95.31    12.31  

Gyeonggi-KT Green Growth Fund

 

Venture investment of Green Growth Business

  (*2  (*2  (*2  (*2  56.45    12.31  

KTC Media Contents Fund 1

 

New technology investment fund

  (*2  (*2  (*2  (*2  81.82    4.30  

KTC Media Contents Fund 2

 

New technology investment fund

  (*2  (*2  (*2  (*2  85.71    12.31  

KT Innotz Inc. (“KT Innotz”)

 

Software development of mobile clouding computer and solution

  1,000,000    600,000        600,000    60.00    12.31  

Vanguard Private Equity Fund (*1)

 

Corporate restructuring

  (*2  (*2  (*2  (*2  28.10    12.31  

KT-LIG ACE Private Equity Fund (*1)

 

Investment fund

  (*2  (*2  (*2  (*2  9.01    12.31  

KTR Co., Ltd. (“KTR”) (*3)

 

Rental service

  4,974,608        4,974,608    4,974,608    58.00    12.31  

KT Rental Co., Ltd. (“KT Rental”) (*4)

 

Rental service

  11,410,700    6,618,046        6,618,046    58.00    12.31  

KT Estate Inc. (“KT Estate”)

 

Residential Building Development and Supply

  1,600,000    1,600,000        1,600,000    100.00    12.31  

KT Strategic Investment Fund No.1

 

Investment fund

  (*2  (*2  (*2  (*2  100.00    12.31  

KT Hitel Co., Ltd. (“KTH”)

 

Data communication

  34,500,000    22,750,000        22,750,000    65.94    12.31  

KT Commerce Inc. (“KTC”)

 

B2C, B2B service

  1,400,000    266,000    1,134,000    1,400,000    100.00    12.31  

KT Tech, Inc. (“KT Tech”)

 

PCS handset development

  5,489,382    5,146,962        5,146,962    93.76    12.31  

KT M Hows Co., Ltd. (“KTF M Hows”)

 

Mobile marketing

  1,000,000    510,000        510,000    51.00    12.31  

Subsidiary

 

Type of Business

 Total issued
shares
  Shares owned by  Percentage
of
ownership
(%)
  Financial
year end
 
   Parent  Subsidiaries  Total   

KT M&S Co., Ltd. (“KT M&S”)

 PCS distribution  30,000,000    30,000,000        30,000,000    100.00    12.31  

KT Music Corporation (“KT Music”)

 

Online music production and distribution

  29,766,863    14,494,258        14,494,258    48.69    12.31  

Sidus FNH Corporation (“Sidus FNH”)

 Movie production  (*2  (*2  (*2  (*2  51.00    12.31  

Sidus FNH Benex Cinema Investment Fund

 

Movie investment fund

  (*2  (*2  (*2  (*2  43.33    12.31  

Nasmedia, Inc. (“Nasmedia”)

 

Online advertisement

  3,535,029    1,767,516        1,767,516    50.00    12.31  

Overseas subsidiaries

       

Korea Telecom Japan Co., Ltd. (“KTJ”, Japan)

 

Foreign telecommunication business

  12,856    12,856        12,856    100.00    12.31  

Korea Telecom China Co., Ltd. (“KTCC”, China)

 

Foreign telecommunication business

  1,244,600,000    1,244,600,000        1,244,600,000    100.00    12.31  

Super iMax (Uzbekistan)

 

Wireless high speed internet business

  (*2  (*2  (*2  (*2  100.00    12.31  

East Telecom (Uzbekistan)

 

Fixed line telecommunication business

  (*2  (*2  (*2  (*2  85.00    12.31  

New Telephone Company, Inc. (“NTC”, Rusia)

 

Foreign telecommunication business

  6,639,492    5,309,189        5,309,189    79.96    12.31  

Helios-TV (Rusia)

 

Cable TV business

  (*2  (*2  (*2  (*2  100.00    12.31  

Novaya Svyaz

 Internet business  (*2  (*2  (*2  (*2  100.00    12.31  

KTSC Investment Management B.V. (“KTSC”, Netherlands)

 

Management of investment in Super iMax and East Telecom

  137,690    82,614        82,614    60.00    12.31  

Korea Telecom America, Inc. (“KTAI”, America)

 

Foreign telecommunication business

  6,000    6,000        6,000    100.00    12.31  

PT. KT Indonesia (“KTI”, Indonesia)

 

Foreign telecommunication business

  200,000    198,000        198,000    99.00    12.31  

1Even though the Controlling Company has less than 30% ownership in this subsidiary, this subsidiary was consolidated as the Controlling Company has significant control as a general partner in accordance with the Indirect Investment Asset Management Business Act.

2There are no issued shares since these are not corporations.

3KTR Co., Ltd. was spun off from KT Rental Co., Ltd. on June 1, 2010.

4KT Rental Co., Ltd. merged with the Rent-A-Car division that was spun off from Kumho Rent-A-Car Global Co., Ltd. on June 1, 2010.

The consolidated subsidiaries are determined in accordance with the Enforcement Decree of the Act on External Audit of Stock Companies and SKFAS No. 25,Consolidated Financial Statements.

Newly consolidated subsidiaries as of December 31, 2010, and subsidiaries consolidated as of December 31, 2009 but excluded as of December 31, 2010,2013, are as follows:

 

Consolidated subsidiaries(in millions of Korean won)

  

RemarksType of Business

KT-LIG ACE Private Equity Fund

  New investment made in 2010LocationPercentage
of
ownership  1
(%)

KTRSubsidiary

KT Powertel Co., Ltd. 2

Trunk radio system businessDomestic44.8

KT ENS Corporation (formerly KT Networks Corporation)

Wire/wireless network construction and network infrastructure managementDomestic100.0

KT Linkus Co., Ltd.

  Newly incorporated through spin-offPublic telephone maintenanceDomestic93.8

KT Submarine Co., Ltd. 2

Submarine cable construction and maintenanceDomestic36.9

KT EstateTelecop Co., Ltd.

Security serviceDomestic86.8

KT Hitel Co., Ltd.

Data communicationDomestic63.7

KT Commerce Inc.

B2C, B2B serviceDomestic100.0

KT Capital Co., Ltd.

Financing serviceDomestic100.0

KT New Business Fund No.1

Investment fundDomestic100.0

Gyeonggi-KT Green Growth Fund

Venture investment of Green Growth BusinessDomestic56.5

(in millions of Korean won)

Type of Business

LocationPercentage
of
ownership  1
(%)

Subsidiary

KTC Media Contents Fund 2

  New technology investment made in 2010fundDomestic85.7

KT Strategic Investment Fund No.1

  New investment made in 2010Investment fundDomestic100.0

Novaya SvyazKT Strategic Investment Fund No.2

  Total assets exceeded(Won)10,000 millionInvestment fundDomestic100.0

BC Card Co., Ltd.

Credit card businessDomestic69.5

VP Inc.

Payment security service for credit card and etc.Domestic50.9

H&C Network

Call center for financial sectorsDomestic100.0

BC Card China Co., Ltd.

Research and development of calculation system and softwareChina100.0

INITECH Co., Ltd.

Internet banking ASP and security solutionsDomestic57.0

InitechSmartro Holdings Co., Ltd.

Holding company of Initech co., Ltd., Smartro Co., LtdDomestic100.0

Smartro Co., Ltd.

VAN (Value Added Network) businessDomestic81.1

Sidus FNH Corporation

Movie productionDomestic72.4

Sofnics, Inc.

Software development and salesDomestic80.6

KTDS Co., Ltd.

System integration and maintenanceDomestic95.3

KT M Hows Co., Ltd.

Mobile marketingDomestic51.0

KT M&S Co., Ltd.

PCS distributionDomestic100.0

KT Music Corporation

Online music production and distributionDomestic57.8

KT Skylife Co., Ltd.

Satellite broadcasting businessDomestic50.1

Korea HD Broadcasting Corp.

TV contents providerDomestic92.6

KT Estate Inc.

Residential building development and supplyDomestic100.0

KT AMC Co., Ltd.

Asset management and consulting servicesDomestic100.0

NEXR Co., Ltd.

Cloud system implementationDomestic99.8

KTSB Data service Co., Ltd.

Data center development and related serviceDomestic51.0

KT Cloudware Corporation

Development of cloud computing operationDomestic86.2

CENTIOS Co., Ltd.

U-City solution businessDomestic82.8

Centios Philippines, Inc.

Smart space businessPhilippines100.0

Enswers Inc. 3

Video-clip searching serviceDomestic45.2

Soompi USA, LLC

Operation service for “soompi.com”U.S.A.100.0

KT OIC Co., Ltd.

Development and distribution of education contents and softwareDomestic79.2

Ustream Inc.

Live video-streaming service businessDomestic51.0

Incheonucity Co., Ltd.

U-City development and operation agentDomestic51.4

KT Innoedu Co., Ltd. 3

E-learning businessDomestic48.4

KT Rental

Computer rental and general rental businessDomestic58.0

KT Auto Lease Corporation

Car rental businessDomestic100.0

Kumho Rent a car (Vietnam) Co. Ltd.

Car rental businessVietnam100.0

KT Rental Auto Care Corporation

Wholesale and retail for automobile componentDomestic100.0

KT Sat Co., Ltd.

Satellite communication businessDomestic100.0

KT Media Hub Co. Ltd.

Media contents development and distributionDomestic100.0

Best Partners Co., Ltd.

Outsourcing service for HR, administration, and accounting serviceDomestic100.0

Nasmedia, Inc. 3

Online advertisementDomestic45.4

T-ON Telecom

Trunk radio system business and data communicationDomestic100.0

KT Sports

Management of sports groupDomestic100.0

KT Music Contents Fund No.1

Music contents investment businessDomestic80.0

Consus Changwon Private Estate Investment Trust

Investment in real estateDomestic93.6

KT-Michigan Global Contents Fund

Content investment businessDomestic81.3

Autopion Co. Ltd.

Service for information and communicationDomestic100.0

GreenPoint Co., Ltd.

Car sharing businessDomestic52.3

K-REALTY CR-REIT IV

Investment in real estateDomestic100.0

K-REALTY REIT V

Investment in real estateDomestic100.0

Olleh Rwanda Networks Ltd.

Network installation and managementRwanda51.0

KT Belgium

Foreign investment businessBelgium100.0

KT ORS Belgium

Foreign investment businessBelgium100.0

Excluded subsidiary(in millions of Korean won)

  

RemarksType of Business

LocationPercentage
of
ownership  1
(%)

Subsidiary

Korea Telecom Japan Co., Ltd.

Foreign telecommunication businessJapan100.0

Korea Telecom China Co., Ltd.

Foreign telecommunication businessChina100.0

KT Dutch B.V

Super iMax and East Telecom managementNetherlands100.0

Super iMax, LLC

Wireless high speed internet businessUzbekistan100.0

East Telecom, LLC

Fixed line telecommunication businessUzbekistan91.0

Korea Telecom America, Inc.

Foreign telecommunication businessU.S.A.100.0

PT. KT Indonesia

Foreign telecommunication businessIndonesia99.0

1Sum of the ownership interests owned by the Company and subsidiaries

2Even though the Company has less than 50% ownership in these subsidiaries, these entities are consolidated as the Company can exercise the majority voting rights in its decision-making process at all times considering historical voting pattern at the shareholders’ meetings.

3Even though the Company has less than 50% ownership in these subsidiaries, these entities are consolidated as the Company holds the majority of voting right based on an agreement with other investors

Changes in scope of consolidation in 2013 are as follows:

Changes

Location

Subsidiaries

Reason

Doremi Media Co., LtdIncluded

  DisposedDomesticT-ON Telecom.Acquisition of in 2010ownership interest
KT Rental Auto Care CorporationNewly established throughspin-off
KT SportsNewly incorporated
KT Music Contents Fund No.1Newly incorporated
Consus Changwon Private Estate Investment TrustNewly incorporated
KT-Michigan Global Contents FundNewly incorporated
Autopion Co., Ltd.Newly incorporated
GreenPoint Co., Ltd.Acquisition of ownership interest
K-REALTY CR-REIT IVNewly incorporated
K-REALTY REIT VNewly incorporated
RwandaOlleh Rwanda Networks Ltd.Newly incorporated
BelgiumKT BelgiumNewly incorporated
KT ORS BelgiumNewly incorporated

Excluded

DomesticU payment Co., Ltd.Disposal of ownership interest
Kumho Rent-a-car Co., Ltd.Liquidation
RevlixLiquidation
KMP Holdings Co., Ltd.Merged
KT Tech Inc.Liquidation
KT Innotz Inc.Merged

A summary of financial data of the major consolidated subsidiaries as of and for the yearyears ended December 31, 2010 is2011, 2012 and 2013, are as follows:

 

(in millions of Korean won)

  Total assets   Total liabilities   Net assets   Sales   Net income (loss) 

KT Powertel Co., Ltd.

  (Won)165,838    (Won)68,805    (Won)97,033    (Won)127,491    (Won)13,592  

KT Networks Corporation

   171,875     120,503     51,372     342,449     2,321  

KT Telecop Co., Ltd

   130,410     96,214     34,196     216,651     4,874  

KT Hitel Co., Ltd.

   223,225     37,744     185,481     149,845     (2,739

KT Tech, Inc.

   129,052     109,470     19,582     341,514     1,725  

KTR Co., Ltd.

   304,047     269,345     34,702     28,869     1,231  

KT Rental Co., Ltd.

   933,557     673,211     260,346     378,775     13,797  

KT Capital Co., Ltd.

   2,037,839     1,837,892     199,947     176,389     27,763  

KTDS

   147,950     118,184     29,766     355,542     8,144  

KT M&S Co., Ltd.

   265,446     239,158     26,288     615,972     (19,959

New Telephone Company, Inc.

   220,209     18,610     201,599     129,263     33,001  

Others

   691,247     249,396     441,851     485,318     3,342  
                         

Total

  (Won)5,420,695    (Won)3,838,532    (Won)1,582,163    (Won)3,348,078    (Won)87,092  
                         

A summary of financial data of the major consolidated subsidiaries as of and for the year ended December 31, 2010, is presented prior to the elimination of intercompany transactions. The financial data of New Telephone Company, Inc. are based on the consolidated financial statements and the financial data of all others are based on non-consolidated financial statements.
   2011 

(in millions of Korean won)

  Total assets   Total liabilities   Operating
revenue
   Net
income (loss)
 

KT Powertel Co., Ltd.

  167,075    59,061    126,354    14,569  

KT ENS Corporation (formerly KT Networks Corporation)

   212,867     161,864     374,518     389  

KT Linkus Co., Ltd.

   67,419     64,081     77,523     (6,667

KT Submarine Co., Ltd

   127,062     48,004     111,453     6,700  

KT Telecop Co., Ltd.

   156,479     106,836     259,468     7,075  

KT Hitel Co., Ltd. 1

   249,730     69,376     463,032     (2,002

KT Tech, Inc.

   110,923     139,873     246,948     641  

KT Capital Co., Ltd. 1

   4,454,475     4,043,072     1,010,503     25,195  

   2011 

(in millions of Korean won)

  Total assets   Total liabilities   Operating
revenue
   Net
income (loss)
 

H&C Network 1,2

   197,726     81,351     44,892     1,124  

Sidus FNH Corporation

   9,838     5,824     6,904     (2,975

Nasmedia, Inc.

   92,384     53,744     21,656     6,004  

Sofnics, Inc.

   970     521     626     (481

KTDS Co., Ltd.

   146,236     106,006     497,925     10,298  

KT M Hows Co., Ltd.

   15,148     7,078     34,933     1,092  

KT M&S Co., Ltd.

   249,280     226,651     917,176     (3,256

KT Music Corporation

   27,840     7,691     31,279     (2,385

KT Edui Co., Ltd.

   1,119     1,589     3,986     (2,366

KT Innotz Inc.

   5,520     1,727     3,795     (4,623

KT Skylife Co., Ltd. 1,2

   550,443     258,231     480,468     26,649  

KT Estate Inc. 1

   33,382     3,175     7,838     1,337  

NEXR Co., Ltd. 2

   3,887     1,726     3,359     756  

KTSB Dataservice Co., Ltd. 2

   58,755     21,904          (149

KT Cloudware Corporation 2

   916     81          (165

CENTIOS Co., Ltd. 2

   25,493     357          (377

Enswers Inc. 1,2

   16,543     18,185     759     (331

KT OIC Co., Ltd. 2

   5,201     68     30     (396

Korea Telecom Japan Co., Ltd.

   15,359     9,813     33,113     731  

Korea Telecom China Co., Ltd.

   2,804     128     3,419     111  

KT Dutch B.V. (formerly KTSC Investment Management B.V) 1

   65,587     18,458     17,014     (5,026

Korea Telecom America, Inc.

   6,368     2,069     11,134     149  

PT. KT Indonesia

   52     1          (8

KT Powertel Co., Ltd.

   175,862     55,613     124,936     12,527  

KT ENS Corporation (formerly KT Networks Corporation)

   258,430     201,076     500,555     4,644  

KT Linkus Co., Ltd.

   68,260     62,686     81,564     2,302  

KT Submarine Co., Ltd.

   109,787     25,037     68,900     7,953  

KT Telecop Co., Ltd.

   180,870     130,719     296,180     2,642  

KT Hitel Co.,Ltd. 1

   249,231     79,511     443,431     (8,902

KT Tech, Inc.

   13,190     42,562     175,861     2,731  

KT Capital Co., Ltd. 1

   5,058,883     4,519,485     3,348,952     98,353  

H&C Network 1

   244,031     119,086     199,143     8,713  

Sidus FNH Corporation

   9,534     1,921     2,066     209  

Nasmedia, Inc.

   90,675     47,053     23,463     6,445  

Sofnics, Inc.

   1,564     207     782     (279

KTDS Co., Ltd.

   171,546     115,994     570,703     17,155  

KT M Hows Co., Ltd.

   26,498     16,511     28,874     1,933  

KT M&S Co., Ltd.

   257,809     224,430     1,009,331     (78,241

KT Music Corporation 1

   73,050     33,086     31,393     (2,124

KT Innotz Inc.

   3,012     344     2,609     (1,411

KT Skylife Co., Ltd. 1

   641,564     292,649     574,829     55,546  

KT Estate Inc. 1

   1,460,511     145,885     24,861     3,124  

NEXR Co., Ltd.

   2,305     1,964     2,651     (1,787

KTSB Dataservice

   32,733     265     439     (4,383

KT Cloudware Corporation

   21,345     2,321     3,878     (5,397

CENTIOS Co., Ltd 1

   32,848     9,259     171     (3,163

Enswers Inc. 1

   13,966     18,330     4,896     (3,010

KT OIC Co., Ltd.

   3,968     406     325     (1,569

Ustream Inc.

   3,171     858     321     (2,683

KT Innoedu Co., Ltd. 2

   10,561     5,218     10,522     308  

KT Rental 1,2

   1,694,021     1,426,484     368,228     11,072  

KT Media Hub Co., Ltd. 2

   95,703     13,679     14,381     2,237  

KT Sat Co., Ltd. 2

   417,886     16,269     10,310     1,739  

Best Partners Co., Ltd. 2

   1,526     79     15     (57

Korea Telecom Japan Co., Ltd.

   8,284     3,955     14,458     (324

Korea Telecom China Co., Ltd.

   1,895     38     1,863     (675

KT Dutch B.V. (formerly KTSC Investment Management B.V) 1

   47,277     14,748     12,086     (9,837

   2011 

(in millions of Korean won)

  Total assets   Total liabilities   Operating
revenue
   Net
income (loss)
 

Korea Telecom America, Inc.

   5,850     1,904     13,392     (31

PT. KT Indonesia

   38               (6

KT Powertel Co., Ltd.

   167,131     44,012     112,905     5,453  

KT ENS Corporation (formerly KT Networks Corporation)

   291,636     225,285     587,438     11,133  

KT Linkus Co., Ltd.

   70,562     62,993     103,003     1,920  

KT Submarine Co., Ltd.

   115,781     27,449     83,006     6,146  

KT Telecop Co., Ltd.

   192,126     138,357     239,166     3,840  

KT Hitel Co.,Ltd. 1

   293,665     102,644     582,925     3,551  

KT Capital Co., Ltd. 1

   5,462,028     4,759,100     3,317,337     129,354  

H&C Network 1

   257,390     110,126     225,402     18,870  

Sidus FNH Corporation

   9,481     2,549     5,729     (387

Nasmedia, Inc.

   97,140     40,943     24,769     5,615  

Sofnics, Inc.

   1,431     267     881     (178

KTDS Co., Ltd.

   189,983     125,172     574,792     18,245  

KT M Hows Co., Ltd.

   25,845     14,341     48,047     1,739  

KT M&S Co., Ltd.

   281,011     223,089     884,125     22,614  

KT Music Corporation 1

   82,997     48,289     51,350     (5,088

KT Skylife Co., Ltd. 1

   684,651     283,068     630,469     72,724  

KT Estate Inc. 1

   1,434,685     109,634     253,367     22,692  

NEXR Co., Ltd.

   2,814     4,451     4,540     (1,965

KTSB Dataservice

   28,001     321     1,447     (4,802

KT Cloudware Corporation

   15,995     1,128     4,682     (2,913

Centios Co., Ltd 1

   27,873     9,793     1,060     (5,097

Enswers Inc. 1

   8,722     20,148     5,922     (4,990

KT OIC Co., Ltd.

   3,626     512     2,039     (448

Ustream Inc.

   2,677     1,050     2,831     (2,363

KT Innoedu Co., Ltd.

   12,618     8,450     21,578     (1,020

KT Rental 1

   2,188,271     1,896,259     886,959     32,400  

KT Media Hub Co., Ltd.

   184,702     81,578     304,713     21,146  

KT Sat Co., Ltd.

   492,965     35,237     169,463     56,859  

Best Partners Co., Ltd.

   882     116     265     (681

T-ON Telecom 2

   3,347     2,298     1,152     (2,358

KT Sports 2

   15,672     6,750     21,794     (970

KT Music Contents Fund No.1 2

   10,529     185     72     (157

KT-Michigan Global Contents Fund 2

   6,227          26     (173

Autopion Co., Ltd. 2

   5,314     3,314            

Korea Telecom Japan Co., Ltd.

   17,752     14,204     22,154     30  

Korea Telecom China Co., Ltd.

   1,178     367     1,338     (1,108

KT Dutch B.V. (formerly KTSC Investment Management B.V) 1

   46,347     14,684     22,077     (4,131

Korea Telecom America, Inc.

   5,773     1,825     13,881     32  

PT. KT Indonesia

   30               1  

Olleh Rwanda Networks Ltd. 2

   226,776     217,132          (943

KT Belguium 2

   38,033               (11

KT ORS Belgium 2

   95                 

1These companies are the intermediate parent companies of other subsidiaries and the above financial information is from their consolidated financial statements.

2These entities were newly consolidated for the years ended December 31, 2011, 2012 and 2013. Only operating revenues and net income subsequent to the inclusion of consolidation scope are disclosed above.

3.    Summary of2.    Significant Accounting Policies

The following is a summary of significant accounting policies followed by the Controlling Company and its subsidiaries (collectively referred to as “the Company”)Group in the preparation of its financial statements. These policies have been consistently applied to all the yearsperiods presented, unless otherwise stated.

2.1    Basis of PresentationPreparation

The Company maintains its accounting records in Korean won and prepares statutory financial statements in Korean language (Hangul) in conformity with the accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these consolidated financial statements are intended for useof the Group have been prepared in accordance with International Financial Reporting Standards(“IFRS”) as issued by those who are informed about Korean accounting principles and practices. the International Accounting Standards Board (“IASB”)

The accompanyingpreparation of the consolidated financial statements have been condensed, restructuredrequires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and translated into English from the Korean language financial statements.

Principles of Consolidation

The fiscal year end of the consolidated subsidiaries is the same as that of the Controlling Company, except for KT Internal Venture Fund No.2 and KTC Media Contents Fund 1. If the fiscal year end of a consolidated subsidiary is different from that of the Controlling Company,estimates are significant to the consolidated financial statements are prepareddisclosed in Note 3.

2.2    Changes in Accounting Policy and Disclosures

(1) New standards and amendments adopted by the Group

The Group adopted the following amended and enacted standards for the annual period beginning on January 1, 2013:

—Amendment to IAS 1, Presentation of Financial Statements: Presentation of Items of Other Comprehensive Income

The amendment requires entities to group items presented in other comprehensive income based on whether they are potentially reclassifiable to profit or loss subsequently. The Group applied the subsidiary’s reliableamendment retroactively and there is no impact of the application of this amendment on its total comprehensive income or loss.

—Amendment to IAS 19, Employee Benefits

The amendment requires entities to immediately recognize all actuarial gains and losses incurred in other comprehensive income or loss. All past service costs incurred are immediately recognized in accordance with the change of the plan, and the previous separate calculation of the interest cost and the expected returns on plan assets has been revised to calculate net interest expense (income) by applying the discount rate used in the defined benefit obligation measurement in the net defined benefit liabilities (assets). The Group applies the amendment retroactively and the comparative consolidated statements of operations and consolidated statements of comprehensive income are restated by reflecting adjustments resulting from the retrospective application.

—IFRS 10, Consolidated Financial Statements

IFRS 10,Consolidated Financial Statements, introduces a single control concept and provides additional guidance for evaluating control.

As a result of the adoption of IFRS 10, the Group consolidated KT Submarine Co., Ltd. by virtue of de-facto control because the Group is able to exercise the majority voting rights in its decision-making process considering historical voting pattern at the shareholders’ meeting, although the Group has 36.9% of ownership (39.34% including treasury stocks). KT Submarine Co., Ltd. was classified as an associate in accordance with the previous standard and accounted for using the equity method. Accordingly, the comparative consolidated financial statements were retrospectively adjusted and restated as if the Group obtained control over the entity from the initial acquisition of its interest.

Results of retrospective application of amendment to IAS 19 and IFRS 10 are as follows.

(in millions of Korean won, except per share amounts)

  2012 
Accounts  As reported  IFRS 10  IAS 19  Restated 

Current assets

   10,482,845    34,574        10,517,419  

Non-current assets

   23,996,654    43,835        24,040,489  

Current liabilities

   11,247,314    19,452        11,266,766  

Non-current liabilities

   10,067,673    5,494        10,073,167  

Operating revenue

   24,577,709    66,063        24,643,772  

Operating expenses

   22,892,776    56,360    14,537    22,963,673  

Profit(loss) from continuing operations before income tax

   1,422,502    6,877    (14,537  1,414,842  

Profit(loss) for the year from the continuing operations

   1,111,450    5,017    (11,028  1,105,439  

Basic earnings per share (in won)

   4,341        (45  4,296  

Cash flows from operating activities

   5,721,398    4,087        5,725,485  

Cash flows from investing activities

   (3,844,381  (6,798      (3,851,179

Cash flows from financing activities

   (1,266,474  (11,330      (1,277,804

(in millions of Korean won, except per share amounts)

  2011 
Accounts  As reported  IFRS 10  IAS 19  Restated 

Current assets

   9,790,659    55,998        9,846,657  

Non-current assets

   22,294,750    41,140        22,335,890  

Current liabilities

   8,745,125    34,481        8,779,606  

Non-current liabilities

   10,802,475    12,785        10,815,260  

Operating revenue

   21,979,299    108,531        22,087,830  

Operating expenses

   20,002,551    97,010    1,173    20,100,734  

Profit(loss) from continuing operations before income tax

   1,603,371    7,024    (1,173  1,609,222  

Profit(loss) for the year from the continuing operations

   1,452,019    4,227    (889  1,455,357  

Basic earnings per share (in won)

   5,947        (4  5,943  

Cash flows from operating activities

   2,150,309    13,723        2,164,032  

Cash flows from investing activities

   (2,647,997  (17,643      (2,665,640

Cash flows from financing activities

   768,472    3951        772,423  

—IFRS 11, Joint Arrangements

IFRS 11,Joint Arrangements, reflects the substance of joint arrangements and focuses on the rights and obligations of the fiscal year endparties to the joint arrangements rather than on the legal forms of the Controlling Company. Differencesarrangements. Joint arrangements are classified into joint operations or joint ventures. The adoption of this standard does not have an impact on the consolidated financial statements.

—IFRS 12, Disclosures of Interests in Other Entities

IFRS 12,Disclosure of Interests in Other Entities, provides disclosure requirements for all types of equity investments in other entities including subsidiaries, associates, joint ventures and unconsolidated structured entities (Notes 14, 38 and 39).

—IFRS 13, Fair Value Measurement

IFRS 13,Fair Value Measurement, provides a precise definition of fair value, and a single source of fair value measurement and disclosure requirements for use across IFRS. The Group has applied this standard prospectively according to the transitional provisions of IFRS 13 and there is no material impact of the application of this standard on the consolidated financial statements.

(2) New standards, amendments and interpretations not yet adopted

New standards, amendments and interpretations effective for annual periods beginning after January 1, 2013, and not early adopted by the Group are as follows:

—Amendment to IFRS 10, Consolidated Financial Statements

Amendment to IFRS 10,Consolidated Financial Statements, provides that, if a parent company qualifies as an investment entity, it is required to measure its investments in subsidiaries at fair value through profit and loss instead of consolidating these subsidiaries in its consolidated financial statements. The amendment does not apply for a parent of an investment entity if the parent itself is not an investment entity. This amendment is effective for annual periods beginning on or after January 1, 2014, with early adoption permitted. The Group expects that the application of this amendment would not have a material impact on its consolidated financial statements.

—Amendment to IAS 32, Financial Instruments: Presentation

Amendment to IAS 32,Financial Instruments: Presentation, provides that the right to offset must not be contingent on a future event and must be legally enforceable in all of circumstances; and if an entity can settle amounts in a manner such that outcome is, in effect, equivalent to net settlement, the entity will meet the net settlement criterion. This amendment is effective for annual periods beginning on or after January 1, 2014, and the Group is assessing the impact of application of this amendment on its consolidated financial statements.

—Amendment to IAS 39, Financial Instruments: Recognition and Measurement

Amendment to IAS 39,Financial Instruments: Recognition and Measurement, allows the continuation of hedge accounting policyfor a derivative that has been designated as a hedging instrument in a circumstance in which that derivative is novated to a central counterparty (CCP) as a consequence of laws or regulations. This amendment is effective for annual periods beginning on or after January 1, 2014, with early adoption permitted. The Group is assessing the impact of application of this amendment on its consolidated financial statements.

—Enactment of IFRIC interpretations 2121, Levies

IFRIC interpretations 2121,Levies, are applied to a liability to pay a levy imposed by a government in accordance with the legislation. The interpretation requires that the liability to pay a levy, which is not income tax, is recognized when the activity that triggers the payment of the levy occurs, as identified by the legislation (the obligating event). This interpretation is effective for annual periods beginning on or after January 1, 2014, with early adoption permitted. The Group expects that the application of this interpretation would not have a material impact on its consolidated financial statements.

2.3    Consolidation

The Group has prepared the consolidated financial statements in accordance with IFRS 10,Consolidated Financial Statements.

(1) Subsidiaries

Subsidiaries are all entities (including special purpose entities) over which the Group has control. The Group controls the corresponding investee when the Group is exposed to, 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 a subsidiary begins from the date the Group obtains control of the subsidiary and is deconsolidated when the subsidiary ceases when the Group loses control of the subsidiary.

The Group applies the acquisition method to account for business combinations. The consideration transferred is measured at the fair values of the assets transferred, and identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are initially measured at their fair values at the acquisition date. The Group recognizes any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest’s proportionate share of the recognized amounts of acquiree’s identifiable net assets. All other non-controlling interests are measured at their acquisition-date fair values, unless another measurement basis is required by IFRSs. Acquisition-related costs are expensed as incurred.

Goodwill is recognized as the excess of the aggregate of the consideration transferred, the amount of any non-controlling interest in the acquiree, and the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree over the identifiable net assets acquired. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in profit or loss.

Balances of receivables and payables, income and expenses and unrealized gains and losses on transactions between the Company and its consolidatedCompany’s subsidiaries are adjusted during consolidation.

The investment accountseliminated. Accounting policies of the Controlling Company and corresponding capital accounts of the subsidiaries are eliminated as of the fiscal year end of the subsidiaries closest to date when the Controlling Company acquires control in the subsidiaries. All significant intercompany transactions and balances with consolidated subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Company.

(2) Changes in ownership interests in subsidiaries without change of control

In transactions with non-controlling interests, which do not result in loss of control, the Group recognizes directly in equity any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received, and attribute it to the owners of the parent.

(3) Disposal of subsidiaries

If the Group loses control of a subsidiary, any investment continuously retained in the subsidiary is re-measured to its fair value at the date when control is lost and any resulting differences are recognized in profit or loss.

(4) Associates

Associates are all entities over which the Group has significant influence which is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. Investments in associates are initially recognized at acquisition cost using the equity method. Unrealized gains on transactions between the Group and its associates are eliminated during consolidation.to the extent of the Group’s interest in the associates. If there is any objective evidence that the investment in the associate is impaired, the Group recognizes the difference between the recoverable amount of the associate and its book value as impairment loss.

(5) Jointly controlled entities

A joint arrangement of which two or more parties have joint control is classified as either a joint operation or a joint venture. A joint operator has rights to the assets, and obligations for the liabilities,

relating to the joint operation and recognizes the assets, liabilities, revenues and expenses relating to its interest in a joint operation. A joint venture has rights to the net assets relating to the joint venture and accounts for that investment using the equity method.

2.4    Segment Reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker (Note 33). The chief operating decision-maker is responsible for making strategic decisions on resource allocation and performance assessment of the operating segments.

2.5    Foreign Currency Translation

(1) Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in Korean won, which is the Company’s functional and presentation currency.

(2) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation when items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss.

Exchange differences arising on non-monetary financial assets and liabilities such as equity instruments at fair value through profit or loss and available-for-sale equity instruments are recognized in profit or loss and included in other comprehensive income, respectively, as part of the fair value gain or loss.

(3) Translation into presentation currency

Different functional currencies are translated into presentation currency using the following procedures.

Assets and liabilities at the closing rate at the date of that statement of financial position

Income and expenses at average rate for the period

Equity at historical rate

All resulting exchange differences are recognised in other comprehensive income

2.6    Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of less than three months.

2.7    Financial Assets

(1) Classification and measurement

The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss, available-for-sale financial assets, loans and receivables, and held-to-maturity financial assets. Regular purchases and sales of financial assets are recognized on trade date.

At initial recognition, financial assets are measured at fair value plus, in the case of financial assets not carried at fair value through profit or loss, transaction costs. Transaction costs of financial assets carried at fair value through profit or loss are expensed in the statement of income. After the initial recognition, available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables, and held-to-maturity investments are subsequently carried at amortized cost using the effective interest rate method.

Changes in fair value of financial assets at fair value through profit or loss are recognized in profit or loss and changes in fair value of available-for-sale financial assets are recognized in other comprehensive income. When the available-for-sale financial assets are sold or impaired, the fair value adjustments recorded in equity are reclassified into profit or loss.

(2) Impairment

The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or a group of financial assets that can be reliably estimated.

Impairment of loans and receivables is presented as a deduction in an allowance account. Impairment of other financial assets is directly deducted from their carrying amount. The Group writes off financial assets when the assets are determined to be no longer recoverable.

The objective evidence that a financial asset is impaired includes significant financial difficulty of the issuer or obligor; a delinquency in interest or principal payments over three months; or the disappearance of an active market for that financial asset because of financial difficulties. A decline in the fair value of an available-for-sale equity instrument by more than 30% from its cost or a prolonged decline below its cost for more than six months is also objective evidence of impairment.

(3) Derecognition

If the Group transfers a financial asset and the transfer does not result in derecognition because the Company has control overretained substantially of all risks and rewards of ownership of the transferred asset due to a subsidiary,recourse in the Company records differences betweenevent the debtor defaults, the Group continues to recognize the transferred asset in its entirety and recognizes a financial liability for the consideration received. The related financial liability is classified as ‘borrowings’ in the statement of financial position (Note 16).

2.8    Derivative Instruments

Derivatives are initially recognized at fair value on the date when a derivative contract is entered into and are subsequently re-measured at their fair value. Changes in the fair value of the

derivatives that are not qualified for hedge accounting are recognized in the statement of income within ‘finance income (expenses)’ according to the nature of transactions.

The Group applies cash flow hedge accounting for hedging price changes risks on forecast purchases of inventories. The effective portion of changes in fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income and the ineffective portion is recognized in ‘operating income (expenses)’. Amounts of changes in fair value of effective hedging instruments accumulated in other comprehensive income are included in the initial measurement of the cost of non-financial assets as hedging transactions and recognized as ‘cost of sales’ for the periods when the corresponding transactions affect profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that is reported in other comprehensive income is recognized as ‘operating income (expenses)’.

The Group applies fair value hedge accounting for hedging fixed interest risks on borrowings. The effective portion of changes in fair value of derivatives that are designated and qualify as fair value hedges is recognized as ’finance cost’, and the ineffective portion is recognized as ‘operating income (expenses)’. However, changes in the fair value of the hedged items attributable to hedged risk are recognized as ‘finance cost’.

If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortized to profit or loss over the period to maturity.

2.9    Inventories

Inventories are stated at the lower of cost and net realizable value. Cost is determined using the weighted-average method, except for inventories in-transit which is determined using the specific identification method.

2.10    Non-current Assets (or Disposal Group) Held-for-sale

Non-current assets (or disposal group) are classified as assets held-for-sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. The assets are measured at the lower amount between their carrying amount and the fair value less costs to sell.

2.11    Property and Equipment

Property and equipment are stated at its cost less accumulated depreciation and accumulated impairment losses. Historical cost includes expenditures that is directly attributable to the acquisition of the items.

The fair value of a liability for an asset retirement obligation is recorded in the period in which it is incurred if a reasonable estimate of fair value can be made. In periods subsequent to initial measurement, we recognize period-to-period changes in the liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate.

Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate the difference between their cost and their residual values over their estimated useful lives, as follows:

Estimated Useful Lives

Buildings

5 – 40 years

Structures

5 – 40 years

Machinery and equipment

3 – 40 years

(Telecommunications equipment and others)

Others

Vehicles

4 – 6 years

Tools

4 – 6 years

Office equipment

4 – 6 years

The depreciation method, residual values and useful lives of property and equipment are reviewed at the end of each reporting period and, if appropriate, accounted for as changes in accounting estimates.

2.12    Investment Property

Property held to earn rentals or for capital appreciation or both is classified as investment accountsproperty. Investment property is measured initially at its cost. After recognition as an asset, investment property is carried at cost less accumulated depreciation and corresponding capital accountsimpairment losses. Investment property, except for land, is depreciated using the straight-line method over their useful lives from 10 to 40 years.

2.13    Intangible Assets

(1)     Goodwill

Goodwill is measured as explained in Note 2.3 (1) and goodwill arising from acquisition of subsidiaries asand business are included in intangible assets. Goodwill is tested at least annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. The calculation of the gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the acquirer’s cash-generating units, or negative goodwill.groups of cash-generating units (“CGU”), that is expected to benefit from the synergies of the combination. Goodwill is monitored at the operating segment level.

Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs to sell. Any impairment is recognized immediately as an expense and is not subsequently reversed.

(2)    Intangible assets except goodwill

Separately acquired Intangible assets except for goodwill are shown at historical cost. These assets have definite useful lives and are carried at historical cost less accumulated amortization. Assets with definite useful lives are amortized using the straight-line method overaccording to the estimated useful lives which range from four to ten years. The negative goodwill relatingpresented below. However, facility usage rights (condominium membership and golf membership) and broadcast license are regarded as intangible assets with indefinite useful life and not amortized, because there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows.

The estimated useful life used for amortizing intangible assets is as follows:

Estimated Useful Lives

Development costs

5 – 6 years

Goodwill

Unlimited useful life

Software

6 years

Industrial property rights

2 – 10 years

Frequency usage rights

5.75 – 15 years

Others 1

3 – 50 years

1Facility usage rights (condominium membership and golf membership) and broadcast license included in others are classified as intangible assets with indefinite useful life.

(3) Research and development costs

Expenditure on research is recognized as an expense as incurred. If the expense as incurred that is identifiable and when the probable future economic benefits are expected, the cost for the new merchandises and technology is recognized as intangible assets when all the following criteria are met:

It is technically feasible to complete the intangible asset so that it will be available for use;

Management intends to complete the intangible asset and use or sell it;

There is the ability to use or sell the intangible asset;

It can be demonstrated how the intangible asset will generate probable future economic benefits;

Adequate technical, financial and other resources to complete the development and to use or sell the intangible asset are available; and

The expenditure attributable to the intangible asset during its development can be reliably measured

Other development expenditures that do not meet these criteria are recognized as expenses as incurred. Development costs previously recognized as an expense are not recognized as an asset in a subsequent period. Capitalized development costs, which are stated as intangible assets, are amortized using the straight-line method when the assets are available for use and are tested for impairment.

2.14    Borrowing Costs

Borrowing costs incurred in the acquisition or construction of a qualifying asset are capitalized in the period when it is prepared for its intended use, and investment income earned on the temporary investment of borrowings made specifically for the purpose obtaining a qualifying asset is deducted from the borrowing costs eligible for capitalization during the period. Other borrowing costs are recognized as expenses for the period in which they are incurred.

2.15    Government Grants

Government grants related to assets are recognized in profit or loss on a systematic and rational basis over the useful life of the asset by setting up the grant as deferred income, and government grants related to income are deferred and recognized in the future is reversedstatement of income as a gain whenpart of operating income for the period in which the related expenseexpenses for the purpose of the government grants are incurred.

2.16    Impairment of Non-Financial Assets

Goodwill or intangible assets with indefinite useful lives are not subject to amortization and are tested at least annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. Non-financial assets, other than goodwill, that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

2.17    Financial Liabilities

(1) Classification and measurement

Financial liabilities at fair value through profit or loss are financial instruments held for trading. Financial liabilities are classified in this category if incurred principally for the purpose of repurchasing them in the near term. Derivatives that are not designated as hedges or bifurcated from financial instruments containing embedded derivatives are also categorized as held-for-trading.

The Group classifies non-derivative financial liabilities, except for financial liabilities at fair value through profit or loss, financial guarantee contracts and financial liabilities that arise when a transfer of financial assets does not qualify for derecognition, as financial liabilities carried at amortized cost and presented as ‘trade payables’, ‘borrowings’, and ‘other financial liabilities’ in the statement of financial position.

Preferred shares that provide for a mandatory redemption at a particular date are classified as liabilities. Interest expenses on these preferred shares calculated using the effective interest method are recognized in the statement of income as ‘finance costs’, together with interest expenses recognized on other financial liabilities.

The Group’s financial liabilities at fair value through profit or loss are financial instruments held for trading and designated as financial liabilities at fair value through profit or loss. Financial liabilities held for trading are financial liabilities that are incurred principally for the purpose of repurchasing them in the near term and derivatives that are not designated as hedges or bifurcated from financial instruments containing embedded derivatives. Financial liabilities at fair value through profit or loss are structured financial liabilities containing embedded derivatives issued by the Group.

As it was unable to measure the embedded derivatives separately from its host contract, the Group designated the entire hybrid contact as at fair value through profit or loss. The financial liability that the Group designated as at fair value through profit or loss is actually incurred, whereasa foreign convertible bond.

(2) Derecognition

Financial liabilities are removed from the negative goodwillstatement of financial position when it is extinguished, for example, when the obligation specified in the contract is discharged, cancelled or expired or when the terms of an existing financial liability are substantially modified.

2.18    Financial Guarantee Contracts

Financial guarantee contracts provided by the Group are initially measured at fair value on the date the guarantee was given. Subsequent to initial recognition, the Group’s liabilities under such guarantees are measured at the higher of the amounts below and recognized as ‘other financial liabilities’:

the amount determined in accordance with IAS 37,Provisions, Contingent Liabilities and Contingent Assets; or

the initial amount, less accumulated amortization recognized in accordance with IAS 18,Revenue.

2.19    Compound Financial Instruments

Compound financial instruments are convertible bonds that can be converted into equity instruments at the option of the holder. The liability component of a compound financial instrument is recognized initially at the fair value of a similar liability that does not relatinghave an equity conversion option. The equity component is recognized initially on the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the certainliability and equity components in proportion to their initial carrying amounts.

2.20    Employee Benefits

(1) Post-employment benefits

The Group has both defined benefit and defined contribution plans.

A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The contributions are recognized as employee benefit expenses when an employee has rendered service.

A defined benefit plan is a pension plan that is not a defined contribution plan. Typically defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. 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 expensecash outflows using interest rates of high-quality corporate bonds and that have terms to maturity approximating to the terms of the related pension obligation. The remeasurement of the net defined benefit liability is amortizedrecognized in other comprehensive income.

If any plan amendments, curtailments, or settlements occur, past service costs or any gains or losses on settlement are recognized as profit or loss for the year.

(2) Termination benefits

Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognizes termination benefits at the earlier of the following dates: when the entity can no longer withdraw the offer of those benefits or when the entity recognizes costs for a restructuring.

2.21    Share-based payments

Equity-settled share-based payments granted to employees are estimated at the grant date fair value of equity instruments and recognized as employee benefit expenses over the weighted average useful livesvesting period. The number of depreciable non-monetary assetsequity instruments expected to vest is remeasured with consideration to non-market vesting conditions at the end of an acquireethe reporting period, with any changes from the original measurement recognized in the profit for the year and equity.

When the options are exercised, the Company issues new shares. The proceeds received, net of any directly attributable transaction costs, are recognized as share capital (nominal value) and share premium.

2.22    Provisions

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation and the amountsincrease in the provision due to passage of this negative goodwilltime is recognized as interest expense.

2.23    Leases

(1) Lessee

A lease is an agreement, whereby the lessor conveys to the lessee, in excessreturn for a payment or series of payments, the right to use an asset for an agreed period of time. Leases where all the risks and rewards of ownership are not transferred to the Group are classified as operating leases. Lease payments under operating leases are recognized as expenses on a straight-line basis over the lease term.

Leases where the Group has substantially all the risks and rewards of ownership are classified as finance leases and recognized as lease assets and liabilities at the lower of the fair value of the total non-monetary assets of an acquiree are recorded as a gain as ofleased property and the acquisition date. In addition, the differences between the additional investment in the subsidiaries and net assets of the subsidiaries attributable to subsequently acquired controlling interest and differences between the acquisition cost of the investments in the subsidiaries and changes in net assets of the subsidiaries due to certain equity transactions of the subsidiaries including capital increase with consideration are reflected in the capital surplus or capital adjustment.

When the Company gains significant influence over the equity-method investees, the excess of the acquisition cost of an investment in an investee over the Company’s share of the fairpresent value of the identifiable net assets acquired is amortized using the straight-line method over its estimated useful life, not exceeding 20 years. When acquisition cost of investments in an investee is less than the Company’s interestminimum lease payments on the fair valueopening date of the identifiable net assets acquired,lease period.

(2) Lessor

A lease is classified as a finance lease if it transfers substantially all the investment differences relatingrisks and rewards incidental to ownership at the inception of the lease. A lease other than a finance lease is classified as an operating lease. Lease income from operating leases is recognized in income on a straight-line basis over the lease term. Initial direct costs incurred by the lessor in negotiating and arranging an operating lease is added to the expectedcarrying amount of the leased asset and recognized as an expense or loss in the future is reversed as a gain when the related expense or loss is actually incurred. The investment differences not relating to the certain future expense up to fair value of depreciable non-monetary assets of an investee is amortized over the weighted average useful lives of depreciable non-monetary assets of an investee and the remaining amounts of investment difference in excess of the fair value of the total non-monetary assets of an investee are recorded as a gain as of the acquisition date.

Unrealized gains or losses included in inventories and other assets as a result of intercompany transactions are eliminated basedlease term on the average gross profit ratio ofsame basis as the corresponding company. Unrealized gains or losses, arising from sales by the Controlling Company to the consolidated subsidiaries,lease income.

2.24    Capital Stock

Common stocks are fully eliminated and charged to the equity of the Controlling Company. Unrealized gains or losses, arising from sales by the consolidated subsidiaries to the Controlling Company, or sales between consolidated subsidiaries, are fully eliminated, and charged to the equity of the Controlling Company and the minority interests, based on the percentage of ownership. Unrealized gains or losses, arising from the transactions betweenclassified as equity.

Where the Company andpurchases its own equity method investees are eliminated in proportionshare capital, the consideration paid, including any directly attributable incremental costs, is deducted from equity attributable to the Company’s ownership and reflectedequity holders until the stocks are cancelled or reissued. Where such shares are subsequently reissued, any consideration received is included in equity-method investments.equity attributable to the Company’s equity holders.

Minority interest

The Company records the equity of the consolidated subsidiaries, which is not included in the equity of the Controlling Company, as minority interest in consolidated subsidiaries. In addition, even if the minority interest has a deficit balance, the total comprehensive income is attributed to the owners of the parent and to the minority interests.

Reclassifications of Prior Year Financial Statements

Certain reclassifications have been made in 2008 and 2009 consolidated financial statements to conform to 2010 consolidated financial statement presentation. Such reclassifications did not have an effect on the shareholders’ equity and net income of the Company as of and for the years ended December 31, 2008 and 2009.

2.25    Revenue Recognition

Revenue is the gross inflow of economic benefits arising in the ordinary course of the Company’s activities and is measured asat the fair value of the consideration received or receivable for the sale of goods andor rendering of services inarising from the said ordinary coursenormal activities of the Company’s activities. RevenueGroup. It is shownstated as net of value-added tax, salesvalue added taxes, returns, rebates and discounts, and sales returns. after elimination of intra-company transactions.

The CompanyGroup recognizes revenue when the amount of revenue can be reliably measured, andmeasured; when it is probable that future economic benefits will flow to the entity; and when specific criteria have been met for each of the Group’s activities, as described below. The Group bases its estimate on historical results, taking into consideration the Company. type of customer, the type of transaction and the specifics of each arrangement.

(1) Sales of Services

When providing interconnection or telecommunications service to a customer based on service plans, the related revenue is recognized at the time service is provided. If the customer uses the telecommunications equipment according to the service plans, the related revenue is recognized on straight-line basis over the contract period. Revenue related to the other telecommunications services is recognized when the service is provided to the customer.

For other services, when the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with such a transaction is recognized by reference to the stage of performance of the services. When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue is recognized only to the extent of the expenses recognized that are recoverable.

Total consideration for combined services is allocated to each service in proportion to its fair value and the allocated amount is recognized as revenue according to revenue recognition policy for the service.

(2) Sales of goods

The Group sells a range of handsets and other telephone products. Revenue from the sale of goods is recognized when the significant risks and rewards of ownership of goodsproducts are transferreddelivered to the buyer. Revenue from the rendering of services is recognized under the percentage-of-completion method, under which revenue is generally recognized based on the costs incurred to date as a percentage of the total estimated costs to be incurred.purchaser.

The Company recognizes revenues from construction contracts using the percentage-of-completion method to determine the amounts to be recognized as revenues in a given period. The stage of completion is measured using the percentage of the total contract costs incurred up to the date of statement of financial position over the total estimated costs for each contract. When the outcome of a construction contract cannot be estimated reliably, the contract revenue is recognized only to the extent of contract costs incurred that are likely to be recoverable, and contract costs incurred for the period is recognized as an expense.(3) Interest income

Interest income is recognized using the effective interest method. method according to the time passed. When a loan and receivable is impaired, the Group reduces the carrying amount to its recoverable amount and continues unwinding the discount as interest income. Interest income on impaired loans and receivables is recognized using the original effective interest rate.

(4) Commission fees

Commission fees related to the credit card business is recognized when it is probable that future economic benefits will flow to the entity and these benefits can be reliably measured. Revenues from acquiree fee, agent fee, optional service fees, member service fees and credit card service charge are measured at the fair value of the consideration received and recognized on a accrual basis.

(5) Royalty income

Royalty income is recognized on an accrual basis in accordance with the substance of the relevant agreements.

(6) Dividend income

Dividend income is recognized when the rightsright to receive such dividends and amounts thereof are determined.payment is established.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and in banks, and financial instruments with maturity of three months or less at the time of purchase. These financial instruments are readily convertible into cash without significant transaction costs and bear low risks from changes in value due to interest rate fluctuations.

Allowance for Doubtful Accounts(7) Customer loyalty programme

The Company provides an allowanceGroup operates a customer loyalty program where customers accumulate points for doubtful accounts and notes receivable. Allowancespurchases made which entitle them to discounts on future purchases. The reward points are calculated based on the estimates made throughrecognized as a reasonable and objective method.

Changes in the allowances for doubtful accounts for eachseparately identifiable component of the years in the three-year period ended December 31, 2010 are summarized as follows:

   Year Ended December 31, 
   2010  2009  2008 
   (In millions of Won) 

Balance at beginning of year

  (Won)477,124   (Won)488,739   (Won)487,729  

Provision

   171,195    104,977    148,972  

Write-offs

   (133,095  (116,592  (147,962
             

Balance at end of year

  (Won)515,224   (Won)477,124   (Won)488,739  
             

Inventories

The quantities of inventories are determined using the perpetual method and periodic inventory count, while the costs of inventories are determined using the moving-weighted average method. Goods-in-transit and land use the specific identification method. Inventories are stated at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expense. Replacement cost is used for the estimate of the net realizable value of raw materials. Market prices of merchandise and supplies are net realizable value and replacement cost, respectively. If, however, the circumstances which caused the valuation loss cease to exist, the valuation loss is reversed up to the original carrying amount before valuation. The said reversal is deducted from cost of sales.

Investments in Securities

Costs of debt securities and equity securities are determined using the specific identification method and the moving-weighted average method, respectively. Investments in equity securities or debt securities are classified into trading securities, available-for-sale securities and held-to-maturity securities, depending on the acquisition and holding purpose. Investments in equity securities of companies, over which the Company exercises a significant control or influence, are recorded using the equity method of accounting. Trading securities are classified as current assets while available-for-sale securities and held-to-maturity securities are classified as long-term investments, excluding those securities that mature or are certain to be disposed of within one year, which are then classified as current assets.

Held-to-maturity securities are measured at amortized cost while available-for-sale and trading securities are measured at fair value. However, non-marketable securities, classified as available-for-sale securities, are carried at cost when the fair values are not readily determinable.

Gains and losses related to trading securities are recognized in the income statement, while unrealized gains and losses of available-for-sale securities are recognized under other comprehensive income and expense. Realized gains and losses on available-for-sale securities are recognized in the income statement.

Equity-Method Investments

Company reflects any changes in the equity of its equity-method investments after the initial purchase date. Under the equity method, the Company records changes in its proportionate ownership in the book value of the investee in current operations, as capital adjustments or as adjustments to retained earnings, depending on the nature of the underlying change in the book value of the investee. All other changes in equity should be accounted for under other comprehensive income and expense.

Property, Plant and Equipment

Property, plant and equipment are stated at cost, which includes acquisition cost, production cost and other costs required to prepare the asset for its intended use. It also includes the present value of the estimated cost of dismantling and removing the asset, and restoring the site after the termination of the asset’s useful life, provided it meets the criteria for recognition of provisions.

Property, plant and equipment are stated net of accumulated depreciation calculated by straight-line and declining-balance methods based on following estimated useful lives:

Estimated Useful Lives

Building

5 - 60 years

Structures

5 - 40 years

Equipment

Machinery

3 - 15 years

Other

6 - 15 years

Underground access to cable tunnels and concrete and steel telephone poles

20 -40 years

Vehicles

3 - 10 years

Others

Tools

3 - 8 years

Office equipment

2 - 20 years

Expenditures incurred after the acquisition or completion of assets are capitalized if they enhance the value of the related assets over their recently appraised value or extend the useful life of the related assets. Routine maintenance and repairs are charged to expense as incurred.

Intangible Assets

Intangible assets are stated at cost, which includes acquisition cost, production cost and other costs required to prepare the asset for its intended use. Intangible assets are stated net of accumulated amortization calculated by straight-line method based on following estimated useful lives:

Estimated Useful Lives

Goodwill

4 - 10 years

Industrial property rights

5 - 10 years

Development Costs

3 - 8 years

Software

4 - 8 years

Frequency usage rights

5.75 years or 13 years
from the date of service commencement

Other intangible assets

Right to use the base stations

30, 50 years

Copyrights

50 years

Others

10 - 20 years

Development costs which are individually identifiable and directly related to a new technology or to new products which carry probable future benefits are capitalized as intangible assets. Amortization of development cost begins at the commencement of the commercial production of the related products or use of the related technology.

Goodwill represents the excess of the cost of an acquisition over thesale transaction. The fair value of the Controlling Company’s shareconsideration received or receivable in the net identifiable assetsrespect of the acquired subsidiary or associate atinitial sale is allocated between the date of acquisition.

Capitalization of Interest Expense

The Company capitalizesreward points and the interest it incurs on borrowings used to finance the cost of manufacturing, acquisition, and construction of inventory and property, plant, and equipment that require more than one year to complete from the initial date of manufacture, acquisition, and construction.

Government Grants

The Company recognizes government grants, which are to be repaid, as liabilities. The government grants and donations, which are intended to be used for the acquisition of certain assets, are deducted from the costother components of the acquired assets.sale. The government grants or donations, received to compensate for specific expenses, are offset against the related expenses. Other government grants or donations, for which the use or purpose is not specified, are recorded as gains from assets received, and are recognized in current operations. Prior to the acquisition of the assets specified, the grant or donation is recorded as deduction from the assets granted. When the related assets are acquired, the amounts are recognized as a deduction from the account under which the assets acquired are recorded and offset against the depreciation expense over the period of the asset’s useful live. After the disposal of the assets specified by the grant or donation, the remaining amounts are deducted or added to the asset’s disposal gain and loss.

Impairment of Assets

When the book value of an asset is significantly greater than its recoverable value due to obsolescence, physical damage or an abrupt decline in the marketfair value of the asset,reward points is measured by taking into account the said decline in value is deductedproportion of the reward points that are not expected to be redeemed by customers. Revenue from the book value to agree with recoverable amount andreward points is recognized as an asset impairment losswhen the points are redeemed.

2.26    Current and Deferred Income Tax

The tax expense for the period. When the recoverable value subsequently exceeds the book value, the impairment amountperiod consists of current and deferred tax. Tax is recognized as gainon the profit for the period in the statement of income, except to the extent that the revised book value does not exceed the book value that would have been recorded without the impairment. Reversal of impairment of goodwill is not allowed.

Derivatives

All derivative instruments are accounted for at their fair value accordingit relates to the rights and obligations associated with the derivative contracts. The resulting changesitems recognized in fair value of derivative instruments are recognized either under the income statement or shareholders’ equity, depending on whether the derivative instruments qualify as a cash flow hedge. Fair value hedge accounting is applied to a derivative instrument purchased with the purpose of hedging the exposure to changes in the fair value of an asset or a liability or a firm commitment that is attributable to a particular risk. The resulting changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized under the shareholders’ equity under accumulated other comprehensive income and expense.

Income Tax and Deferred Income Tax

Incomeor directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively. The tax expense includesis calculated on the current incomebasis of the tax underlaws enacted or substantively enacted at the relevant income tax law andend of the changes in deferred tax assets or liabilities. reporting period.

Deferred tax assets and liabilities representis recognized for temporary differences arising between financial reporting and the tax bases of assets and liabilities and their carrying amounts as expected tax consequences at the recovery or settlement of the carrying amounts of the assets and liabilities. However, deferred tax assets and liabilities are not recognized if they arise 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 nor taxable profit or loss.

Deferred tax assets are recognized for temporary differences which will decrease future taxable income or operating lossonly to the extent that it is probable that future taxable incomeprofit will be available against which the deductible temporary differences can be utilized.

Deferred tax liability is recognized for taxable temporary differences associated with investments in subsidiaries, associates, and interests in joint ventures, except to the extent that the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. In addition, deferred tax asset is recognized for 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 differencesdifference can be utilized.

Deferred tax effects applicableassets and liabilities are offset when there is a legally enforceable right to itemsoffset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

2.27    Deferred Loan Fees and Costs

Loan origination fees in the shareholders’ equityrelation to loan origination process such as upfront fee, are directly reflected in the shareholders’ equity.

Discounts on Debentures

Discounts on debentures aredeferred and amortized over the termlife of the debenturesloan as an adjustment to the yield of the loan using the effective interest rate method. AmortizationLoan origination costs, which relates to loan origination activities such as commissions to brokers, are deferred and amortized over the life of the discount is recordedloan as partan adjustment to the yield of the loan, using the effective interest expense.rate method, if the future economic benefit related costs incurred can be matched with each loan.

Accrued Severance Benefits

EmployeesIn addition, the deferred loan origination fees and directors with at least one year of servicecosts are entitled to receive a lump-sum payment upon termination of their employment withoffset and the Company based on their length of service and rate of pay atnet amounts are presented in the time of termination. Accrued severance benefits represent the amount which would be payable assuming all eligible employees and directors were to terminate their employment as of the date ofconsolidated statement of financial position.

2.28    Non-current Assets Held for Sale and Discontinued Operations

When a component of the Group representing a separate major line of business or geographical area of operation has been disposed of, or is subject to a sale plan involving loss of control of a subsidiary, the Group discloses in the statement of income the post-tax profit or loss of discontinued operations and the post-tax gain or loss recognized on the measurement to fair value less costs to sell or on the disposal of the assets or group to be sold constituting the discontinued operation. The domestic subsidiaries have partially funded their accrued severance benefits through severance insurance deposits with an insurance company. Deposits made by the subsidiaries are recorded as deductions from accrued severance benefits. The excess portion of deposits over accrued severance benefits is recorded as other investments.

In addition, the domestic subsidiaries deposit a certain portion of severance benefits to National Pension Service according to National Pension Law. The deposit amount is recorded as a deduction from accrued severance benefits.

Overseas subsidiaries accrue employees’ retirement benefits accordingnet cash flows attributable to the local regulations in which they operate.

Provisionsoperating, investing and Contingent Liabilities

When it is probable that an outflowfinancing activities of economic benefits will occur due to a present obligation resulting from a past event, and whose amount is reasonably estimable, a corresponding amount of provision is recognized in the financial statements. However, when such outflow is dependent upon a future event, is not certain to occur, or cannot be reliably estimated, a disclosure regarding the contingent liability is madediscontinued operations are presented in the notes to the financial statements.statements (Note 40).

Finance Leases2.29    Dividend

i) The Company as Lessee

The Company accounts for lease transactions as either operating lease or finance lease, depending on the terms of the lease agreement. A finance lease is a lease that transfers substantially all the risks and rewards incidentalDividend distribution to the ownership of an asset. The lower of the present value of minimum lease payments and the fair value of the lease assetCompany’s shareholders is recognized as the value of the finance lease asset and liability. Annual minimum lease payments, excluding residual value, are allocated to interest expense, or for the redemption of capital leasea liability using the effective interest method.

ii) The Company as Lessor

The Company accounts for lease transactions as finance lease for leases that transfer substantially all of the risks and benefits of ownership of the lease asset to the lessee. The Company recognizes the amount equivalent to the net investment in the lease asset as finance lease receivable. The Company recognizes interest income over lease term using systematic and reasonable method. Interest income is calculated for net finance lease receivable based on effective interest rate. The lease receipt is recorded separately as collection of finance lease receivable and interest income.

Operating Leases

i) The Company as Lessee

An operating lease is a lease that does not transfer substantially all the risks and rewards incidental to ownership of an asset. The annual minimum lease payments, less guaranteed residual value, are charged to expense on a regular basis over the lease term.

ii)The Company as Lessor

The Company accounts for operating leases as leases that do not transfer substantially all of the risks and benefits of ownership of the lease asset to the lessee. The lease assets are recognized as tangible or intangible assets depending on the nature of the lease assets. The annual minimum lease receipts, less guaranteed residual value, are recognized as revenue over the lease term.

Valuation of Assets and Liabilities at Present Value

Receivables and payables resulting from long-term installment payment transactions, long-term cash loans or other similar borrowings, are valued at their present values, discounted at an appropriate discount rate when the difference between the nominal value and present value is material. The present value discounts are amortized or recovered using the effective interest rate method and are recognized as interest income or expense over the term of the contract.

Translation of Assets and Liabilities Denominated in Foreign Currencies

Monetary assets and liabilities denominated in foreign currencies are translated into Korean won at the rates of exchange in effect at the date of statement of financial position, and the resulting translation gains and losses are recognized in current operations.

Currency Translation for Foreign Operations

Assets and liabilities of a foreign subsidiary or company subject to the equity method of accounting for investments are translated into Korean won at the rates of exchange in effect at the date of statement of financial position, while equity accounts are translated at historical rates, except for the change in retained earnings during the year (current period income or loss) which is the result of the income statement translation process, and income statement accounts at the average rate over the period. Net translation adjustments are allocated to the controlling interest and minority interest and the portions allocated to the controlling interest are accounted for as gain(loss) on translation of foreign operation included in the other comprehensive income. Net translation adjustment of equity-method investees are accounted for as comprehensive income(expensive) of equity-method investees in the other comprehensive income.

Share-based Payments

In the case of equity-settled share-based payment, the fair value of the goods or employee services received in exchange for the grant of the options is recognized as an expense and a capital adjustment. If the fair value of goods or employee services cannot be estimated reliably, the fair value is estimated based on the fair value of the equity granted.

For cash-settled share-based payment, the fair value of the obligation the Company will assume is determined by the fair value of the goods or employee services received in exchange for the grant of the options. Until the liability is settled, the Company is required to measure the fair value at date of statement of financial position and at settlement date. The change in fair value is recognized as an expense.

Share-based payment transactions with an option for the parties to choose between cash and equity settlement are accounted for based on the substance of the transaction.

Joint Venture

A joint venture is a contractual agreement to establish joint control over business, assets or entities. In case of jointly controlled entities that involve the establishment of a corporation, partnership or other entity in which each participant has an interest, the Company applies the equity method of accounting. As of December 31, 2010, the Company holds 50% of ownership on Kumho Rent-A-Car Global Co., Ltd., and applies the equity method of accounting.

Accounting Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported therein. Although these estimatesthe period in which the dividends are based on management’s best knowledgeapproved by the Company’s shareholders.

2.30    Approval of current events and actions thatIssuance of the Financial Statements

The issuance of the December 31, 2013 financial statements of the Company may undertake inwas approved by the future, actual results may differ from those estimates.directors on April 11, 2014.

U.S.2.31    US Dollar Convenience Translation

The December 31, 20102013 consolidated financial statements are expressed in Korean Won and have been translated into U.S. dollars at the rate of W1,138.91,055.3 to US$1, the market average exchange rate announced by Seoul Money Brokerage Services, Ltd. and in effect on December 31, 2010,2013, solely for the convenience of the reader. These translations should not be construed as a representation that any or all of the amounts shown could be converted into U.S. dollars at this or any other rate.

Changes3.    Critical Accounting Estimates and Assumptions

The Group makes estimates and assumptions concerning the future. The estimates and assumptions are continuously evaluated with consideration to factors such as events reasonably predictable in Accounting Policiesthe foreseeable future within the present circumstance according to historical experience. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.

3.1    Impairment of Goodwill

Through December 31, 2008, Korea Accounting InstituteThe Group tests whether goodwill has suffered any impairment annually and also when there are indications that an asset may be impaired. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations (Note 13).

3.2    Income Taxes

The Group is operating in numerous countries and the income generated from these operations is 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.

3.3    Fair Value of Derivatives and Financial Supervisory 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 (Note 36).

3.4    Allowance for Doubtful Accounts

The Group recognizes provisions for accounting of estimated loss in customers’ insolvency. When the allowance for doubtful accounts is estimated, it is based on the aging analysis of trade receivables balances, incurred loss experience, customers’ credit rates and changes of payment terms. If the customer’s financial position becomes worse, the actual loss amount will be increased more than the estimated.

3.5    Net defined benefit liability

The present value of net defined benefit liability depends on a number of factors that are determined on an actuarial basis using a number of assumptions including the discount rate (Note 18).

3.6    Deferred Revenue

Service have issuedinstallation fees and revised various Korea accounting standardsinitial subscription fees related to activation of service are deferred and recognized as revenue over the expected terms of customer relationships. The estimate of expected terms of customer relationship is based on the historical rate. If management’s estimation is amended, it may cause significant differences in the timing of revenue recognition and amount recognized.

3.7    Provisions

As described in Note 17, the Group records provisions for litigation and asset retirement obligations as of the end of the reporting period. The provisions are estimated based on the factors such as the historical experiences.

3.8    Useful lives of Property and Equipment and Investment Property

Depreciation on property and equipment excluding land, condominium memberships, golf club memberships, and broadcasting concession is calculated using the straight-line method over their useful lives. The estimated useful lives are determined based on expected usage of the assets and the following is a summary of majorestimates can be materially affected by technical changes whichand other factors. The Group will increase depreciation if the useful lives are newly adopted byconsidered shorter than the Company.

Accounting Standards

Key Requirements

SKAS No. 25 “Consolidated Financial Statements”If negative consolidated capital surplus is incurred, it is first charged to related consolidated capital surplus, and remaining amount is recorded as a consolidated capital adjustment.
Opinion on Application of Accounting Standards 06-2 “Accounting for Recognition of Deferred Tax Related to Investments on a Subsidiary”Temporary differences related to investments in subsidiary, equity method investee or joint venture are not classified by origin but are treated as a lump-sum difference in considering whether to recognize deferred tax assets or liabilities. However, temporary differences arising from certain transactions under SKAS No. 16, such as elimination of inter-company transactions through equity method, shall be separately treated in the same way as they are recognized in the consolidated financial statements.

As a result of the adoption of the accounting standards, the Company’s net assets at the beginning of 2008 increased by(Won)3,852 million.previously estimated useful lives.

Reconciliation of the differences in accounting policies4.    Financial Instruments by category

For the year ended December 31, 2010, the following adjustments were made on the subsidiaries’ financial statements to reconcile the differences in accounting policies between the Controlling Company and subsidiaries:

(in millions of Korean won)

  Net assets
before adjustment
   Amount
of adjustment
  Net assets
after adjustment
   Remarks 

KT Linkus Co., Ltd.

  (Won)8,444    (Won)(375 (Won)8,069     1  

KT Hitel Co., Ltd.

   185,481     (4,824  180,657    

KT New Business Fund No. 1

   22,432     (165  22,267    
                

Total

  (Won)216,357    (Won)(5,364 (Won)210,993    
                

1Adjustments are made to unify the amortization period of investment difference arising from one subsidiary’s investments in another subsidiary.

4.    Restricted Deposits

Restricted depositsFinancial instruments by category as of December 31, 20102012 and 2009,2013, are as follows:

 

(in millions of Korean won)

  2010   2009   

Description

Cash and cash equivalents

  (Won)9,495    (Won)10,241    Restricted for research and development

Short-term investment assets

   14,211     12,817    Restricted for investing in Media Contents, Pledge

Long-term investment assets

   3,054     3,035    Checking account deposits
            

Total

  (Won)26,760    (Won)26,093    
            

5.    Inventories

Inventories as of December 31, 2010 and 2009, are as follows:

(In millions of Korean won)

  2012 

Financial assets

  Loans
and
receivables
   Assets at fair
value through
the profit and
loss
   Derivatives
used for
hedge
   Available-
for-sale
   Held-to-Maturity   Total 

Cash and cash equivalents

  2,057,613                    2,057,613�� 

Trade and other receivables

   6,980,474                         6,980,474  

Loans receivable

   1,180,700                         1,180,700  

Finance lease receivables

   861,655                         861,655  

Other financial assets

   460,394     6,407     21,348     429,875     436     918,460  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  11,540,836    6,407    21,348    429,875    436    11,998,902  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   2010   2009 

(in millions of Korean won)

  Acquisition
cost
   Valuation
allowance
  Book
Value
   Acquisition
cost
   Valuation
allowance
  Book
Value
 

Merchandise

  (Won)598,486    (Won)(39,715 (Won)558,771    (Won)625,253    (Won)(45,157 (Won)580,096  

Supplies

   38,361     (1,540  36,821     43,996     (4,716  39,280  

Others

   60,239         60,239     80,026         80,026  
                            

Total

  (Won)697,086    (Won)(41,255 (Won)655,831    (Won)749,275    (Won)(49,873 (Won)699,402  
                            

6.    Loans Receivable

Loans granted by KT Capital and KTR as of December 31, 2010 and 2009, are summarized as follows:

Current

(In millions of Korean won)

  2012 

Financial liabilities

  Liabilities at fair
value through the
profit and loss
   Derivatives
used for
hedge
   Financial
liabilities at
amortized cost
   Other
liabilities
   Total 

Trade and other payables

          7,922,662        7,922,662  

Finance lease liabilities

             41,646          41,646  

Borrowings

             11,436,119          11,436,119  

Other financial liabilities

   3,216     112,603     16,649     9,328     141,796  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  3,216    112,603    19,417,076    9,328    19,542,223  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   2010  2009 

(in millions of Korean won)

  Original
amount
  Allowance for
doubtful
accounts
  Carrying
value
  Original
amount
  Allowance for
doubtful
accounts
  Carrying
Value
 

Factoring

  (Won)35,737   (Won)(179 (Won)35,558   (Won)15,077   (Won)(76 (Won)15,001  

Loans

   680,684    (8,961  671,723    448,398    (9,168  439,230  

Deferred loan origination fee

   (1,434      (1,434  (753      (753

Accounts receivable-loans

   13,383    (1,604  11,779    2,154    (94  2,060  

Loans for installment credit

   37,401    (586  36,815    28,412    (2,334  26,078  

Deferred incidental expense

   11        11    5        5  

Accounts receivable-loans for installment credit

   546        546    950    (14  936  

Financial investment for new technology

   18        18    200    (94  106  

Financial loans for new technology

               2,500    (237  2,263  
                         

Total

  (Won)766,346   (Won)(11,330 (Won)755,016   (Won)496,943   (Won)(12,017 (Won)484,926  
                         

(In millions of Korean won)

  2013 

Financial assets

  Loans
and
receivables
   Assets at fair
value through
the profit and
loss
   Derivatives
used for
hedge
   Available-
for-sale
   Held-to-Maturity   Total 

Cash and cash equivalents

  2,070,869                    2,070,869  

Trade and other receivables

   6,053,040                         6,053,040  

Loans receivable

   1,348,597                         1,348,597  

Finance lease receivables

   709,937                         709,937  

Other financial assets

   582,693     15,643     3,496     547,627     3,248     1,152,707  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  10,765,136    15,643    3,496    547,627    3,248    11,335,150  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(In millions of Korean won)

  2013 

Financial liabilities

  Liabilities at fair
value through the
profit and loss
   Derivatives
used for
hedge
   Financial
liabilities at
amortized cost
   Other
liabilities
   Total 

Trade and other payables

          8,472,707        8,472,707  

Finance lease liabilities

             68,210          68,210  

Borrowings

             11,483,893          11,483,893  

Other financial liabilities

   2,956     150,612     73,080     15,984     242,632  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  2,956    150,612    20,097,890    15,984    20,267,442  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-Current

   2010  2009 

(in millions of Korean won)

  Original
amount
  Allowance for
doubtful
accounts
  Carrying
value
  Original
amount
  Allowance for
doubtful
accounts
  Carrying
value
 

Factoring receivables

  (Won)   (Won)   (Won)   (Won)2,945   (Won)(15 (Won)2,930  

Loans

   352,816    (4,419  348,397    378,768    (7,242  371,526  

Deferred loan origination fee

   (2,139      (2,139  (3,593      (3,593

Loans for installment credit

   56,852    (931  55,921    43,833    (2,994  40,839  

Deferred incidental expense

   (89      (89  179        179  

New technology financial investment assets

   3,966    (20  3,946    1,356    (911  445  

New technology financial loans

   9,315    (264  9,051    2,932    (277  2,655  
                         

Total

  (Won)420,721   (Won)(5,634 (Won)415,087   (Won)426,420   (Won)(11,439 (Won)414,981  
                         

7.    Securities

Trading securities as of December 31, 2010 and 2009, are as follows:

(in millions of Korean won)

      2010           2009     

Beneficiary certificates

  (Won)6,003    (Won)21,470  

The above trading securities are in short-term investment assets in the consolidated statements ofIncome or expense (gain or loss) by financial position and carried at fair value determined based on the trading price as of year-end published by the financial institutes.

Available-for-sale securities as of December 31, 2010 and 2009, are as follows:

Current

(in millions of Korean won)

      2010           2009     

Beneficiary certificates

  (Won)    (Won)6,508  

Debt securities

   45     3  
          

Total

  (Won)45    (Won)6,511  
          

The above current available-for-sale securities are included in the short-term investment assets in the consolidated statements of financial position and carried at fair value determined based on the trading price as of fiscal year-end published by the financial institutes.

Non-current

(in millions of Korean won)

  2010   2009 

Marketable equity securities1

    

Solitech Co., Ltd.

  (Won)2,684    (Won)2,348  

Digital Ocean Co., Ltd. (formerly GaeaSoft Corp.)

   214     487  

Krtnet Corp.

   2,536     2,626  

PT. Mobile-8 Telecom Tbk

   2,561     2,504  

Show Mirae Asset PEF 1

   3,274     2,168  

KOREA CABLE T.V CHUNG-BUK SYSTEM CO., LTD.

   1,250     221  

Daewoo Securities Green Korea Special Purpose Acquisition Company

   2,818       

Tongyang Value Ocean Special Purpose Acquisition Company

   606       

Others

   4,178     1,503  
          

Sub-total

   20,121     11,857  
          

(in millions of Korean won)

  2010   2009 

Non-marketable equity securities1

    

Korea Information Certificate Authority, Inc.

   1,000     2,000  

Vacom Wireless, Inc.

   641     641  

Neighbor Systems Co., Ltd.

   525     525  

Entaz Co., Ltd.

   1,000     1,000  

Smart Channel Co., Ltd.(formerly Mediapuff Plus)2

   500     500  

SBS KT SPC

   25,000     15,000  

IBK-Auctus Green Growth PEF

   7,000     100  

MBC KT SPC

   11,000     11,000  

Korea Software Financial Cooperative

   1,220     1,220  

Daesung Private Equity Fund

   3,000     3,000  

Translink Capital Partners I, L.P.3

   2,430     5,222  

Translink Management II Fund4

   1,731       

Pacren Walden Ventures Parallel VI-KT, L.P.4

   5,858     3,652  

Sovik Contents Investment Fund

   1,500     1,500  

Korea Telecommunications Operators Association

   689     689  

GE Premier 1st CR-REIT

   3,000       

Wooridle Film Investment Fund No. 15

   563       

Luxpia Co., Ltd.

   1,000     1,000  

Leaders PEF

   16,003     18,644  

Minigate Co., Ltd

   2,400       

Mirae Asset PEF

   5,090       

BC Card Co., Ltd

   8,712       

SEMI Materials, Co., Ltd

   2,990       

SEJONG Metal Co,. Ltd. (redeemable convertible preferred stock)

   1,100       

Smith & Mobile Inc.

   1,500       

Alti semiconductor Co., Ltd

   3,000       

Alphaasset Sinabro Private Stock Investment Trusts 7th

   2,725       

Enswers Inc.

   2,001     2,001  

On Game Network Inc.

   5,368     5,527  

Woongjin passone

   3,121       

Wiz communications Co., Ltd

   1,852     1,987  

QCP Investment Purpose Company III Inc.

   2,000     2,000  

Petra PEF 2nd

   5,000       

Petra PEF 1st

   3,905     4,000  

Hyundai-Asan Private Stock Investment Trusts

   2,819       

CJ Venture Investment 12th Global Contents Investment Fund

   1,969     2,003  

Enterprise DB Corp.

   3,013       

KDBCJKL PEF 2nd

   4,200       

KoFC-IMM Pioneer Champ 2010-17th Investment Fund

   2,010       

Nexenta Systems, Inc.

   2,260       

SoftBank Commerce Korea

   959     959  

Shinhan Venture Capital Co., Ltd.

   900     900  

Others

   17,438     15,002  
          

Sub-total

   169,992     100,072  
          

Debt securities

    

Government and public bonds

   20     64  

Tongyang Value Ocean Special Purpose Acquisition Company Convertible bonds

   200     200  

KIC Co., Ltd. Convertible bonds

   813       

Foosung Co., Ltd. Convertible bonds

        2,420  

KB2B. Bonds with warrant

   2,443     1,677  

Saehacoms Co., Ltd. Bonds with warrant

   783       

Probe corp. Convertible bonds

   1,000     1,000  

Sejong Metal Co,. Ltd. Bonds with warrant

   981       

Others

   3,162       
          

Sub-total

   9,402     5,361  
          

Total

  (Won)199,515    (Won)117,290  
          

1

The fair value of marketable equity securities is determined using quoted market prices as of year end. Non-marketable equity securities are recognized at acquisition cost if the fair value of the securities cannot be reliably measured due to lack

of basis and experience. But if the reasonably estimated recoverable amounts of non-marketable securities are less than the carrying amounts and the amount of deficiency is material then, the securities are recognized at the recoverable amounts by deducting the deficiency from the carrying amounts directly.

2The securities are pledged as collateral for borrowings of investee.

3During the year ended December 31, 2010, the Company recognized(Won)2,792 million of loss on impairment of investment securities as non-operating expense.

4This is an investment fund which the Company participates as a limited partner. As the Company has no significant influence or control over this investee, the Company classifies this investment as an available-for-sale security.

5The Company has no significant influence due to withdrawal from the fund. Accordingly, the Company reclassifies this investment as an available-for-sale security.

Held-to-maturity securities as of December 31, 2010 and 2009, are as follows:

(in millions of Korean won)

  2010   2009 

Current (*)

  (Won)    (Won)17  

Non-Current

   66     65  
          

Total

  (Won)66    (Won)82  
          

The current held-to-maturity securities are included in short-term investment assets in the consolidated statements of financial position.

Maturities of debt securities as of December 31, 2010, are as follows:

(in millions of Korean won)

  Available-for-sale   Held-to-maturity 

Within 1 year

  (Won)45    (Won)  

Over 1 year and within 5 years

   9,402     66  
          

Total

  (Won)9,447    (Won)66  
          

For the years ended December 31, 2010 and 2009, changes in valuation gain or loss on short-term available-for-sale securities are as follows:

2010

(in millions of Korean won)

 

2010.1.1

  Valuation Amount   Included in Earnings   2010.12.31 

(Won) 7,800

  (Won)2,201    (Won)1,392    (Won)11,393  

Deferred income tax

  

   (2,342
         

Total

  

  (Won)9,051  
         

2009

(in millions of Korean won)

 

2009.1.1

  Valuation Amount   Included in Earnings   2009.12.31 

(Won) (2,810)

  (Won)5,015    (Won)5,595    (Won)7,800  

Deferred income tax

  

   (2,009
         

Total

  

  (Won)5,791  
         

The amounts are not adjusted for the minority interests in consolidated subsidiaries.

Equity-method Investments

Equity-method investments as of December 31, 2010 and 2009, are as follows:

(In millions of Korean won)

 2010  2009 

Investee

 Percentage
of
Ownership
  Acquisition
Cost
  Net asset
value
  Carrying
value
  Acquisition
Cost
  Net asset
value
  Carrying
value
 

Kumho Rent-A-Car Global Co.,
Ltd1, 9

  50.00 (Won)2,032   (Won)589   (Won)943   (Won)   (Won)   (Won)  

Korea Telecom Directory Co., Ltd.

  34.00  6,800    (2,559      6,800    (2,283    

KBSi Co., Ltd.

  32.38  4,760    6,874    6,874    4,760    5,259    5,259  

CU Industrial Development Co.,
Ltd.8

  19.00  506    9,198    9,198    506    12,769    12,769  

KTCS Corporation7, 8

  17.05  3,800    19,613    19,613    3,800    16,449    16,449  

KTIS Corporation7, 8

  17.80  2,850    19,432    19,432    2,850    16,413    16,413  

Korea Digital Satellite Broadcasting Co., Ltd.11

  32.28  195,976    29,247    29,247    195,976    12,945    12,945  

MOS Facilities Co., Ltd.8

  15.93  5,000    101    101    5,000    114    114  

Kiwoom Investment Co., Ltd.

  20.17  9,000    7,858    7,858    9,000    7,175    7,175  

Korea Information & Technology Fund 10

  33.33  100,000    122,042    122,042    100,000    115,636    115,636  

Exdell Corporation8

  19.00  190    273    273    190    239    239  

Information Technology Solution Bukbu Corporation8

  18.00  180    368    368    180    376    376  

Information Technology Solution Nambu Corporation8

  18.00  180    360    360    180    381    381  

Information Technology Solution Seobu Corporation8

  18.00  180    434    434    180    451    451  

Information Technology Solution Busan Corporation8

  18.00  180    322    322    180    339    339  

Information Technology Solution Jungbu Corporation8

  18.00  180    470    470    180    458    458  

Information Technology Solution Honam Corporation8

  18.00  180    434    434    180    414    414  

Information Technology Solution Deagu Corporation8

  18.00  180    245    245    180    269    269  

Everyshow

  20.69  1,500    688    688    1,500    1,045    1,045  

KT-Global New Media Fund

  50.00  14,000    12,663    12,663    14,000    12,932    12,932  

Company K Movie Asset Fund No. 1

  60.00  9,000    9,362    9,362    9,000    8,806    8,806  

Boston Global Film & Contents Fund L.P.

  31.84  10,000    10,146    10,146    10,000    10,085    10,085  

OIC Co., Ltd. (formerly OIC Language Visual Limited)

  20.00  200    41    41    200    183    183  

Mongolian Telecommunications

  40.00  3,450    12,312    12,312    3,450    11,135    11,135  

Metropol Property LLC

  34.00  1,739    628    1,373    1,739    640    1,684  

WiBro Infra Co., Ltd.2

  26.22  65,000    65,502    65,502              

Harex Info Tech Inc.8

  14.77  3,375    433    433    3,375    62    62  

Boston Film Fund

  38.96  7,461    1,383    1,383    8,000    4,249    4,249  

KTF-CJ Music Contents Investment Fund

  50.00  5,000    4,952    4,952    5,000    4,955    4,955  

Shinhan-KT Mobilecard Co., Ltd.

  50.00  1,000    (1      1,000    248    248  

KT-DoCoMo Mobile Investment Fund

  45.00  4,500    4,858    4,858    4,500    4,473    4,473  

MetroM Co., Ltd.8

  19.88  80    179    179    80    147    147  

KDNET Co., Ltd.8

  19.88  80    142    142    80    147    147  

GOODTECH Co., Ltd.8

  19.88  80    180    180    80    153    153  

Touchtel Co., Ltd.8

  19.90  100    183    183    100    180    180  

KNS Co.,Ltd (formerly Excelnet Co., Ltd.)

  20.62  249    259    259    100    120    120  

(In millions of Korean won)

 2010  2009 

Investee

 Percentage
of
Ownership
  Acquisition
Cost
  Net asset
value
  Carrying
value
  Acquisition
Cost
  Net asset
value
  Carrying
value
 

KMTEC Co., Ltd.8

  19.90  100    185    185    100    183    183  

MTT Co., Ltd.8

  19.90  100    221    221    100    206    206  

Goodmorning F Co., Ltd.8

  19.00  254    891    891    254    1,696    1,696  

BKLCD Co., Ltd.

  29.15  20,000    18,111    18,111    20,000    19,542    19,542  

TPS

  100.00  164    1,100    1,100    164    1,283    1,283  

ETN

  100.00  1    1    1    1    1    1  

Oscar ent. Co., Ltd.

  49.00  650    423    423    650    398    398  

KT-IMM Investment Fund2

  45.45  5,000    5,076    5,076              

Ansan U-City BTL1, 8

  15.00  98    68    68              

Miraeasset Good Company Investment Fund No.32

  33.33  3,040    3,008    3,008              

2010 KIF IMM IT Investement Fund 2

  21.88  700    659    659              

Anyang KDC project2

  21.05  2,600    2,600    2,600              

QCP New technology investment fund 20th2

  37.74  2,000    96    96              

Nau IB 7th fund2

  30.77  2,000    302    302              

Saehacoms Co., Ltd.1

  20.00  500    393    393              

Crzyfish, Inc.1

  25.05  500    455    455              

Haitai Confectionery & Foods Co., Ltd 1, 10

  30.37  53,741    35,713    52,689              

Wooridle Film Investment Fund3

                  1,600    1,478    1,478  

eNtoB Corp.4

                  6,050    8,314    8,730  

WMC Co., Ltd.5

                  80    98    98  

Sky Life Contents Fund4

                  4,500    3,751    3,751  

Netcom4

                  90          

PARANGOYANGI6

                  2,900    (542    

Music City Media Co., Ltd.6

                  1,040    (688    

D&G Star Co., Ltd.4

                  260    27    27  

Paramount Music Co., Ltd.4

                  1,000    305    305  
                         

Total

  (Won)550,436   (Won)408,513   (Won)429,148   (Won)431,135   (Won)283,016   (Won)287,989  
                         

1The Company newly acquired the shares of the investees in 2010.

2These companies are newly established in 2010.

3The investments in the investees were reclassified as an available-for-sale in 2010.

4The Company sold all of its equity shares of these companies in 2010.

5WMC Co., Ltd. merged with KNS Co., Ltd. in 2010.

6These companies go bankrupt were liquidated in 2010.

7The shares of the investees are listed on the Korea Exchange in 2010.

8As of December 31, 2010, the Company’s ownership of the investees is less than 20%. Since the Company can exercise significant influence or control over the investees, the investments are classified as equity method investment.

9This investment is the joint venture. As a result, the Company accounts for this investment using the equity method.

10Although the Company’s respective ownership in these companies is more than 30%, the Company is not the largest stockholder of these companies. As a result, the Company accounts for these investments as equity-method investments.

11As the Company is not the largest shareholder of these companies in the consideration of the potential voting rights, the Company accounts for these investments as equity-method investments.

The details of changes in differences between the initial purchase price and the Company’s initial proportionate ownership in net book value of the investees ended December 31, 2010 and 2009, are as follows:

   2010 

(in millions of Korean won)

  2010.1.1  Addition  Amortization  2010.12.31 

Kumho Rent-A-Car

  (Won)   (Won)1,415   (Won)(1,062 (Won)353  

Metropol Property LLC

   1,044        (298  746  

eNtoB Corp.

   416    (345  (71    

Haitai Confectionery & Foods Co., Ltd.

       20,842    (3,908  16,934  
                 

Total

  (Won)1,460   (Won)21,912   (Won)(5,339 (Won)18,033  
                 
   2009 

(in millions of Korean won)

  2009.1.1  Addition  Amortization  2009.12.31 

eNtoB Corp.

  (Won)553   (Won)   (Won)(137 (Won)416  

Korea Digital Satellite Broadcasting Co., Ltd.

   10,928        (10,928    

Harex Info Tech Inc.

   383        (383    

U-Mobile

   49,561    (43,731  (5,830    

Metropol Property LLC

   1,342        (298  1,044  

OliveNine Entertainment Co., Ltd.

   644    (644        

The Contents Entertainment

   947    (947        

Doremi Music Publishing Co., Ltd.

   (15  15          
                 

Total

  (Won)64,343   (Won)(45,307 (Won)(17,576 (Won)1,460  
                 

There are no unrealized gains and losses arising from intercompany transactions to be eliminated as of December 31, 2010.

The changes in the book values of equity-method investmentsinstrument category for the years ended December 31, 20102011, 2012 and 20092013, are as follows:

 

(In millions of Korean won)

 2010 

Investee

 2010.1.1  Acquisition
(Disposal)
  Valuation
gain(loss)
  Other increase
(Decrease)
  2010.12.31 

Kumho Rent-A-Car Global

 (Won)   (Won)   (Won)(1,719 (Won)2,662   (Won)943  

KBSi Co., Ltd.

  5,259        1,615        6,874  

CU Industrial Development Co., Ltd.

  12,769        (3,571      9,198  

KTCS Corporation

  16,449        3,127    37    19,613  

KTIS Corporation

  16,413        3,569    (550  19,432  

Korea Digital Satellite Broadcasting Co., Ltd. 1

  12,945        16,142    160    29,247  

MOS Facilities Co., Ltd.

  114        (253  240    101  

Kiwoom Investment Co., Ltd.

  7,175        462    221    7,858  

Korea Information & Technology Fund

  115,636        6,915    (509  122,042  

Exdell Corporation

  239        34        273  

Information Technology Solution Bukbu Corporation

  376        (8      368  

Information Technology Solution Nambu Corporation

  381        (21      360  

Information Technology Solution Seobu Corporation

  451        (17      434  

Information Technology Solution Busan Corporation

  339        (17      322  

Information Technology Solution Jungbu Corporation

  458        12        470  

Information Technology Solution Honam Corporation

  414        20        434  

Information Technology Solution Deagu Corporation

  269        (24      245  

Everyshow

  1,045        (378  21    688  

KT-Global New Media Fund

  12,932        (269      12,663  

Company K Movie Asset Fund No. 1

  8,806        556        9,362  

Boston Global Film & Contents Fund L.P. 1

  10,085        61        10,146  

OIC Co., Ltd. (formerly OIC Language Visual Limited)

  183        (142      41  

Mongolian Telecommunications

  11,135        (28  1,205    12,312  

Metropol Property LLC

  1,684        (45  (266  1,373  

WiBro Infra Co., Ltd.

      65,000    505    (3  65,502  

Harex Info Tech Inc.

  62        28    343    433  

Boston Film Fund

  4,249    (538  (2,338  10    1,383  

KTF-CJ Music Contents Investment Fund

  4,955        (3      4,952  

Shinhan-KT Mobilecard Co., Ltd.

  248        (248        

KT-DoCoMo Mobile Investment Fund

  4,473        385        4,858  

MetroM Co., Ltd.

  147        32        179  

KDNET Co., Ltd.

  147        (5      142  

GOODTECH Co., Ltd.

  153        27        180  

Touchtel Co., Ltd.

  180        3        183  

KNS Co.,Ltd (formerly Excelnet Co., Ltd.)

  120        (17  156    259  

KMTEC Co., Ltd.

  183        2        185  

MTT Co., Ltd.

  206        15        221  

Goodmorning F Co., Ltd.

  1,696    (884  77    2    891  

BKLCD Co., Ltd.

  19,542        (310  (1,121  18,111  

TPS

  1,283        3,512    (3,695  1,100  

ETN

  1                1  

Oscar ent. Co., Ltd.

  398        25        423  

KT-IMM Investment Fund

      5,000    76        5,076  

Ansan U-City BTL 1

      98    (30      68  

Miraeasset Good Company Investment Fund No.3 1

      3,040    (32      3,008  

2010 KIF IMM IT Investement Fund1

      700    (41      659  

Anyang KDC project

      2,600            2,600  

QCP New technology investment fund 20th

      2,000        (1,904  96  

Nau IB 7th fund 1

      2,000    53    (1,751  302  

Saehacoms Co., Ltd.

      500    (107      393  

Crzyfish, Inc.

      500    (45      455  

Haitai Confectionery & Foods Co., Ltd

      53,741    (1,052      52,689  

Wooridle Film Investment Fund

  1,478        (447  (1,031    

eNtoB Corp. 1

  8,730    (7,937  400    (1,193    

WMC Co., Ltd.

  98        19    (117    

Sky Life Contents Fund

  3,751    (3,812  61          

D&G Star Co., Ltd.

  27    (10  (2  (15    

Paramount Music Co., Ltd.

  305            (305    
                    

Total

 (Won)287,989   (Won)121,998   (Won)26,564   (Won)(7,403 (Won)429,148  
                    

(In millions of Korean won)

 2009 

Investee

 2009.1.1  Acquisition
(Disposal)
  Valuation
gain(loss)
  Other Increase
(Decrease)
  2009.12.31 

Korea Telecom Directory Co., Ltd.

 (Won)8,358   (Won)   (Won)(8,358 (Won)   (Won)  

KBSi Co., Ltd.

  4,679        580        5,259  

CU Industrial Development Co., Ltd.

  8,369        4,350    50    12,769  

KTCS Corporation

  13,666    1,050    1,771    (38  16,449  

KTIS Corporation

  12,812        2,233    1,368    16,413  

Korea Digital Satellite Broadcasting Co., Ltd.

  32,928        (4,018  (15,965  12,945  

MOS Facilities Co., Ltd.

  41        (275  348    114  

Kiwoom Investment Co., Ltd.

  6,953        54    168    7,175  

Korea Information & Technology Fund

  110,909        3,984    743    115,636  

Exdell Corporation

  218        21        239  

Information Technology Solution Bukbu Corporation

  225    (13  164        376  

Information Technology Solution Nambu Corporation

  221    (13  173        381  

Information Technology Solution Seobu Corporation

  222    (13  242        451  

Information Technology Solution Busan Corporation

  246    (13  106        339  

Information Technology Solution Jungbu Corporation

  295    (15  178        458  

Information Technology Solution Honam Corporation

  248    (13  179        414  

Information Technology Solution Deagu Corporation

  218    (12  63        269  

Everyshow

  1,226        (181      1,045  

KT-Global New Media Fund

  5,817    8,000    (885      12,932  

Company K Movie Asset Fund No. 1

  8,803        3        8,806  

Boston Global Film & Contents Fund L.P.1

      10,001    84        10,085  

OIC Co., Ltd. (formerly OIC Language Visual Limited)

      200    (17      183  

Mongolian Telecommunications

  13,289        910    (3,064  11,135  

Metropol Property LLC

  1,776            (92  1,684  

Harex Info Tech Inc.

  631        (569      62  

Boston Film Fund

  4,281        (32      4,249  

KTF-CJ Music Contents Investment Fund

  5,038        (83      4,955  

Shinhan-KT Mobilecard Co., Ltd.

  708        (460      248  

KT-DoCoMo Mobile Investment Fund

  4,439        34        4,473  

MetroM Co., Ltd.

          76    71    147  

KDNET Co., Ltd.

          75    72    147  

GOODTECH Co., Ltd.

          81    72    153  

Touchtel Co., Ltd.

          91    89    180  

KNS Co.,Ltd (formerly Excelnet Co., Ltd.)

          30    90    120  

KMTEC Co., Ltd.

          93    90    183  

MTT Co., Ltd.

          117    89    206  

Goodmorning F Co., Ltd.

  1,460        235    1    1,696  

BKLCD Co., Ltd.

      20,000    (458      19,542  

TPS

  205        2,429    (1,351  1,283  

ETN

  1                1  

Oscar ent. Co., Ltd.

  384        14        398  

Wooridle Film Investment Fund1

  1,529        (51      1,478  

eNtoB Corp.

  8,740        281    (291  8,730  

WMC Co., Ltd.

          27    71    98  

Sky Life Contents Fund

  3,737        14        3,751  

Netcom

  80        (1  (79    

D&G Star Co., Ltd.

  190        (163      27  

Paramount Music Co., Ltd.

  313        (8      305  

KTC Media Contents Investment Fund No.1

  4,510            (4,510    

OLIVE9

      (3      3      

U Mobile

  82,663    (65,424  (17,794  555      

KSCALL

  327    (449  281    (159    

KOSNC

  341    (541  200          

KCALL

  332    (515  183          

TMWORLD

  320    (474  154          

UMSNC

  293    (465  172          

The Contents Entertainment

  950    (950            

Olive Nine Creative Co., Ltd.

  150    (150            

Onestone Communication Co., Ltd.

  206    (206            
                    

Total

 (Won)353,347   (Won)(30,018 (Won)(13,671 (Won)(21,669 (Won)287,989  
                    

(In millions of Korean won)

  2011  2012  2013 

Loans and receivables

    

Interest income 1

  324,985   387,254   279,047  

Foreign currency transaction gain(loss)

   6,108    (1,198  23,509  

Foreign currency translation gain(loss)

   4,762    (3,208  (5,245

Loss on disposal

   (3,807  (15,809  (7,534

Loss on valuation

   (149,667  (150,389  (189,665

Assets at fair value through the profit and loss

    

Dividend income

   13          

Gain(loss) on disposal

   (1,120  10    375  

Gain(loss) on valuation

   12,951    (80  (5,427

Derivatives used for hedging

    

Transaction gain(loss)

   (26,882  (4,023  1,134  

Gain(loss) on valuation

   42,755    (49,729  127  

Other comprehensive income(loss) 2

   52,414    (9,407  (1,936

Reclassified to profit or loss from other comprehensive income 2,3

   (31,151  24,764    1,408  

Available-for-sale

    

Interest income 1

   389    142    345  

Dividend income

   7,810    6,370    20,841  

Gain on disposal

   6,724    7,991    2,339  

Impairment loss

   (4,727  (3,401  (5,053

Other comprehensive income(loss) 2

   60,834    23,952    49,778  

Reclassified to profit or loss from other comprehensive income 2

   (1,376  (4,865  6,554  

Liabilities at fair value through the profit and loss

    

Foreign currency transaction loss

       199    42  

Gain(loss) on disposal

   40    (78  (676

Gain on valuation

   (142  331    156  

Derivatives used for hedging

    

Gain(loss) on disposal

       2,352    (3,339

Gain(loss) on valuation

   1,041    (191,627  (97,289

Other comprehensive income(loss) 2

   10,790    (119,883  (70,367

Reclassified to profit or loss from other comprehensive income 2,3

   (3,882  130,103    66,199  

Financial liabilities at amortized cost

    

Interest expense 1,4

   (587,560  (589,727  (548,129

Foreign currency transaction gain(loss)

   4,063    3,383    (330

Foreign currency translation gain(loss)

   (85,198  262,383    104,820  

Other liabilities

    

Financial guarantee gain or loss

   (4,973  (11,216  9,034  
  

 

 

  

 

 

  

 

 

 

Total

  (364,806 (305,406 (369,282
  

 

 

  

 

 

  

 

 

 

 

1In accordance with SKAS No. 24Preparation and Presentation of Financial Statements II (Financial Industry), gain on valuation of equity-method investments amounting to(Won)136 million (2009:(Won)10 million) and loss on valuation of equity-method investments amounting to(Won)102 million (2009:(Won)16 million) recorded by KT Capital are classifiedCo., Ltd. and KT Rental, a subsidiary of the Group, recognizes interest income and expense as operating revenue and expense. Interest income recognized as operating revenue is170,598 million (2011:173,740 million, 2012:184,182 million) and interest expense recognized as operating expense respectively.is

Market value information of publicly listed investees as of December 31, 2010 and 2009, is as follows:

    2010 

(In millions of Korean won)

  Number of Shares
Owned
   Market Price per
share
   Market Value   Recorded Book
Value
 

KTCS Corporation

   8,132,130    (Won)2,210.0    (Won)17,972    (Won)19,613  

KTIS Corporation

   6,196,190     3,510.0     21,749     19,432  

Mongolian Telecommunications

   10,348,111     3,413.1     35,319     12,312  

    2009 

(In millions of Korean won)

  Number of Shares
Owned
   Market Price per
share
   Market Value   Recorded Book
Value
 

Mongolian Telecommunications

   10,348,111    (Won)1,877.8    (Won)19,432    (Won)11,135  

Financial information of investees as of December 31, 2010 and 2009, are as follows:

(In millions of Korean won)

  2010 

Investee

  Assets   Liabilities   Sales   Net income(loss) 

Kumho Rent-A-Car Global

  (Won)6,045    (Won)4,868    (Won)222,039    (Won)1,333  

Korea Telecom Directory Co., Ltd.

   20,692     28,896     21,648     283  

KBSi Co., Ltd.

   31,246     10,017     57,947     4,987  

CU Industrial Development Co., Ltd.

   121,632     73,412     27,981     (18,986

KTCS Corporation

   168,243     53,237     353,950     16,270  

KTIS Corporation

   157,782     48,641     349,114     18,041  

Korea Digital Satellite Broadcasting Co., Ltd.

   533,246     385,935     431,356     42,956  

MOS Facilities Co., Ltd.

   6,097     5,463     22,252     (1,545

Kiwoom Investment Co., Ltd.

   39,173     215     5,135     2,296  

Korea Information & Technology Fund

   366,281          27,930     20,747  

Exdell Corporation

   2,957     1,519     10,990     257  

Information Technology Solution Bukbu Corporation

   5,591     3,547     29,091     366  

Information Technology Solution Nambu Corporation

   4,763     2,763     31,918     246  

Information Technology Solution Seobu Corporation

   5,488     3,079     35,026     341  

Information Technology Solution Busan Corporation

   7,210     5,420     25,295     318  

Information Technology Solution Jungbu Corporation

   5,753     3,144     36,006     654  

Information Technology Solution Honam Corporation

   5,158     2,747     27,779     458  

Information Technology Solution Deagu Corporation

   2,892     1,528     18,086     225  

Everyshow

   4,199     874     7,454     (1,789

KT-Global New Media Fund

   25,357     32          (539

Company K Movie Asset Fund No. 1

   15,604          1,708     927  

Boston Global Film & Contents Fund L.P.

   32,053     196     993     192  

OIC Co., Ltd. (formerly OIC Language Visual Limited)

   243     37          (709

Mongolian Telecommunications

   41,075     10,294     19,636     1,363  

Metropol Property LLC

   2,120     274     1,093     418  

WiBro Infra Co., Ltd.

   358,261     108,423     374     1,916  

Harex Info Tech Inc.

   3,593     660     3,075     354  

Boston Film Fund

   3,549          612     148  

KTF-CJ Music Contents Investment Fund

   9,903          627     (6

Shinhan-KT Mobilecard Co., Ltd.

   54     55     102     (498

KT-DoCoMo Mobile Investment Fund

   10,945     150     945     854  

MetroM Co., Ltd.

   2,186     1,284     14,810     192  

KDNET Co., Ltd.

   1,390     672     11,348     78  

(In millions of Korean won)

  2010 

Investee

  Assets   Liabilities   Sales   Net income(loss) 

GOODTECH Co., Ltd.

   1,319     410     11,920     170  

Touchtel Co., Ltd.

   2,348     1,426     12,429     53  

KNS Co.,Ltd (formerly Excelnet Co., Ltd.)

   2,483     1,225     17,972     136  

KMTEC Co., Ltd.

   1,861     931     14,448     51  

MTT Co., Ltd.

   2,064     955     12,791     114  

Goodmorning F Co., Ltd.

   6,038     1,351     11,701     202  

Others

   939,868     670,705     749,304     11,092  

(In millions of Korean won)

  2009 

Investee

  Assets   Liabilities   Sales   Net income(loss) 

Korea Telecom Directory Co., Ltd.

  (Won)25,809    (Won)32,525    (Won)7,206    (Won)(31,297

KBSi Co., Ltd.

   21,242     5,000     33,133     1,791  

CU Industrial Development Co., Ltd.

   122,646     55,439     55,918     22,898  

KTCS Corporation

   129,011     47,029     245,156     12,196  

KTIS Corporation

   129,494     48,715     119,679     13,200  

Korea Digital Satellite Broadcasting Co., Ltd.

   448,079     344,151     397,457     20,280  

MOS Facilities Co., Ltd.

   11,529     10,850     22,258     (1,547

Kiwoom Investment Co., Ltd.

   35,672     100     4,750     263  

Korea Information & Technology Fund

   346,909          30,391     11,956  

Exdell Corporation

   2,111     851     10,781     115  

Information Technology Solution Bukbu Corporation

   5,036     2,946     22,452     906  

Information Technology Solution Nambu Corporation

   4,343     2,227     25,790     954  

Information Technology Solution Seobu Corporation

   4,961     2,457     25,866     1,334  

Information Technology Solution Busan Corporation

   3,508     1,623     50,624     589  

Information Technology Solution Jungbu Corporation

   5,072     2,525     34,375     991  

Information Technology Solution Honam Corporation

   4,655     2,355     19,172     995  

Information Technology Solution Deagu Corporation

   2,622     1,124     15,489     350  

Everyshow

   8,280     3,367     4,849     (851

KT-Global New Media Fund

   26,139     275          (1,771

Company K Movie Asset Fund No. 1

   14,677          1,498     6  

Boston Global Film & Contents Fund L.P.

   31,861     199          262  

OIC Co., Ltd. (formerly OIC Language Visual Limited)

   920     6          (86

Mongolian Telecommunications

   33,715     5,877     24,361     2,275  

Metropol Property LLC

   2,422     538     1,515     877  

Harex Info Tech Inc.

   1,114     823     1,782     (868

Boston Film Fund

   11,116     227     119     (111

KTF-CJ Music Contents Investment Fund

   9,960     50     653     (84

Shinhan-KT Mobilecard Co., Ltd.

   596     100     80     (919

KT-DoCoMo Mobile Investment Fund

   10,048     108     65     77  

MetroM Co., Ltd.

   1,486     748     13,998     210  

KDNET Co., Ltd.

   1,460     723     11,061     129  

GOODTECH Co., Ltd.

   1,753     985     11,600     214  

Touchtel Co., Ltd.

   1,767     862     11,996     80  

KNS Co.,Ltd (formerly Excelnet Co., Ltd.)

   1,180     577     11,631     201  

KMTEC Co., Ltd.

   1,442     523     13,459     108  

MTT Co., Ltd.

   1,839     805     12,300     196  

Goodmorning F Co., Ltd.

   11,841     2,917     46,545     1,235  

Wooridle Film Investment Fund

   7,393          28     (200

eNtoB Corp.

   72,238     44,716     567,871     1,213  

WMC Co., Ltd.

   1,181     690     10,541     227  

Sky Life Contents Fund

   16,800     129     1,390     62  

Others

   159,019     110,140     323,679     4,815  

The adjustments made on the financial statements of investees during the application of the equity method of accounting to reconcile their accounting policies with those of the Company as of December 31, 2010 and 2009, and for the years then ended are as follows:

(In millions of Korean won)

  Net Asset
before
Adjustments
   Adjustments  Net Asset
after
Adjustments
   

Notes

Korea Digital Satellite Broadcasting Co., Ltd.

  (Won)47,552    (Won)(18,305 (Won)29,247    Adjustment of equity due to redeemable preferred stock

MOS Facilities Co., Ltd.

   122,094     (52  122,042    Adjustment of dividends payable

QCP New technology investment fund 20

   926     (830  96    Impairment of investments
                

Total

  (Won)170,572    (Won)(19,187 (Won)151,385    
                

The changes in the share of losses not recognized, as the Company discontinued recognizing its share of further losses exceeding its interest in the equity-method investees, as of December 31, 2010 and 2009 are as follows:

(In millions of Korean won)

  2010  2009 
   2010.1.1  Increase
(Decrease)
  2010.12.31  2009.1.1  Increase
(Decrease)
  2009.12.31 

Korea Telecom Directory Co., Ltd.

  (Won)(2,283 (Won)(506 (Won)(2,789 (Won)   (Won)(2,283 (Won)(2,283

Shinhan-KT Mobilecard Co., Ltd.

       (1  (1            

Music City Media Co., Ltd.

   (688  688        (688      (688

PARANGOYANGI

   (542  542        (303  (239  (542
                         

Total

  (Won)(3,513 (Won)723   (Won)(2,790 (Won)(991 (Won)(2,522 (Won)(3,513
                         

8.    Property and Equipment

The changes in property, plant and equipment for the years ended December 31, 2010 and 2009 are as follows:

  2010 

(In millions of Korean won)

 Land  Buildings  Structures  Machinery and
equipment
  Vehicles  Rental
asset
  Others1  Construction-
in-progress
  Total 

Balance at 2010.1.1

 (Won)1,466,791   (Won)3,306,258   (Won)147,920   (Won)8,766,736   (Won)31,069   (Won)104,442   (Won)360,526   (Won)590,818   (Won)14,774,560  

Acquisition

  10,156    1,468    835    50,525    1,205    801,091    89,850    2,587,210    3,542,340  

Disposal

  (531  (8,600  (9,816  (146,807  (66  (1,545  (25,008  (96  (192,469

Depreciation

      (158,461  (14,519  (2,370,126  (7,378  (140,157  (204,858      (2,895,499

Impairment

              (519          (8,778      (9,297

Others 1

  (12,592  94,966    6,165    2,188,230    107    (60,998  198,217    (2,405,872  8,223  
                                    

Balance at 2010.12.31

 (Won)1,463,824   (Won)3,235,631   (Won)130,585   (Won)8,488,039   (Won)24,937   (Won)702,833   (Won)409,949   (Won)772,060   (Won)15,227,858  
                                    

Acquisition cost

 (Won)1,463,956   (Won)5,039,486   (Won)322,783   (Won)39,985,058   (Won)81,190   (Won)915,620   (Won)1,809,979   (Won)814,770   (Won)50,432,842  

Accumulated depreciation

      (1,801,296  (191,102  (31,402,282  (56,253  (212,787  (1,385,156      (35,048,876

Accumulated impairment loss

              (1,748          (12,634      (14,382

Government grants

  (132  (2,559  (1,096  (92,989          (2,240  (42,710  (141,726
  2009 

(In millions of Korean won)

 Land  Buildings  Structures  Machinery and
equipment
  Vehicles  Rental
asset
  Others1  Construction-
in-progress
  Total 

Balance at 2009.1.1

 (Won)1,289,230   (Won)3,415,917   (Won)229,676   (Won)9,374,073   (Won)34,606   (Won)90,288   (Won)459,414   (Won)295,427   (Won)15,188,631  

Acquisition

  48    841    2    34,937    727    112,910    32,081    2,592,880    2,774,426  

Disposal

  (12,021  (12,556  (1,780  (102,848  (143  (38,322  (21,087  (348  (189,105

Depreciation

      (150,103  (16,512  (2,511,196  (8,936  (40,195  (208,506      (2,935,448

Impairment

              (229          (134  (873  (1,236

Others

  189,534    52,159    (63,466  1,971,999    4,815    (20,239  98,758    (2,296,268  (62,708
                                    

Balance at 2009.12.31

 (Won)1,466,791   (Won)3,306,258   (Won)147,920   (Won)8,766,736   (Won)31,069   (Won)104,442   (Won)360,526   (Won)590,818   (Won)14,774,560  
                                    

Acquisition cost

 (Won)1,466,923   (Won)4,977,592   (Won)338,854   (Won)40,256,240   (Won)86,461   (Won)209,252   (Won)1,832,087   (Won)651,441   (Won)49,818,850  

Accumulated depreciation

      (1,668,667  (189,607  (31,376,363  (55,392  (104,810  (1,465,470      (34,860,309

Accumulated impairment loss

              (1,761          (3,855      (5,616

Government grants

  (132  (2,667  (1,327  (111,380          (2,236  (60,623  (178,365

1Others mainly consist of the transfers from construction-in-progress to machinery, increase in contribution for construction, increase due to changes in consolidated entities and reclassifications.

As of December 31, 2010, with respect to rental and leasehold contracts, certain land and buildings are pledged for mortgages and leasehold rights, and the maximum pledged amount is(Won)70,704 million (2009:(Won)73,392 million).

As of December 31, 2010, the value of land based on the posted price issued by the Korean tax authority amounted to(Won)5,412,098 million (2009:(Won)5,549,125 million)

9.    Intangible Assets

The changes in intangible assets for the years ended December 31, 2010 and 2009, are as follows:

  2010 

(In millions of Korean won)

 Goodwill  Industrial
rights
  Development
costs
  Software  Frequency
usage
rights
  Other
intangible
assets
  Total 

Balance at 2010.1.1

 (Won)85,315   (Won)10,471   (Won)227,594   (Won)165,570   (Won)696,488   (Won)94,062   (Won)1,279,500  

Acquisition

  28,974    523    243,024    62,739    78    23,114    358,452  

Disposal

          (13,520  (4,983      (2,567  (21,070

Amortization

  (74,677  (1,836  (111,650  (51,958  (115,650  (34,189  (389,960

Impairment

              (1,811      (1,632  (3,443

Others

      (54  758    839        7,844    9,387  
                            

Balance at 2010.12.31

 (Won)39,612   (Won)9,104   (Won)346,206   (Won)170,396   (Won)580,916   (Won)86,632   (Won)1,232,866  
                            
  2009 

(In millions of Korean won)

 Goodwill  Industrial
rights
  Development
costs
  Software  Frequency
usage
rights
  Other
intangible
assets
  Total 

Balance at 2009.1.1

 (Won)228,394   (Won)10,203   (Won)193,793   (Won)106,147   (Won)812,137   (Won)123,564   (Won)1,474,238  

Acquisition

      1,785    140,208    60,401        12,721    215,115  

Amortization

  (137,487  (1,865  (102,366  (45,594  (115,649  (23,057  (426,018

Impairment

  (1,840      (714  (1,261      (3,927  (7,742

Others

  (3,752  348    (3,327  45,877        (15,239  23,907  
                            

Balance at 2009.12.31

 (Won)85,315   (Won)10,471   (Won)227,594   (Won)165,570   (Won)696,488   (Won)94,062   (Won)1,279,500  
                            

The research and development expense for the years ended December 31, 2010 and 2009, are as follows:

(In millions of Korean won)

  2010   2009   2008 

Research expense

  (Won)268,681    (Won)239,507    (Won)235,508  

Development expense

   26,388     23,706     47,639  
               

Total

  (Won)295,069    (Won)263,213    (Won)283,147  
               

As a significant expenditure, which is expected to have future economic benefits but is not capitalized in the year incurred because they are not under the Company’s control, training expense amounted to(Won)31,832 million (2009:(Won)23,575 million).

10.    Insurance

As of December 31, 2010, the summary of assets covered under the insurance programs with various insurance companies are as follows:

       Coverage 

(In millions of Korean won)

  

Insurance type

  2010   2009 

Inventories

  Theft and fire  (Won)145,100    (Won)167,129  

Buildings

  Fire and other   1,326,221     1,347,580  

Machinery

  Property package and other   551,937     195,454  

Vessel (vehicles)

  Vessel and other   69,814     63,225  

Others 1

  Fire and other   452,492     481,139  
            

Total

    (Won)2,545,564    (Won)2,254,527  
            

1Includes insurance for structures, finance lease receivables, other fixed assets and officers liability.

11.    Government Grants and Customers’ Contribution.

The changes in government grants and customers’ contribution to construction costs which are incurred in acquisition of assets for the years ended December 31, 2010 and 2009, are as follows:

   2010 

(In millions of Korean won)

  2010.1.1   Increase   Decrease  Transfer  2010.12.31 

Land

  (Won)132    (Won)    (Won)   (Won)   (Won)132  

Buildings

   2,667          (108      2,559  

Structures

   1,327          (231      1,096  

Equipment

   111,380     218     (39,718  21,109    92,989  

Others

   2,236     28     (1,324  1,300    2,240  

Construction- in-progress

   60,623     4,496         (22,409  42,710  
                       

Total

  (Won)178,365    (Won)4,742    (Won)(41,381 (Won)   (Won)141,726  
                       

   2009 

(In millions of Korean won)

  2009.1.1   Increase   Decrease  Transfer  2009.12.31 

Land

  (Won)132    (Won)    (Won)   (Won)   (Won)132  

Buildings

   2,188          (233  712    2,667  

Structures

   1,507          (185  5    1,327  

Equipment

   119,311          (50,238  42,307    111,380  

Others

   1,786          (1,311  1,761    2,236  

Construction- in-progress

   107,675     16,440     (18,707  (44,785  60,623  
                       

Total

  (Won)232,599    (Won)16,440    (Won)(70,674 (Won)   (Won)178,365  
                       

13.    Derivatives

During the years ended December 31, 2010, 2009 and 2008, the Company entered into various derivatives contracts with financial institutions as below.

Type of transaction

Financial institution

Description

Interest rate swaps

Merrill Lynch and others

Exchange fixed interest rate for variable

interest rate for a specified period

Currency swaps

Merrill Lynch and others

Exchange foreign currency cash flow for local currency

cash flow local currency cash flow for a specified period

Combined interest rate currency swap

Merrill Lynch and others

Exchange foreign currency variable interest rate swaps

for local currency fixed interest rate

Currency forward

Kookmin Bank and others

Exchange a specified currency at the agreed exchange

rate at a specified date

Details of the above derivative contracts as of December 31, 2010 are as follows:

Currency swap contracts

   Contract  Settlement  Contract amounts in millions  Contract interest rate per
annum
 

Counterparty

 Year  Year          Pay                Receive        Pay (%)  Receive%) 

Merrill Lynch

  2005    2034   KRW2,003   US$20    6.24    6.50  

CITI

  2007    2012   KRW46,800   JPY50    4.79    5.13  

Merrill Lynch

  2007    2012   KRW46,800   US$50    4.79    5.13  

Goldman Sachs

  2007    2012   KRW46,800   US$50    4.79    5.13  

JPMorgan

  2008    2012   KRW62,972   JPY50    5.34    5.13  

JPMorgan

  2004    2014   KRW 115,620   US$100    5.50    5.88  

JPMorgan

  2004    2014   KRW231,240   US$200    5.50    5.875 x n/N  

Merrill Lynch

  2004    2014   KRW116,400   US$100    4.99    5.875 x n/N  

Merrill Lynch

  2004    2014   KRW53,325   US$50    4.65    5.875 x n/N  

Deutsche Bank

  2004    2014   KRW53,325   US$50    4.65    5.875 x n/N  

Merrill Lynch

  2005    2014   KRW50,170   US$50    4.97    5.875 x n/N  

Credit Suisse

  2005    2014   KRW50,175   US$50    4.97    5.875 x n/N  

Merrill Lynch

  2005    2015   KRW51,800   US$50    4.57    4.875 x n/N  

UBS AG

  2005    2015   KRW51,850   US$50    4.57    4.875 x n/N  

BTMU

  2008    2011   KRW106,740   JPY12,500    4.61    3M JPY Libor+0.60  

CA

  2008    2011   KRW50,750   US$50    3.72    3M USD Libor+1.50  

HSBC

  2008    2012   KRW81,200   US$80    4.08    3M USD Libor+1.60  

BNP

  2008    2012   KRW30,450   US$30    4.08    3M USD Libor+1.60  

DBS

  2008    2013   KRW217,940   US$200    5.57    3M USD Libor+1.50  

DBS

  2010    2013   KRW112,200   US$100    4.07    3M USD Libor+0.47  

CA

  2008    2011   KRW66,150   US$70    4.88    3M USD Libor+1.50  

ANZ

  2008    2011   KRW33,075   US$35    4.76    3M USD Libor+1.50  

ABN

  2008    2011   KRW28,335   US$30    4.97    3M USD Libor+1.50  

Hanabank

  2008    2011   KRW18,912   US$20    4.52    3M USD Libor+1.50  

Nonghyop

  2008    2011   KRW18,900   US$20    4.52    3M USD Libor+1.50  

BTMU

  2008    2011   KRW39,124   US$4,000    5.03    3M JPY Libor+1.60  

Mizuho

  2008    2011   KRW28,643   US$3,000    5.10    3M JPY Libor+1.60  

DBS

  2008    2011   KRW51,400   US$50    5.84    3M USD Libor+1.60  

Wooriinvest

  2008    2011   KRW15,420   US$15    5.82    3M USD Libor+1.60  

BNP

  2008    2011   KRW31,500   US$30    5.88    3M USD Libor+1.60  

Wooribank

  2008    2011   KRW31,500   US$30    5.77    3M USD Libor+2.00  

Korea Export Insurance Corporation

  2010    2011   USD4   KRW4,411          

Kookmin Bank

  2008    2012   USD13   KRW14,593          

Interest rate swap contracts

Counterparty

Contract
period
Notional amount
in millions
Pay (%)Receive (%)

Merrill Lynch

2007-2015USD 100KRW CD+4.44%KRW 8.36%

Merrill Lynch

2008-2011KRW 180,000KRW 4.875% x m/N

+ KRW 4.875% x n/N

USD 4.875% x n/N

Kookmin Bank

2008-2011KRW 20,000CD+1.45%6.55%

Kookmin Bank

2008-2011KRW 10,000CD+1.35%6.71%

Daegu Bank

2008-2011USD 38.43%USD

Libor(3M)+4.00

The assets and liabilities relating to outstanding contracts as of December 31, 2010 and 2009 are as follows:

   2010 

(In millions of Korean won

and thousands of foreign currencies)

  Contract
amount
   Assets
(Current)
   Assets
(Non-current)
   Liabilities
(Current)
   Liabilities
(Non-current)
 

Interest rate swap

  KRW210,000    (Won)1,213    (Won)    (Won)214    (Won)  
  USD100,000          

Currency swap

  USD223,771     479     34,193          6,560  

Combined interest rate
currency swap

  USD

JPY

1,460,000

19,500,000

  

  

   149,415     62,973          13,277  

Currency forward

  USD16,976     136          14     406  
                         

Total

    (Won)151,243    (Won)97,166    (Won)228    (Won)20,243  
                      
   2009 

(In millions of Korean won

and thousands of foreign currencies)

  Contract
amount
   Assets
(Current)
   Assets
(Non-current)
   Liabilities
(Current)
   Liabilities
(Non-current)
 

Interest rate swap

  KRW256,000    (Won)    (Won)23    (Won)5,118    (Won)656  
  USD100,000          

Currency swap

  USD220,000          47,547          3,782  

Combined interest rate
currency swap

  USD

JPY

1,410,000

19,500,000

  

  

        247,488            

Currency forward

  USD30,208     288          6     1,717  
                         

Total

    (Won)288    (Won)295,058    (Won)5,124    (Won)6,155  
                      

Details of the currency swap and combined interest rate currency swap contracts to which hedge accounting is applied as of December 31, 2010 and 2009, are as follows:

    Assets
(Current)
   Assets
(Non-current)
   Liabilities
(Non-current)
 

(In millions of Korean won

and thousands of foreign currencies)

  Contract
date
  Maturity
date
   Contract
amount
   2010.12.31   2009.12.31   2010.12.31   2009.12.31   2010.12.31   2009.12.31 

Cash flow hedge

                 

Currency swap 1

   2007.4.4    2012.4.11    USD150,000    (Won)    (Won)    (Won)34,193    (Won)42,839    (Won)    (Won)  
   2008.10.6    2012.4.11    USD50,000                         5,930     3,782  
   2009.6.20    2034.9.7    USD20,000                    4,708     630       

Combined

   2008.1.4    2011.1.11    JPY12,500,000     67,510               48,908            

interest rate

   2008.3.20    2011.3.31    USD50,000     6,220               7,751            

currency swap 1

   2008.3.20    2012.3.31    USD110,000               12,366     18,233            
   2008.9.2    2013.9.11    USD200,000                    5,988     9,527       
   2010.4.9    2013.4.9    USD100,000                         3,750       
   2009.6.20    2014.6.24    USD600,000               38,443     66,812            
   2009.6.20    2015.7.15    USD100,000               12,164     20,172            
   2008.2.25    2011.2.25    USD175,000     33,735               37,236            
   2008.4.28    2011.4.28    JPY7,000,000     29,998               20,098            
   2008.6.20    2011.6.20    USD95,000     9,269               10,522            
   2008.3.12 2   2010.12.13    USD                    8,785            
   2008.7.2    2011.4.4    USD30,000     2,683               2,983            
                                   

Sub-total

        149,415          97,166     295,035     19,837     3,782  
                                   

Fair value hedge

                 

Interest rate swap 3

   2009.9.1    2011.12.1    KRW180,000     1,213               23            
                                   

Total

       (Won)150,628    (Won) —    (Won)97,166    (Won)295,058    (Won)19,837    (Won)3,782  
                                   

1In applying the cash flow hedge accounting, the Company hedges its exposures to cash flow fluctuation until September 7, 2034. Approximately(Won)6,37497,827 million of net derivative loss included in accumulated other comprehensive income at December 31, 2010, is expected to be recognized in current operations within 12 months from that date.(2011:

2The remaining principal of the derivative is repaid at maturity during the year ended December 31, 2010.

3Above interest rate swap contract is to hedge the risk of variability in future fair value from the bond and, accordingly, the loss on valuation of the swap contract amounting to(Won)1,190106,951 million, is included in operations2012:116,810 million) for the year ended December 31, 2010.

The valuation gains and losses on the derivatives contracts for years ended December 31, 2010, 2009 and 2008, are as follows:

   2010 

(In millions of Korean won)

  For trading   For hedging 

Type of Transaction

  Valuation
gain 1
   Valuation
loss
   Valuation
gain
   Valuation
loss
   Accumulated other
comprehensive  loss 2
 

Interest rate swap

  (Won)4,999    (Won) —    (Won)1,190    (Won)    (Won)  

Currency swap

                  6,322     (11,942

Combined interest rate currency swap

             33,595     41,385     (38,476

Currency forward

   1,447     14                 
                         

Total

  (Won)6,446    (Won)14    (Won)34,785    (Won)47,707    (Won)(50,418
                         
   2009 

(In millions of Korean won)

  For trading   For hedging 

Type of Transaction

  Valuation
gain 1
   Valuation
loss
   Valuation
gain
   Valuation
loss
   Accumulated other
comprehensive  income 2
 

Interest rate swap

  (Won)6,883    (Won)    (Won)23    (Won)    (Won)  

Currency swap

        9,574     250     17,005     (3,809

Combined interest rate currency swap

   6,178     75,401     4,605     89,282     (23,095

Currency forward

   3,317     6                 

Put option

   223                      
                         

Total

  (Won)16,601    (Won)84,981    (Won)4,878    (Won)106,287    (Won)(26,904
                         
   2008 

(In millions of Korean won)

  For trading   For hedging 

Type of Transaction

  Valuation
gain
   Valuation
loss
   Valuation
gain
   Valuation
loss
   Accumulated other
comprehensive  income 2
 

Interest rate swap

  (Won)    (Won)10,798    (Won)    (Won) —    (Won)  

Currency swap

   17,626          54,905     97     11,708  

Combined interest rate currency swap

   297,925          267,655          (22,146

Currency forward

        6,088                 

Put option

   12,569                      
                         

Total

  (Won)328,120    (Won)16,886    (Won)322,560    (Won)97    (Won)(10,438
                         

1In accordance with SKAS No. 24,Preparation and Presentation of Financial Statements II (Financial Industry), the gain on valuation of currency forwards amounting to(Won)1,311 million for the year ended December 31, 2010, and the gain on valuation of currency forwards amounting to(Won)3,029 million and the gain on valuation of interest rate swap amounting to(Won)807 million for the year ended December 31, 2009, recorded by KT Capital are classified as operating income.2013.

 

2The amounts directly reflected in equity before adjustments of deferred income tax.

3During the year, the certain derivatives of the Group were settled and the related gain or loss on valuation of cash flow hedge in other comprehensive income was reclassified to profit or loss for the year.

4The amounts reflected as interest expense arising from derivatives.

5.    Cash and Cash Equivalents

Cash and cash equivalents as of December 31, 2012 and 2013, are as follows:

(In millions of Korean won)

  2012   2013 

Cash on hand

  5,943    5,712  

Cash in banks

   860,956     885,620  

Money market trust

   768,259     817,466  

Other financial instruments

   422,455     362,071  
  

 

 

   

 

 

 

Total

  2,057,613    2,070,869  
  

 

 

   

 

 

 

Cash and cash equivalents in the statement of financial position equal cash and cash equivalents in the statements of cash flows.

Restricted cash and cash equivalents as of December 31, 2012 and 2013, are as follows:

(In millions of Korean won)

  Type  2012   2013   Description 

Cash and cash equivalents

  Restricted
deposit
  6,690    1,998     
 
Deposit restricted for
governmental project
  
  

6.    Trade and Other Receivables

Trade and other receivables as of December 31, 2012 and 2013, are as follows:

   2012 

(in millions of Korean won)

  Total
amounts
   Allowance for
doubtful
accounts
  Present value
discount
  Carrying
value
 

Current assets

      

Trade receivables

  4,468,062    (464,126 (30,906 3,973,030  

Other receivables

   2,101,533     (166,204  (851  1,934,478  
  

 

 

   

 

 

  

 

 

  

 

 

 

Total

  6,569,595    (630,330 (31,757 5,907,508  
  

 

 

   

 

 

  

 

 

  

 

 

 

Non-current assets

      

Trade receivables

  688,303    (3,992 (52,252 632,059  

Other receivables

   494,494     (9,736  (43,851  440,907  
  

 

 

   

 

 

  

 

 

  

 

 

 

Total

  1,182,797    (13,728 (96,103 1,072,966  
  

 

 

   

 

 

  

 

 

  

 

 

 

   2013 

(in millions of Korean won)

  Total
amounts
   Allowance for
doubtful
accounts
  Present
value discount
  Carrying
value
 

Current assets

      

Trade receivables

  3,791,089    (523,098 (28,248 3,239,743  

Other receivables

   2,143,203     (142,821  (556  1,999,826  
  

 

 

   

 

 

  

 

 

  

 

 

 

Total

  5,934,292    (665,919 (28,804 5,239,569  
  

 

 

   

 

 

  

 

 

  

 

 

 

Non-current assets

      

Trade receivables

  404,372    (2,568 (33,539 368,265  

Other receivables

   500,028     (9,775  (45,047  445,206  
  

 

 

   

 

 

  

 

 

  

 

 

 

Total

  904,400    (12,343 (78,586 813,471  
  

 

 

   

 

 

  

 

 

  

 

 

 

The fair values of trade and other receivables with original maturities less than one year equal their carrying values because the discounting effect is immaterial. The fair value of trade and other

receivables with original maturities longer than one year, which are mainly from sales of goods, is determined discounting the expected future cash flow at the weighted average borrowing rate.

Details of changes in allowance for doubtful accounts for the years ended December 31, 2012 and 2013, are as follows:

   2012  2013 

(in millions of Korean won)

  Trade
receivables
  Other
receivables
  Trade
receivables
  Other
receivables
 

Beginning balance

  473,311   169,164   468,118   175,940  

Provision

   99,037    14,771    151,240    8,926  

Reversal or written-off

   (117,567  (9,622  (92,979  (34,227

Changes in the scope of consolidation

   10,487    1,632    338    2,349  

Others

   2,850    (5  (1,051  (392
  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  468,118   175,940   525,666   152,596  
  

 

 

  

 

 

  

 

 

  

 

 

 

Provisions for doubtful trade and other receivables are recognized as operating expenses or finance costs.

Details of aging analysis of trade receivables as of December 31, 2012 and 2013, are as follows:

(in millions of Korean won)

  2012  2013 

Neither past due nor impaired

  3,874,113   2,959,284  
  

 

 

  

 

 

 

Past due and impaired

   

Up to six months

   700,683    725,681  

Six months to twelve months

   131,928    105,607  

Over twelve months

   366,483    343,102  
  

 

 

  

 

 

 
   1,199,094    1,174,390  

Allowance for doubtful accounts

   (468,118  (525,666
  

 

 

  

 

 

 

Total

  4,605,089   3,608,008  
  

 

 

  

 

 

 

The detail of other receivables as of December 31, 2012 and 2013, are as follows:

(in millions of Korean won)

  2012  2013 

Loans

  131,324   89,134  

Receivables 1

   2,029,077    2,096,086  

Accrued income

   24,656    22,603  

Refundable deposits

   365,161    389,199  

Others

   1,107    606  

Allowance

   (175,940  (152,596
  

 

 

  

 

 

 

Total

  2,375,385   2,445,032  
  

 

 

  

 

 

 

Current

   1,934,478    1,999,826  

Non-current

   440,907    445,206  

1The settlement receivables of BC Card Co., Ltd. of1,553,823 million (2012:1,343,859 million) included.

Details of aging analysis of other receivables as of December 31, 2012 and 2013, are as follows:

(in millions of Korean won)

  2012  2013 

Neither past due nor impaired

  2,180,948   2,312,757  
  

 

 

  

 

 

 

Past due and impaired

   

Up to six months

   193,559    105,712  

Six months to twelve months

   21,041    16,641  

Over twelve months

   155,777    162,518  
  

 

 

  

 

 

 
   370,377    284,871  

Allowance for doubtful accounts

   (175,940  (152,596
  

 

 

  

 

 

 

Total

  2,375,385   2,445,032  
  

 

 

  

 

 

 

The maximum exposure of trade and other receivables to credit risk is the carrying value of each class of receivables mentioned above as of December 31, 2013. As of December 31, 2013, the Company is provided with guarantees of667,817 million by Seoul Guarantee Insurance related to the collection of certain accounts receivable arising from the handset sales.

7.    Loans Receivable

Loans receivable are from the Group’s Finance/Rental Business Group, which provides credit card, loan and lease services. Loans receivable as of December 31, 2012 and 2013, are as follows:

Current

   2012   2013 

(in millions of Korean won)

  Original
amount
   Allowance
for doubtful
accounts
  Carrying
Value
   Original
amount
  Allowance
for doubtful
accounts
  Carrying
Value
 

Factoring receivables

  71,293       71,293    82,994   (1,245 81,749  

Loans

   581,351     (33,256  548,095     752,165    (32,722  719,443  

Loans for installment credit

   49,205     (1,235  47,970     38,799    (1,205  37,594  

Deferred loan origination costs

   755         755     (62      (62
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Total

  702,604    (34,491 668,113    873,896   (35,172 838,724  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Non-Current

   2012   2013 

(in millions of Korean won)

  Original
amount
   Allowance
for doubtful
accounts
  Carrying
Value
   Original
amount
   Allowance
for doubtful
accounts
  Carrying
Value
 

Factoring receivables

  6,051    (1,599 4,452    1,073    (103 970  

Loans

   406,410     (15,161  391,249     426,218     (15,929  410,289  

Loans for installment credit

   66,517     (1,935  64,582     46,849     (5,007  41,842  

Deferred loan origination costs

   2,336         2,336     3,432         3,432  

New technology financial investment assets

   6,788     (2,433  4,355     6,629     (803  5,826  

New technology financial loans

   55,190     (9,577  45,613     63,575     (16,061  47,514  
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Total

  543,292    (30,705 512,587    547,776    (37,903 509,873  
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

The fair values of trade and other receivables with maturities less than one year equal their carrying values because the discounting effect is immaterial. The fair value of loans receivables is determined discounting the future cash flow at the weighted average borrowing rate.

Details of changes in allowance for doubtful accounts for the years ended December 31, 2012 and 2013, are as follows:

(in millions of Korean won)

  2012  2013 

Beginning

  43,587   65,196  

Provision

   32,914    40,743  

Reversal or written-off

   (12,210  (30,448

Others

   905    (2,416
  

 

 

  

 

 

 

Ending

  65,196   73,075  
  

 

 

  

 

 

 

Provisions for doubtful loans receivable are recognized as operating expenses.

Details of aging analysis of loans receivables as of December 31, 2012 and 2013, are as follows:

(in millions of Korean won)

  2012  2013 

Neither past due nor impaired

  1,155,838   1,322,206  
  

 

 

  

 

 

 

Past due and impaired

   

Up to six months

   75,942    54,263  

Six months to twelve months

   3,767    27,312  

Over twelve months

   10,349    7,891  
  

 

 

  

 

 

 
   90,058    89,466  

Allowance for doubtful accounts

   (65,196  (73,075
  

 

 

  

 

 

 

Total

  1,180,700   1,348,597  
  

 

 

  

 

 

 

The maximum exposure of loans receivables to credit risk is carrying value as of December 31, 2013.

8.    Other Financial Assets and Liabilities

Other financial assets and liabilities as of December 31, 2012 and 2013, are as follows:

(In millions of Korean won)

  2012  2013 

Other financial assets

   

Assets at fair value through the profit and loss

  6,407   15,643  

Derivatives used for hedge

   21,348    3,496  

Financial instruments 1

   460,394    582,693  

Available-for-sale financial assets

   429,875    547,627  

Held-to-maturity investments

   436    3,248  

Less: Non-current

   (672,475  (672,645
  

 

 

  

 

 

 

Current

  245,985   480,062  
  

 

 

  

 

 

 

Other financial liabilities

   

Liabilities at fair value through the profit and loss

  3,216   2,956  

Derivatives used for hedge

   112,603    150,612  

Financial guarantee liabilities 2

   9,328    15,984  

Other financial liabilities

   16,649    73,080  

Less: Non-current

   (69,813  (178,812
  

 

 

  

 

 

 

Current

  71,983   63,820  
  

 

 

  

 

 

 

1Financial assets amounting to23,870 million (2012:20,834 million) and70 million (2012:77 million) are collaterals pledged against the investee’s debt and checking account deposit, which are subject to withdrawal restrictions.

2As of December 31, 2013, the Company has funding obligation to Smart Channel Co., Ltd. The related financial guarantee liabilities of5,393 million are recognized (Note 20).

Financial instruments at fair value through the profit and loss as of December 31, 2012 and 2013, are as follows:

   2012   2013 

(in millions of Korean won)

  Assets   Liabilities   Assets   Liabilities 

Financial instruments held for trading

        

Interest rate swap

  1    63    1      

Currency swap

             7,238       

Currency forward

   119          499     6  

Other derivatives

   6,287          7,905     148  

Financial instruments at fair value through the profit and loss

        3,153          2,802  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  6,407    3,216    15,643    2,956  
  

 

 

   

 

 

   

 

 

   

 

 

 

The valuation gains and losses on financial instruments held for trading for the years ended December 31, 2011, 2012 and 2013, are as follows:

   2011   2012   2013 

(in millions of Korean won)

  Valuation
gain
   Valuation
loss
   Valuation
gain
   Valuation
loss
   Valuation
gain
   Valuation
loss
 

Interest rate swap

  3    45        2          

Currency swap

   10,229                         8,395  

Currency forward

   294     180     118          499     6  

Other derivatives

   2,271     36               3,789     1,467  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  12,797    261    118    2    4,288    9,868  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The valuation gains and losses on financial instruments at fair value through the profit and loss for the years ended December 31, 2011, 2012 and 2013, are as follows:

(In millions of Korean won)

  2011   2012   2013 

Foreign currency translation gain

      199    42  

Gain on transactions

   112     547       

Gain on valuations

   273     135     309  
  

 

 

   

 

 

   

 

 

 

Total

  385    881    351  
  

 

 

   

 

 

   

 

 

 

The maximum exposure of debt securities of financial instruments at fair value through the profit and loss to credit risk is carrying value as of December 31, 2013.

Derivatives used for hedge as of December 31, 2012 and 2013, are as follows:

   2012   2013 

(in millions of Korean won)

  Assets   Liabilities   Assets   Liabilities 

Interest rate swap 1

      1,340        934  

Currency swap 2

   21,348     111,263     3,496     149,678  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   21,348     112,603     3,496     150,612  

Less: Non-current

   (21,348   (50,032   (3,496   (105,679
  

 

 

   

 

 

   

 

 

   

 

 

 

Current

      62,571        44,933  
  

 

 

   

 

 

   

 

 

   

 

 

 

1The interest rate swap contract is to hedge the risk of variability in future fair value of the bond (Note 16).

2The currency swap contract is to hedge the risk of variability in cash flow from the bond (Note 16). In applying the cash flow hedge accounting, the Company hedges its exposures to cash flow fluctuations until September 7, 2034.

The full value of a hedging derivative is classified as a non-current asset or liability if the remaining maturity of the hedged item is more than 12 months and, as a current asset or liability, if the maturity of the hedged item is less than 12 months.

The valuation gains and losses on the derivatives contracts for the years ended December 31, 2011, 2012 and 2013, are as follows:

(in millions of Korean
won)

 2011  2012  2013 

Type of Transaction

 Valuation
gain
  Valuation
loss
  Accumulated
other

comprehensive
income 1
  Valuation
gain
  Valuation
loss
  Accumulated
other

comprehensive
income 1
  Valuation
gain
  Valuation
loss
  Accumulated
other

comprehensive
income 1
 

Interest rate swap

       (135       (1,206       405  

Currency swap

  52,727    8,931    83,517        241,356    (169,361  127    97,289    (95,792
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 52,727   8,931   83,382      241,356   (170,567 127   97,289   (95,387
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

1The amounts before adjustments of deferred income tax directly reflected in equity and allocation to the non-controlling interest.

The ineffective portion recognized in profit or loss on the cash flow hedge is valuation loss of1,241 million for the current period (2011: valuation profit of2,714 million, 2012: valuation loss of29,183 million).

Details of available-for-sale financial assets as of December 31, 2012 and 2013, are as follows:

(In millions of Korean won)

  2012  2013 

Marketable equity securities

  49,156   55,347  

Non-marketable equity securities

   369,766    466,302  

Marketable debt securities

   4,935    25,211  

Non-marketable debt securities

   6,018    767  

Less: Non-current

   (424,814  (544,968
  

 

 

  

 

 

 

Current

  5,061   2,659  
  

 

 

  

 

 

 

Changes of available-for-sale financial assets for the years ended December 31, 2012 and 2013, are as follows:

(In millions of Korean won)

  2012  2013 

Beginning

  429,065   429,875  

Acquisition

   86,622    127,052  

Disposal

   (111,194  (66,917

Valuation 1

   31,599    65,670  

Impairment

   (3,401  (5,053

Reclassification

   (3,762  (3,000

Changes in scope of consolidation

   1,056      

Others

   (110    
  

 

 

  

 

 

 

Ending

  429,875   547,627  
  

 

 

  

 

 

 

1The amount before adjustment of deferred income tax directly reflected in equity and allocation to the non-controlling interest.

The maximum exposure of debt securities of available-for-sale financial assets to credit risk is carrying value as of December 31, 2013.

Available-for-sale financial assets are measured at fair value. However, non-marketable equity securities that do not have quoted market prices in an active market and the fair value of which cannot be reliably measured are recognized at cost and the impairment loss is recognized if any.

9.    Inventories

Inventories as of December 31, 2012 and 2013, are as follows:

   2012   2013 

(in millions of Korean won)

  Acquisition
cost
   Valuation
allowance
  Book
Value
   Acquisition
cost
   Valuation
allowance
  Book
Value
 

Merchandise

  702,249    (33,988 668,261    719,164    (122,919 596,245  

Goods in transit

   193,720         193,720     611         611  

Others

   73,326     (274  73,052     77,051     (289  76,762  
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Total

  969,295    (34,262 935,033    796,826    (123,208 673,618  
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Cost of inventories and valuation loss on inventory write-downs recognized as expenses amount to3,797,973 million (2011:4,530,779 million, 2012:4,568,286 million) and88,946 million, respectively, during the year (2011:23,877 million, 2012:23,931 million).

10.    Other Assets and Liabilities

Other assets and liabilities as of December 31, 2012 and 2013, are as follows:

(In millions of Korean won)

  2012  2013 

Other assets

   

Advance payments

  128,838   134,758  

Prepaid expenses

   244,771    258,387  

Others

   84,028    22,199  

Less: Non-current

   (95,178  (75,748
  

 

 

  

 

 

 

Current

  362,459   339,596  
  

 

 

  

 

 

 

Other liabilities

   

Advances received

  146,678   191,767  

Withholdings

   93,910    129,484  

Unearned revenue

   42,208    27,313  

Others

   1,035    1,512  

Less: Non-current

   (41,426  (2,000
  

 

 

  

 

 

 

Current

  242,405   348,076  
  

 

 

  

 

 

 

11.    Property and Equipment

The changes in property and equipment for the years ended December 31, 2012 and 2013, are as follows:

  2012 

(in millions of Korean won)

 Land  Buildings
and
structures
  Machinery
and
equipment
  Others  Construction-
in-progress
  Total 

Acquisition cost

 1,207,203   3,578,231   33,484,020   2,012,681   758,345   41,040,480  

Accumulated depreciation (including accumulated impairment loss and others)

  (132  (1,218,432  (24,259,715  (1,445,321  (26,886  (26,950,486
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at 2012.1.1

 1,207,071   2,359,799   9,224,305   567,360   731,459   14,089,994  

Acquisition

  9,554    4,582    151,698    447,717    3,253,263    3,866,814  

Disposal/Abandonment 1

  (17,200  (42,335  (65,727  (156,694  (12,065  (294,021

Depreciation

      (134,673  (2,389,952  (351,539      (2,876,164

Transfer in (out)

  16,049    82,700    2,922,815    121,294    (3,142,858    

Inclusion in scope of consolidation 2

  13,097    5,565    81    967,914    1,524    988,181  

Exclusion from scope of consolidation

          (63  (18      (81

Others

  14,685    (89,708  9,801    75,164    21,701    31,643  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at 2012.12.31

 1,243,256   2,185,930   9,852,958   1,671,198   853,024   15,806,366  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  2012 

(in millions of Korean won)

 Land  Buildings
and
structures
  Machinery
and
equipment
  Others  Construction-
in-progress
  Total 

Acquisition cost

 1,243,388   3,264,020   32,184,133   3,632,642   867,842   41,192,025  

Accumulated depreciation (including accumulated impairment loss and others)

  (132  (1,078,090  (22,331,175  (1,961,444  (14,818  (25,385,659

1Land and buildings disposed of in connection with the sale and leaseback transactions with AJU-KTM private funding real-estate investment trust No. 1 and K-REALTY CR-REIT 2 were included (Note 29).

2Operating lease of959,056 million with KT Rental is included in changes in scope of consolidation.

  2013 

(in millions of Korean won)

 Land  Buildings
and
structures
  Machinery
and
equipment
  Others  Construction-
in-progress
  Total 

Acquisition cost

 1,243,388   3,264,020   32,184,133   3,632,642   867,842   41,192,025  

Accumulated depreciation (including accumulated impairment loss and others)

  (132  (1,078,090  (22,331,175  (1,961,444  (14,818  (25,385,659
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at 2013.1.1

 1,243,256   2,185,930   9,852,958   1,671,198   853,024   15,806,366  

Acquisition

  2,718    14,178    417,218    1,051,278    2,843,801    4,329,193  

Disposal/Abandonment

  (3,297  (21,448  (173,102  (157,278  (283,677  (638,802

Depreciation

      (112,046  (2,428,859  (553,709      (3,094,614

Transfer in (out)

  9,671    12,544    2,188,686    104,024    (2,314,925    

Inclusion in scope of consolidation

  42    39    293    9        383  

Exclusion from scope of consolidation

      (379  (87  (348      (814

Others

  1,090    (18,848  36,618    (13,792  (19,816  (14,748
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at 2013.12.31

 1,253,480   2,059,970   9,893,725   2,101,382   1,078,407   16,386,964  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Acquisition cost

 1,253,612   3,270,339   32,103,084   4,232,627   1,092,155   41,951,817  

Accumulated depreciation (including accumulated impairment loss and others)

  (132  (1,210,369  (22,209,359  (2,131,245  (13,748  (25,564,853

Details of property, plant and equipment provided as collateral as of December 31, 2012 and 2013, are as follows:

   2012

(in millions of Korean won)

  Carrying
amount
   Secured
amount
   Related
line item
   Related
amount
   Secured
party

Buildings

  11,836    7,800     Borrowings     6,000    Shinhan Bank

Machinery and equipment

   48,232     12,439     Borrowings     10,411    Korea Exchange Bank

   2013

(in millions of Korean won)

  Carrying
amount
   Secured
amount
   Related
line item
   Related
amount
   Secured
party

Buildings

  11,356    7,800     Borrowings     6,000    Shinhan bank

Machinery and equipment

   37,248     2,786     Borrowings     2,322    Korea Exchange bank

The borrowing costs capitalized for qualifying assets amount to20,144 million (2011:14,675 million, 2012:12,126 million) in 2013. The interest rate applied to calculate the capitalized borrowing costs in 2013 is 3.95% to 4.44%. (2012: 4.46% to 4.89%).

12.    Investment Property

The changes in investment property for years ended December 31, 2012 and 2013, are as follows:

   2012 

(in millions of Korean won)

  Land  Buildings  Total 

Acquisition cost

  325,158   1,195,175   1,520,333  

Accumulated depreciation

       (361,228  (361,228
  

 

 

  

 

 

  

 

 

 

Beginning

  325,158   833,947   1,159,105  

Disposal 1

   (2,619  (70,024  (72,643

Depreciation

       (49,006  (49,006

Transfer

   12,908    104,849    117,757  
  

 

 

  

 

 

  

 

 

 

Ending

  335,447   819,766   1,155,213  
  

 

 

  

 

 

  

 

 

 

Acquisition cost

  335,447   1,022,454   1,357,901  

Accumulated depreciation

       (202,688  (202,688

1Land and buildings disposed of in connection with the sale and leaseback transactions with Aju-KTM private funding real estate investment trust No.1 and K-REALTY CR-REIT 2 were included.

   2013 

(in millions of Korean won)

  Land  Buildings  Construction-
in-progress
   Total 

Acquisition cost

  335,447   1,022,454       1,357,901  

Accumulated depreciation

       (202,688       (202,688
  

 

 

  

 

 

  

 

 

   

 

 

 

Beginning

  335,447   819,766       1,155,213  

Acquisition

   3,053    11,352    3,778     18,183  

Disposal

   (420  (7,657       (8,077

Depreciation

       (47,232       (47,232

Transfer

   (9,116  (3,476       (12,592
  

 

 

  

 

 

  

 

 

   

 

 

 

Ending

  328,964   772,753   3,778    1,105,495  
  

 

 

  

 

 

  

 

 

   

 

 

 

Acquisition cost

  328,964   1,015,079   3,778    1,347,821  

Accumulated depreciation

       (242,326       (242,326

The fair value of investment property is2,051,183 million as of December 31, 2013 (2012:2,335,642 million). The fair value of investment property is estimated based on the expected cash flow.

Rental income from investment property is197,673 million in 2013 (2011:150,752 million, 2012:203,328 million) and direct operating expenses (including repairs and maintenance) arising from investment property that generated rental income during the period are recognized as operating expenses.

Details of investment property provided as collaterals as of December 31, 2012 and 2013, are as follows:

   2012 

(in millions of Korean won)

  Carrying
amount
   Secured
amount
   

Collateral
for

  Amount of deposit
received
 

Buildings

  545,872    59,098    Deposits received  37,741  
   2013 

(in millions of Korean won)

  Carrying
amount
   Secured
amount
   

Collateral
for

  Amount of deposit
received
 

Land

  23,258    1,484    Deposits  31,727  

Buildings

   360,489     40,713    received  

13. Intangible Assets

The changes in intangible assets for the years ended December 31, 2012 and 2013, are as follows:

  2012 

(in millions of Korean won)

 Goodwill  Development
costs
  Software  Frequency
usage
rights
  Others  Total 

Acquisition cost

 457,144   1,069,158   555,808   1,783,508   886,785   4,752,403  

Accumulated amortization (including accumulated impairment loss and others)

  (7,749  (642,530  (331,169  (887,811  (238,549  (2,107,808
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at 2012.1.1

 449,395   426,628   224,639   895,697   648,236   2,644,595  

Acquisition1

      322,350    72,434    267,161    68,572    730,517  

Disposal /Abandonment

  (1,705  (612  (1,142      (4,413  (7,872

Amortization

      (127,237  (59,931  (118,500  (82,995  (388,663

Inclusion in scope of consolidation2

  150,337    9,341    1,176        77,035    237,889  

Exclusion in scope of consolidation

          (234          (234

Others

      (1,807  3,084        (3,871  (2,594
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at 2012.12.31

 598,027   628,663   240,026   1,044,358   702,564   3,213,638  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Acquisition cost

 605,776   1,393,089   614,069   1,924,869   1,013,046   5,550,849  

Accumulated amortization (including accumulated impairment loss and others)

  (7,749  (764,426  (374,043  (880,511  (310,482  (2,337,211

1The Company acquired 800MHz frequency and 2.3GHz frequency amortized over the life of usage rights using the straight-line method.

2As a result of additional acquisition of ownership interest in KT Rental, intangible assets such as the customer base measured at fair value in accordance with IFRS 3, “Business Combination”,are included (Note 37). These intangible assets were not recorded in the statements of financial position of KT Rental.
  2013 

(in millions of Korean won)

 Goodwill  Development
costs
  Software  Frequency
usage
rights
  Others  Total 

Acquisition cost

 605,776   1,393,089   614,069   1,924,869   1,013,046   5,550,849  

Accumulated amortization (including accumulated impairment loss and others)

  (7,749  (764,426  (374,043  (880,511  (310,482  (2,337,211
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at 2013.1.1

 598,027   628,663   240,026   1,044,358   702,564   3,213,638  

Acquisition 1

  9,272    137,420    87,898    844,462    125,563    1,204,615  

Disposal / Abandonment

      (57,956  (5,645      (7,617  (71,218

Amortization

      (155,280  (61,413  (161,226  (100,983  (478,902

Impairment

  (12,954  (4,743  (1,019      (17,490  (36,206

Inclusion in scope of consolidation 2

          501            501  

Exclusion in scope of consolidation

                        

Others

  (2,006  (30  1,968    (388  (4,579  (5,035
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at 2013.12.31

 592,339   548,074   262,316   1,727,206   697,458   3,827,393  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Acquisition cost

 610,715   1,359,478   681,176   2,768,943   1,100,540   6,520,852  

Accumulated amortization (including accumulated impairment loss and others)

  (18,376  (811,404  (418,860  (1,041,737  (403,082  (2,693,459

1The Company had acquired the 1.8GHz frequency amortized using the straight-line method.

The carrying value of facility usage rights with indefinite useful life not subject to amortization is150,654 million (2012:160,299 million) as of December 31, 2013.

Goodwill is allocated to the Group’s cash-generating unit. As of December 31, 2013, goodwill allocated to each cash-generation unit is as follows:

(in millions of Korean won)

Telecom wireless business & Convergence/Customer1

65,057

Finance and Rental

KT Rental2

131,426

BC Card Co., Ltd.3

41,234

Others

KT Skylife Co., Ltd.4

306,303

KT Powertel Co., Ltd. and others

48,319

Total

592,339

1The recoverable amounts of mobile business are calculated based on value-in use calculations. These calculations use pre-tax cash flow projections for the next four years based on financial budgets approved by management. Cash flow exceeds the financial budgets are estimated by the expected growth rate. This growth rate does not exceed the long-term average growth rate of the industry which the cash-generate unit belongs in. The Company estimated its revenue growth rate based on past performance and its expectation of future market changes. The Company determined pre-tax cash flow projections based on past performance and its estimation of market growth. Specific risks of the related operating segment are reflected in its discount rate. As a result of the impairment test, there is no impairment loss on goodwill allocated to the mobile business as of December 31, 2013.

2The recoverable amounts of KT Rental are calculated based on value-in use calculations. These calculations use pre-tax cash flow projections for the next five years based on financial budgets approved by management. Cash flow exceeds the financial budgets are projected by expected growth rate. This growth rate does not exceed the long-term average growth rate of the industry which the cash-generating unit belongs in. The Company estimated its revenue growth rate based on past performance and its expectation of future market changes. The Company determined pre-tax cash flow projections based on past performance and its estimation of market growth. Specific risks of the related operating segment are reflected in its discount rate. As a result of the impairment test, there is no impairment loss on goodwill allocated to KT Rental as of December 31, 2013.

3The recoverable amounts of BC Card Co., Ltd. are calculated based on value-in use calculations. These calculations use pre-tax cash flow projections for the next five years based on financial budgets approved by management. Cash flow exceeds the financial budgets are projected by expected growth rate. This growth rate does not exceed the long-term average growth rate of the industry which the cash-generating unit belongs in. The Company estimated its revenue growth rate based on past performance and its expectation of future market changes. The Company determined pre-tax cash flow projections based on past performance and its estimation of market growth. Specific risks of the related operating segment are reflected in its discount rate. As a result of the impairment test, there is no impairment loss on goodwill allocated to BC Card as of December 31, 2013.

4The recoverable amounts of KT Skylife Co., Ltd. are determined based on fair value of KT Skylife less costs to sell. As a result of the impairment test based on the determined recoverable amounts, there is no impairment loss on goodwill allocated to KT Skylife as of December 31, 2013.

As a result of the impairment test, the Group recognized the impairment losses of12,954 million on goodwill allocated to Enswers Inc. and others and recognized the losses as operating expenses in the consolidated statement of the income. The Group considers that the carrying value of other cash generating units does not exceed the recoverable amount of the CGUs.

14.    Investments in Associates and Jointly Controlled Entities

Details of associates as of December 31, 2013, are as follows:

(a) Associates

Company

  Percentage of
ownership (%)
  

Location

  

Date of financial
statements

  Remarks 
  2012  2013      

KTCS Corporation 1

   17.8  17.8 Korea  December 31   1  

KTIS Corporation 1

   17.8  17.8 Korea  December 31   1  

Company

  Percentage of
ownership (%)
  

Location

  

Date of financial
statements

  Remarks 
  2012  2013      

Korea Information & Technology Fund

   33.3  33.3 Korea  December 31  

KT-SB Venture Investment 2

   50.0  50.0 Korea  December 31  

Boston Global Film & Contents Fund L.P

   27.7  27.7 Korea  December 31   2  

Mongolian Telecommunications

   40.0  40.0 Mongolia  December 31  

Metropol Property LLC

   34.0  34.0 Uzbekistan  December 31  

KT Wibro Infra Co., Ltd.

   26.2  26.2 Korea  December 31  

QTT Global (Group) Company Limited

   25.0  25.0 China  December 31  

1KTCS Corporation and KTIS Corporation provide telephone number directory enquiries services. At the end of the reporting period, even though the Group has less than 20% ownership, the equity method of accounting has been applied as it is considered that the Group has significant influence over the operating and financial policies of these entities.

2At the end of the reporting period, even though the Group has 50% ownership, the equity method of accounting has been applied as the Group, which is a limited partner in the investment fund, cannot participate in determining the operating and financial policies.

The changes in investments in associates and jointly controlled entities for the years ended December 31, 2012 and 2013, are as follows:

  2012 

(in millions of Korean won)

 Beginning  Acquisition
(Disposal)
  Reclassification  Share of income (loss)
from jointly controlled
entities and associates
 1
  Other  Ending 

KT Rental 2

 175,235      (179,719 9,370   (4,886   

KTCS Corporation

  20,327            1,456    1    21,784  

KTIS Corporation

  21,088            782        21,870  

Korea Information & Technology Fund

  119,492            1,621        121,113  

KT-SB Venture Investment

  12,643            (258      12,385  

Boston Global Film & Contents Fund L.P

  7,535            (633      6,902  

Mongolian Telecommunications

  11,232            232    (1,465  9,999  

Metropol Property LLC

  1,746            37        1,783  

KT Wibro Infra Co., Ltd.

  66,206            534    1    66,741  

SMART CHANNEL Co., Ltd.

  2,748            (2,748        

KTF-CJ Music Contents Investment Fund 3

  5,038            14        5,052  

QTT Global (Group) Company Limited

      12,746        203        12,949  

Others

  56,707    38,540        13,698    (10,028  98,917  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 499,997   51,286   (179,719 24,308   16,377   379,495  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

1KT Capital Co., Ltd., a subsidiary of the Company, recognizes its share in income (loss) from jointly controlled entities and associates as operating revenue and expense. These include its share in income from jointly controlled entities and associates of4,155 million (2011:2,701 million, 2012:6,591 million) recognized as operating revenue and the share in loss from jointly controlled entities and associates of534 million (2011:136 million , 2012:362 million) recognized as operating expense.

2The Company had joint control over the entity until December 31, 2011, based on an agreement among the shareholders and classified the related investments as investments in joint ventures. However, during 2012, the restriction on controlling power of the Company under the shareholders’ agreement between the Company and the second major shareholder was lifted, and therefore KT rental became a subsidiary (Note 37),

   2013 

(in millions of Korean won)

  Beginning   Acquisition
(Disposal)
  Share of income (loss)
from jointly controlled
entities and associates
 1
  Other  Ending 

KTCS Corporation

  21,784       2,702   (2,306 22,180  

KTIS Corporation

   21,870         2,511    (1,053  23,328  

Korea Information & Technology Fund

   121,113         2,910    (241  123,782  

KT-SB Venture Investment

   12,385     3,750    216    (421  15,930  

Boston Global Film & Contents Fund L.P

   6,902         94        6,996  

Mongolian Telecommunications

   9,999         172    (1,475  8,696  

Metropol Property LLC

   1,783         558    (982  1,359  

KT Wibro Infra Co., Ltd.

   66,741         812        67,553  

KTF-CJ Music Contents Investment Fund

   5,052     (3,561  (1,491        

QTT Global (Group) Company Limited

   12,949         121    45    13,115  

KT-CKP new media Investment Fund

        2,250    (73      2,177  

Others

   98,917     (9,188  1,690    (12,632  78,787  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 
  379,495    (6,749 10,222   (19,065 363,903  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

The summary of financial information of associates and joint ventures as of and for the years ended December 31, 2012 and 2013, follows:

   2012 

(In millions of Korean won)

  Current assets   Non-current
assets
   Current liabilities   Non-current
liabilities
 

KTCS Corporation

  145,616    34,224    55,562    1,748  

KTIS Corporation

   141,634     37,076     50,387     5,287  

Korea Information & Technology Fund

   195,164     168,182     6       

KT-SB Venture Investment

   4,898     20,411     538       

Boston Global Film & Contents Fund L.P.

   18,004     6,925     6       

Mongolian Telecommunications

   16,675     15,707     7,383       

Metropol Property LLC

   2,665          491       

KT Wibro Infra Co., Ltd

   135,638     123,727     4,772     30  

K-Realty CR-REITs No.1

   13,376     488,177     3,739     294,281  

Others

   140,956     312,872     130,740     59,479  
  

 

 

   

 

 

   

 

 

   

 

 

 
  814,626    1,207,301    253,624    360,825  
  

 

 

   

 

 

   

 

 

   

 

 

 

    2012 

(In millions of Korean won)

  Operating
revenue
   Net profit
(loss)
  Other
comprehensive
income
  Total
comprehensive
income
  Dividends
received from
associates
 

KTCS Corporation

  384,165    17,714   (1,041 16,673   407  

KTIS Corporation

   388,370     17,535    (340  17,195    310  

Korea Information & Technology Fund

   19,444     5,820        5,820    208  

KT-SB Venture Investment

   141     (384      (384    

Boston Global Film & Contents Fund L.P.

   762     (2,284      (2,284    

Mongolian Telecommunications

   17,058     342    23    365    120  

Metropol Property LLC

   747     224    3    227      

KT Wibro Infra Co., Ltd

   2,084     2,700        2,700      

K-Realty CR-REITs No.1

   36,912     12,280        12,280    1,142  

Others

   445,690     2,997    92    3,089    5,981  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 
  1,295,373    56,944   (1,263 55,681   8,168  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

    2013 

(In millions of Korean won)

  Current assets   Non-current
assets
   Current liabilities   Non-current
liabilities
 

KTCS Corporation

  130,585    50,403    54,115    2,061  

KTIS Corporation

   140,119     41,733     48,636     2,124  

Korea Information & Technology Fund

   132,143     239,203            

KT-SB Venture Investment

   5,578     26,964     682       

Boston Global Film & Contents Fund L.P.

   12,905     12,504     147       

Mongolian Telecommunications

   14,670     12,869     5,798       

Metropol Property LLC

   4,267          3,340       

KT Wibro Infra Co., Ltd

   159,309     103,401     5,004     45  

K-Realty CR-REITs No.1

   11,620     484,204     3,534     294,474  

Others

   126,914     293,899     122,742     62,038  
  

 

 

   

 

 

   

 

 

   

 

 

 
  738,110    1,265,180    243,998    360,742  
  

 

 

   

 

 

   

 

 

   

 

 

 

    2013 

(In millions of Korean won)

  Operating
revenue
   Net profit
(loss)
  Other
comprehensive
income
  Total
comprehensive
income
  Dividends
received from
associates
 

KTCS Corporation

  396,212    14,480   (4,293 10,187   813  

KTIS Corporation

   387,720     13,573    (3,274  10,299    620  

Korea Information & Technology Fund

   17,345     8,730        8,730      

KT-SB Venture Investment

   370     637        637    421  

Boston Global Film & Contents Fund L.P.

   513     339        339      

Mongolian Telecommunications

   10,877     447    (42  405    23  

Metropol Property LLC

   502     133    6    139    911  

KT Wibro Infra Co., Ltd

   1,660     3,169        3,169      

K-Realty CR-REITs No.1

   39,064     11,091        11,091    2,521  

Others

   395,534     (4,589  (336  (4,925  5,292  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 
  1,249,797    48,010   (7,939 40,071   10,601  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Details of a reconciliation of the summarized financial information to the carrying amount of interests in the associates and joint ventures as of and for the years end December 31, 2012 and 2013, are as follows:

  2012 

(in millions of Korean won)

 Net assets  Percentage of
ownership
  Share in net
assets
  Goodwill  Intercompany
transaction
  Book value 

KTCS Corporation

 122,530    17.8 21,811      (27 21,784  

KTIS Corporation 2

  123,036    17.8  21,906        (36  21,870  

Korea Information & Technology Fund

  363,340    33.3  121,113            121,113  

KT-SB Venture Investment 3

  24,771    50.0  12,385            12,385  

Boston Global Film & Contents Fund L.P

  24,923    27.7  6,902            6,902  

Mongolian Telecommunications

  24,999    40.0  9,999            9,999  

Metropol Property LLC

  2,174    34.0  739    1,044        1,783  

KT Wibro Infra Co., Ltd.

  254,563    26.2  66,741            66,741  
  2013 

(in millions of Korean won)

 Net assets  Percentage of
ownership
  Share in net
assets
  Goodwill  Intercompany
transaction
  Book value 

KTCS Corporation

 124,812    17.8 22,217      (37 22,180  

KTIS Corporation

  131,092    17.8  23,340        (12  23,328  

Korea Information & Technology Fund

  371,346    33.3  123,782            123,782  

KT-SB Venture Investment 3

  31,860    50.0  15,930            15,930  

Boston Global Film & Contents Fund L.P

  25,262    27.7  6,996            6,996  

Mongolian Telecommunications

  21,741    40.0  8,696            8,696  

Metropol Property LLC

  927    34.0  315    1,044        1,359  

KT Wibro Infra Co., Ltd.

  257,661    26.2  67,553            67,553  

Marketable investments in associates and joint ventures as of December 31, 2012 and 2013, are as follows:

   2012 
   Number of
shares
   Book Value
(In millions of
Korean won)
   Fair Value
(In millions of
Korean won)
 

KTCS Corporation

   8,132,130     21,784     18,623  

KTIS Corporation

   6,196,190     21,870     19,518  

Mongolian Telecommunications

   10,348,111     9,999     14,741  

   2013 
   Number of
shares
   Book Value
(In millions of
Korean won)
   Fair Value
(In millions of
Korean won)
 

KTCS Corporation

   8,132,130     22,180     28,218  

KTIS Corporation

   6,196,190     23,328     31,539  

Mongolian Telecommunications

   10,348,111     8,696     10,083  

The Group has not recognized loss from associates and jointly controlled entities of17,428 million for the year (2011:5,633 million, 2012:7,308 million). The accumulated comprehensive loss of joint ventures and associates as of December 31, 2013, which was not recognized by the Group is39,571 million (2011:15,490 million, 2012:22,143 million).

The following equity securities owned by the Company are pledged as collateral for the investee’s borrowings:

(In millions of Korean won)

Investee

Amount

Investments in associate

Smart Channel Co., Ltd.6,500

15.    Trade and other payables

The Group’s trade and other payables as of December 31, 2012 and 2013, are as follows:

(In millions of Korean won)

  2012   2013 

Current liabilities

    

Trade payables

  1,822,895    1,716,686  

Other payables

   5,398,407     5,697,137  
  

 

 

   

 

 

 

Total

  7,221,302    7,413,823  
  

 

 

   

 

 

 

Non-current liabilities

    

Trade payables

  10,696    10,430  

Other payables

   690,664     1,048,454  
  

 

 

   

 

 

 

Total

  701,360    1,058,884  
  

 

 

   

 

 

 

Details of other payables as of December 31, 2012 and 2013, are as follows:

(In millions of Korean won)

  2012  2013 

Non-trade payables 1

  3,969,065   4,469,781  

Accrued expenses

   772,013    937,307  

Operating deposits

   880,895    863,494  

Other

   467,098    475,009  

Less: non-current

   (690,664  (1,048,454
  

 

 

  

 

 

 

Current

  5,398,407   5,697,137  
  

 

 

  

 

 

 

1Settlement payables of BC Card Co., Ltd. of1,725,396 million related to credit card transaction included as of December 31, 2013 (2012:1,519,242 million).

16.    Bonds Payable and Borrowings

Details of bonds payable and long-term borrowings as of December 31, 2012 and 2013, are as follows:

Bonds Payable

 

(In millions of Korean won and
thousands of foreign currencies)

         2010.12.31   2009.12.31 

Type

  Maturity   

Annual
Interest
Rates

  Foreign
Currency
   Korean
Won
   Foreign
Currency
   Korean
Won
 
     

MTNP notes1

   2014.6.24    5.88%   USD 600,000    (Won)683,340     USD 600,000    (Won)700,560  

MTNP notes1

   2034.9.7    6.50%   USD 100,000     113,890     USD 100,000     116,760  

MTNP notes1

   2015.7.15    4.88%   USD 400,000     455,560     USD 400,000     467,040  

MTNP notes1

   2016.5.3    5.88%   USD 200,000     227,780     USD 200,000     233,520  

Euro bonds

   2012.4.11    5.13%   USD 200,000     227,780     USD 200,000     233,520  

FR notes2

   2013.9.11    

Libor(3M)

+1.5%

   USD 200,000     227,780     USD 200,000     233,520  

FR notes2

   2013.4.9    

Libor(3M)

+0.47%

   USD 100,000     113,890            

The 132nd Public bond

   2011.2.9    7.68%        70,000          70,000  

The 159th Public bond

   2013.10.27    5.39%        300,000          300,000  

The 160th Public bond

   2010.11.24    5.45%                  200,000  

The 161st Public bond

   2010.12.23    5.61%                  230,000  

The 162nd Public bond

   2011.2.27    5.52%        320,000          320,000  

The 163rd Public bond

   2014.3.30    5.51%        170,000          170,000  

The 164th Public bond

   2011.6.21    5.22%        260,000          260,000  

The 165-1st Public bond

   2011.8.26    4.22%        130,000          130,000  

The 165-2nd Public bond

   2014.8.26    4.44%        140,000          140,000  

The 166-1st Public bond

   2010.3.21    4.37%                  220,000  

The 166-2nd Public bond

   2012.3.21    4.57%        100,000          100,000  

The 167-1st Public bond

   2012.4.20    4.59%        100,000          100,000  

The 167-2nd Public bond

   2015.4.20    4.84%        100,000          100,000  

The 168-1st Public bond

   2012.6.21    4.43%        240,000          240,000  

The 168-2nd Public bond

   2015.6.21    4.66%        90,000          90,000  

The 169th Public bond

   2012.4.3    5.01%        140,000          140,000  

The 170th Public bond2

   2011.1.11    

Tibor(3M)

+0.6%

   JPY12,500,000     174,635     JPY12,500,000     157,853  

The 171st Public bond

   2013.2.28    5.41%        100,000          100,000  

The 172-1st Public bond2

   2011.3.31    

Libor(3M)

+1.5%

   USD 50,000     56,945     USD 50,000     58,380  

The 172-2nd Public bond2

   2012.3.31    

Libor(3M)

+1.6%

   USD 110,000     125,279     USD 110,000     128,436  

The 173-1st Public bond

   2013.8.6    6.49%        100,000          100,000  

The 173-2nd Public bond

   2018.8.6    6.62%        100,000          100,000  

The 174-1st Public bond

   2010.12.19    5.34%                  100,000  

The 174-2nd Public bond

   2011.12.19    5.56%        130,000          130,000  

The 175-1st Public bond

   2012.2.27    4.80%        40,000          40,000  

The 175-2nd Public bond

   2014.2.27    5.47%        360,000          360,000  

The 176-1st Public bond

   2012.5.28    4.37%        100,000          100,000  

The 176-2nd Public bond

   2014.5.28    5.06%        170,000          170,000  

The 176-3rd Public bond

   2016.5.28    5.24%        260,000          260,000  

The 177-1st Public bond

   2013.2.9    4.86%        240,000            

The 177-2nd Public bond

   2015.2.9    5.26%        190,000            

The 177-3rd Public bond

   2017.2.9    5.38%        170,000            

The 47-2nd Public bond

   2011.7.12    5.32%        70,000          70,000  

The 48th Public bond

   2010.2.15    5.31%                  200,000  

The 49th Public bond2

   2011.2.25    

Libor(3M)

+1.5%

   USD 175,000     199,308     USD 175,000     204,330  

The 50th Public bond2

   2011.4.28    

Tibor(3M)

+1.6%

   JPY 7,000,000     97,796     JPY 7,000,000     88,397  

The 51-1st Public bond2

   2011.6.20    

Libor(3M)

+1.6%

   USD 95,000     108,196     USD 95,000     110,922  

(in millions of Korean won and

thousands of foreign currencies)

    2012  2013 

Type

 Maturity Annual interest
rates
  Foreign
currency
  Korean won  Foreign
currency
  Korean won 

MTNP notes 1

 Jun 24, 2014  5.88 USD600,000      642,660   USD600,000      633,180  

MTNP notes 1

 Sep 07, 2034  6.50 USD100,000    107,110   USD100,000    105,530  

MTNP notes 1

 Jul 15, 2015  4.88 USD400,000    428,440   USD400,000    422,120  

MTNP notes 1

 May 03, 2016  5.88 USD200,000    214,220   USD200,000    211,060  

Reg S bonds

 Jan 20, 2017  3.88 USD350,000    374,885   USD350,000    369,355  

FR notes

 Sep 11, 2013  LIBOR(3M) +1.50 USD200,000    214,220          

FR notes 2

 Apr 9, 2013  LIBOR(3M) +0.47 USD100,000    107,110          

FR notes 2

 Jan 25, 2013  1.58 JPY35,000,000    436,625          

FR notes

 Aug 28, 2018  LIBOR(3M) +1.15         USD300,000    316,590  

Japanese yen bonds

 Jan 29, 2015  0.59         JPY5,000,000    50,233  

Japanese yen bonds

 Jan 29, 2016  0.70         JPY18,200,000    182,848  

Japanese yen bonds

 Jan 29, 2018  0.86         JPY6,800,000    68,317  

The 159th Public bond

 Oct 27, 2013  5.39      300,000          

The 163rd Public bond

 Mar 30, 2014  5.51      170,000        170,000  

The 165-2nd Public bond

 Aug 26, 2014  4.44      140,000        140,000  

The 167-2nd Public bond

 Apr 20, 2015  4.84      100,000        100,000  

The 168-2nd Public bond

 Jun 21, 2015  4.66      90,000        90,000  

The 171st Public bond

 Feb 28, 2013  5.41      100,000          

The 173-1st Public bond

 Aug 6, 2013  6.49      100,000          

The 173-2nd Public bond

 Aug 06, 2018  6.62      100,000        100,000  

The 175-2nd Public bond

 Feb 27, 2014  5.47      360,000        360,000  

The 176-2nd Public bond

 May 28, 2014  5.06      170,000        170,000  

The 176-3rd Public bond

 May 28, 2016  5.24      260,000        260,000  

The 177-1st Public bond

 Feb 9, 2013  4.86      240,000          

The 177-2nd Public bond

 Feb 09, 2015  5.26      190,000        190,000  

The 177-3rd Public bond

 Feb 09, 2017  5.38      170,000        170,000  

The 178-1st Public bond 2

 Jan 18, 2013  LIBOR(3M) +1.05 USD100,000    107,110          

The 178-2nd Public bond 2

 Jan 17, 2014  LIBOR(3M) +1.05 USD100,000    107,110   USD100,000    105,530  

The 179th Public bond

 Mar 29, 2018  4.47      260,000        260,000  

The 180-1st Public bond

 Apr 26, 2016  4.35      210,000        210,000  

The 180-2nd Public bond

 Apr 26, 2021  4.71      380,000        380,000  

The 181-1st Public bond

 Aug 26, 2016  3.94      260,000        260,000  

The 181-2nd Public bond

 Aug 26, 2018  3.99      90,000        90,000  

The 181-3rd Public bond

 Aug 26, 2021  4.09      250,000        250,000  

The 182-1st Public bond

 Oct 28, 2016  4.11      320,000        320,000  

The 182-2nd Public bond

 Oct 28, 2021  4.31      100,000        100,000  

The 183-1st Public bond

 Dec 22, 2016  3.81      50,000        50,000  

The 183-2nd Public bond

 Dec 22, 2021  4.09      90,000        90,000  

The 183-3rd Public bond

 Dec 22, 2031  4.27      160,000        160,000  

The 184-1st Public bond

 Apr 10, 2018  2.74              120,000  

The 184-2nd Public bond

 Apr 10, 2023  2.95              190,000  

The 184-3rd Public bond

 Apr 10, 2033  3.17              100,000  

The 185-1st Public bond

 Sep 16, 2018  3.46              200,000  

The 185-2nd Public bond

 Sep 16, 2020  3.65              300,000  

The 51-2nd Public bond

 Jun 20,2013  6.41      70,000          

The 52-2nd Public bond

 Oct 4, 2013  6.64      100,000          

The 26th Public bond

 Apr 19, 2013  5.15      10,000          

The 27th Public bond

 Jul 25, 2014  5.04      5,000        5,000  

The 17-3rd Public bond

 May 30, 2013  7.14      50,000          

The 18-4th Public bond

 Jun 23, 2013  7.55      10,000          

The 32-2nd Public bond

 Jan 22, 2013  5.95      50,000          

(In millions of Korean won and thousands of
foreign currencies)

         2010.12.31   2009.12.31 

Type

  Maturity   

Annual
Interest
Rates

  Foreign
Currency
   Korean
Won
   Foreign
Currency
   Korean
Won
 
     

The 51-2nd Public bond

   2013.6.20    6.41%        70,000          70,000  

The 52-1st Private bond

   2011.8.4    6.20%        100,000          100,000  

The 52-2nd Public bond

   2013.8.4    6.64%        100,000          100,000  

The 53-1st Public bond

   2010.12.1    8.23%                  20,000  

The 53-2nd Public bond

   2011.12.1    8.36%        181,212          180,023  

Public bond

   2010. 4.17    5.29%                  10,000  

Public bond

   2011.7.24    6.82%        5,000          5,000  

Public bond

   2013.4.19    5.15%        10,000            

Public bond(19-2nd)

   2010.5.10    4.69%                  10,000  

The 10th Public bond

   2010.6.18    5.70%                  40,000  

The 11th Private bond

   2010.12.6    6.85%                  20,000  

The 12th Public bond

   2011.5.23    6.39%        20,000          20,000  

The 13-2nd Public bond

   2010.4.2    8.30%                  10,000  

The 14th Public bond

   2012.1.8    8.90%        30,000          30,000  

The 15th Public bond

   2011.10.26    5.70%        30,000          30,000  

The 16th Public bond

   2012.11.27    5.85%        30,000          30,000  

The 17-1st Public bond

   2012.3.11    5.20%        10,000            

The 18-1st Public bond

   2012.4.9    4.50%        10,000            

The 18-2nd Public bond

   2013.4.9    5.04%        70,000            

The 17-2nd Public bond

   2013.3.11    5.62%        30,000            

The 1-2nd Public bond

   2011.2.6    8.74%        20,000            

The 3rd Public bond

   2012.6.22    6.89%        100,000            

The 1th Private bond

   2010.3.16    5.80%                  30,000  

The 2nd Private bond

   2010.4.16    5.94%                  20,000  

The 4th Public bond

   2010.5.30    5.70%                  40,000  

The 5th Private bond

   2010.6.29    5.67%                  20,000  

The 6-2nd Public bond

   2010.8.3    5.72%                  30,000  

The 7-2nd Public bond

   2010.8.31    6.05%                  20,000  

The 8th Private bond

   2010.9.28    6.26%                  30,000  

The 9-2nd Public bond

   2010.10.18    6.44%                  20,000  

The 11th Public bond

   2010.12.27    

CD(91D)

+1.39%

                  20,000  

The 13-1st Public bond

   2010.2.21    6.33%                  30,000  

The 13-2nd Public bond

   2011.2.21    6.48%        30,000          30,000  

The 14-1st Public bond

   2010.3.28    6.37%                  10,000  

The 14-2nd Public bond

   2011.3.28    6.47%        10,000          10,000  

The 15th Private bond

   2010.4.21    

MOR(3M)

+1.28%

                  20,000  

The 16-1st Public bond

   2010.1.30    6.33%                  60,000  

The 16-2nd Public bond

   2011.4.30    6.46%        10,000          10,000  

The 17-3rd Public bond

   2013.5.30    7.14%        50,000          50,000  

The 18-2nd Public bond

   2010.6.23    7.12%                  40,000  

The 18-3rd Public bond

   2011.6.23    7.22%        20,000          20,000  

The 18-4th Public bond

   2013.6.23    7.55%        10,000          10,000  

The 19-2nd Public bond

   2010.3.11    7.80%                  10,000  

The 19-3rd Public bond

   2010.9.11    7.93%                  20,000  

The 19-4th Public bond

   2010.9.11    

CD(91D)

+1.95%

                  10,000  

The 22-1st Public bond

   2010.7.23    8.70%                  10,000  

The 22-2nd Public bond

   2011.1.23    8.75%        35,000          35,000  

The 22-3rd Public bond

   2012.1.23    8.95%        25,000          25,000  

The 23rd Public bond

   2011.5.29    5.35%        20,000          20,000  

The 24th Public bond

   2012.6.29    6.28%        30,000          30,000  

The 25-1st Public bond

   2011.7.30    6.20%        20,000          20,000  

The 25-2nd Public bond

   2012.7.30    5.75%        25,000          25,000  

The 26th Public bond

   2012.8.27    6.33%        50,000          50,000  

(in millions of Korean won and

thousands of foreign currencies)

    2012  2013 

Type

 Maturity Annual interest
rates
  Foreign
currency
  Korean won  Foreign
currency
  Korean won 

The 32-3rd Public bond

 Jan 22, 2015  6.70      30,000        30,000  

The 33rd Public bond

 Feb 11, 2015  6.45      50,000        50,000  

The 34-2nd Public bond

 Feb 26, 2013  5.60      10,000          

The 35-2nd Public bond

 Mar 22, 2013  5.05      30,000          

The 36-2nd Public bond

 Apr 30, 2013  4.75      30,000          

The 36-3rd Public bond

 Apr 30, 2015  5.65      20,000        20,000  

The 37-3rd Public bond

 Jun 30, 2013  5.45      20,000          

The 37-4th Public bond

 June 30, 2014  5.85      10,000        10,000  

The 38-3rd Public bond

 Jul 19, 2014  5.85      10,000        10,000  

The 39th Public bond

 Jul 30, 2013  5.35      30,000          

The 40-2nd Public bond

 Aug 10, 2013  5.33      20,000          

The 40-3rd Public bond

 Aug 10, 2015  5.95      20,000        20,000  

The 41-2nd Public bond

 Sep 17, 2013  4.63      20,000          

The 41-3rd Public bond

 Sep 17, 2014  5.10      10,000        10,000  

The 42-1st Public bond

 Nov 22, 2013  4.62      30,000          

The 42-2nd Public bond

 Nov 22, 2014  5.10      20,000        20,000  

The 42-3rd Public bond

 Nov 22, 2015  5.44      10,000        10,000  

The 43-1st Public bond

 Jan 28, 2014  5.05      40,000        40,000  

The 43-2nd Public bond

 Jan 28, 2015  5.32      10,000        10,000  

The 43-3rd Public bond

 Jan 28, 2016  5.75      30,000        30,000  

The 44-2nd Public bond

 Apr 28, 2013  4.53      30,000          

The 44-3rd Public bond

 Oct 28, 2013  4.76      20,000          

The 45th Private bond

 May 18, 2014  4.80      30,000        30,000  

The 46-1st Public bond

 Feb 26, 2013  4.10      20,000          

The 46-2nd Public bond

 May 26, 2014  4.50      40,000        40,000  

The 46-3rd Public bond

 May 26, 2015  4.71      20,000        20,000  

The 46-4th Public bond

 May 26, 2016  4.90      20,000        20,000  

The 47th Public bond

 Jun 23, 2014  4.50      30,000        30,000  

The 48th Public bond

 Aug 11, 2016  4.71      10,000        10,000  

The 49th Public bond

 Aug 23, 2014  CD(91D) +0.93      20,000        20,000  

The 50-1st Public bond

 Mar 21, 2013  4.30      20,000          

The 50-2nd Public bond

 Sep 21, 2016  4.87      5,000        5,000  

The 51-1st Public bond

 Sep 30, 2014  4.69      10,000        10,000  

The 51-2nd Public bond

 Sep 30, 2016  4.92      20,000        20,000  

The 52-1st Public bond

 Oct 11, 2013  4.49      10,000          

The 52-2nd Public bond

 Oct 11, 2014  CD(91D) +1.10      10,000        10,000  

The 53rd Public bond

 Oct 17, 2013  4.39      20,000          

The 54th Public bond

 Oct 28, 2014  4.64      10,000        10,000  

The 55-1st Public bond

 Nov 16, 2014  4.46      40,000        40,000  

The 55-2nd Public bond

 Nov 16, 2015  4.56      20,000        20,000  

The 55-3rd Public bond

 Nov 16, 2016  4.74      5,000        5,000  

The 56th Public bond

 Dec 13, 2014  4.18      35,000        35,000  

The 57-1st Public bond

 Oct 05, 2014  CD(91D) +0.87      50,000        50,000  

The 57-2nd Public bond

 Jan 05, 2016  4.44      20,000        20,000  

The 57-3rd Public bond

 Jan 05, 2017  4.61      30,000        30,000  

The 58-1st Public bond

 Jul 10, 2014  4.27      30,000        30,000  

The 58-2nd Public bond

 Jul 10, 2015  4.37      20,000        20,000  

The 59-1st Public bond

 May 25, 2015  3.78      20,000        20,000  

The 59-2nd Public bond

 May 25, 2016  3.87      20,000        20,000  

The 59-3rd Public bond

 May 25, 2017  4.03      40,000        40,000  

The 60th Public bond

 Jul 13, 2015  CD(91D) +0.39      40,000        40,000  

The 61st Public bond

 Sep 22, 2017  3.65      45,000        45,000  

The 62-1st Public bond

 Aug 27, 2015  3.19      20,000        20,000  

The 62-2nd Public bond

 Oct 11, 2017  3.43      50,000        50,000  

The 63rd Public bond

 Sep 27, 2017  3.44      40,000        40,000  

The 64-1st Public bond

 Oct 29, 2015  3.26      20,000        20,000  

The 64-2nd Public bond

 Dec 21, 2017  3.46      50,000        50,000  

The 65th Public bond

 Mar 22, 2018  3.47      55,000        55,000  

(In millions of Korean won and thousands of
foreign currencies)

      2010.12.31  2009.12.31 

Type

 Maturity  

Annual
Interest
Rates

 Foreign
Currency
  Korean
Won
  Foreign
Currency
  Korean
Won
 

The 27th Private bond

  2012.9.4   6.33%      10,000        10,000  

The 28-1st Public bond

  2011.11.12   5.70%      20,000        20,000  

The 28-2nd Public bond

  2012.11.12   6.08%      30,000        30,000  

The 29-1st Public bond

  2011.11.30   5.60%      10,000        10,000  

The 29-2nd Public bond

  2012.11.30   6.00%      40,000        40,000  

The 30-1st Public bond

  2011.6.23   5.30%      10,000        10,000  

The 30-2nd Public bond

  2011.12.23   5.60%      10,000        10,000  

The 30-3rd Public bond

  2012.12.23   5.95%      10,000        10,000  

The 31st Public bond

  2012.12.31   5.98%      10,000        10,000  

The 32-1st Public bond

  2012.1.22   5.65%      10,000          

The 32-2nd Public bond

  2013.1.22   5.95%      50,000          

The 32-3rd Public bond

  2015.1.22   6.70%      30,000          

The 33rd Public bond

  2015.2.11   6.45%      50,000          

The 34-1st Public bond

  2012.2.26   5.30%      30,000          

The 34-2nd Public bond

  2013.2.26   5.60%      10,000          

The 35-1st Public bond

  2012.3.22   4.65%      20,000          

The 35-2nd Public bond

  2013.3.22   5.05%      30,000          

The 36-1st Public bond2

  2012.4.30   

CD(91D)

+1.09%

      20,000          

The 36-2nd Public bond

  2013.4.30   4.75%      30,000          

The 36-3rd Public bond

  2015.4.30   5.65%      20,000          

The 37-1st Public bond

  2011.12.30   4.85%      10,000          

The 37-2nd Public bond

  2012.6.30   5.13%      10,000          

The 37-3rd Public bond

  2013.6.30   5.45%      20,000          

The 37-4th Public bond

  2014.6.30   5.85%      10,000          

The 38-1st Public bond

  2012.1.19   4.80%      30,000          

The 38-2nd Public bond

  2012.7.19   5.08%      30,000          

The 38-3rd Public bond

  2014.7.19   5.85%      10,000          

The 39th Public bond

  2013.7.30   5.35%      30,000          

The 40-1st Public bond

  2012.5.10   4.69%      40,000          

The 40-2nd Public bond

  2013.8.10   5.33%      20,000          

The 40-3rd Public bond

  2015.8.10   5.95%      20,000          

The 41-1st Public bond

  2012.9.17   4.22%      30,000          

The 41-2nd Public bond

  2013.9.17   4.63%      20,000          

The 41-3rd Public bond

  2014.9.17   5.10%      10,000          

The 42-1st Public bond

  2013.11.22   4.62%      30,000          

The 42-2nd Public bond

  2014.11.23   5.10%      20,000          

The 42-3rd Public bond

  2015.11.24   5.44%      10,000          

The 1st Private bond

  2010.3.24   BD+3.95%              40,000  
            

Total

     8,953,391     8,913,261  

Less: Current portion

     (2,178,092   (1,540,000

Less: Discount on bonds

     (29,626   (35,862
            

Net

    (Won)6,745,673    (Won)7,337,399  
            

(in millions of Korean won and

thousands of foreign currencies)

     2012  2013 

Type

 Maturity  Annual interest
rates
  Foreign
currency
  Korean won  Foreign
currency
  Korean won 

The 66th Public bond

  Apr 02, 2018    3.52      54,000        54,000  

The 67-1st Public bond

  Mar 22, 2017    3.00              30,000  

The 67-2nd Public bond

  Mar 22, 2018    3.10              40,000  

The 67-3rd Public bond

  Mar 22, 2020    3.37              20,000  

The 68-1st Public bond

  Apr 30, 2016    2.85              40,000  

The 68-2nd Public bond

  Apr 30, 2017    2.92              10,000  

The 69-1st Public bond

  Dec 27, 2014    3.11              20,000  

The 69-2nd Public bond

  June 27, 2016    CD(91D) +0.43              20,000  

The 69-3rd Public bond

  Jun 27, 2018    3.81              20,000  

The 70-1st Public bond

  Oct 28, 2016    3.29              40,000  

The 70-2nd Public bond

  Oct 28, 2018    3.63              10,000  

The 71-1st Public bond

  Nov 29, 2016    3.46              10,000  

The 71-2nd Public bond

  Nov 29, 2020    4.14              30,000  

The 72-1st Public bond

  Dec 23, 2015    3.18              10,000  

The 72-2nd Public bond

  Dec 23, 2016    3.41              30,000  

Asset backed short-term bond

  Mar 10, 2014    2.85              10,000  

Asset backed short-term bond

  Mar 12, 2014    2.91              10,000  

Asset backed short-term bond

  Mar 18, 2014    3.02              10,000  

Asset backed short-term bond

  Jan 28, 2014    3.03              10,000  

Unsecured private convertible bond 3

  Jan 20, 2016    2.00      15,000        15,000  

Unsecured public bond in won

  Jan 24, 2016    3.43              30,000  

The 16th unsecured bond

  Apr 23, 2015    3.80      80,000        80,000  

The 1st convertible preferred stock 3

  Dec 30, 2014    3.00      2,000        2,000  

The 32-1st Public bond

  Nov 20, 2015    3.19      100,000        100,000  

The 32-2nd Public bond

  Nov 20, 2017    3.33      100,000        100,000  

The 33rd Public bond

  Mar 21, 2018    3.26              53,000  

The 17-2nd Public bond

  Mar 11, 2013    5.45      30,000          

The 27-2nd Public bond

  Apr 9, 2013    5.04      70,000          

The 28-1st Public bond

  Apr 05, 2014    4.61      50,000        50,000  

The 28-2nd Public bond

  Apr 05, 2016    5.25      65,000        65,000  

The 29th Public bond

  Sep 05, 2016    4.85      45,000        45,000  

The 30th Public bond

  Oct 31, 2014    4.50      90,000        90,000  

The 31-1st Public bond

  Jun 15, 2015    3.73      100,000        100,000  

The 31-2nd Public bond

  Jun 15, 2017    3.97      100,000        100,000  

The 34th Public bond

  Mar 21, 2018    3.21              54,000  

The 35th Public bond

  Jun 21, 2018    2.92              50,000  

The 36th Public bond

  Jun 21, 2018    2.92              50,000  

The 37th Public bond

  Jun 21, 2018    2.98              50,000  

The 38-1st Public bond

  Nov 20, 2015    3.13              40,000  

The 38-2nd Public bond

  Nov 20, 2016    3.39              60,000  

The 2nd unsecured convertible bond 3

  Sep 30, 2018    2.00              179  

The 8th unsecured convertible bond 3

  Nov 26, 2015            19,052        19,052  
    

 

 

   

 

 

 
     10,059,542     10,011,994  

Less: Current portion

     (2,305,065   (2,185,017

Discount on bonds

     (26,600   (22,348

Conversion right adjustment

     (5,800   (3,987

Add: Premium on bonds redemption

     3,517     3,566  
    

 

 

   

 

 

 
    7,725,594    7,804,208  
    

 

 

   

 

 

 

 

1As of December 31, 2010,2013, the Controlling Company has issuedoutstanding notes in the amount of USD 1,300 million with fixed interest rates under the Medium Term Note Program (“MTNP”) registered in the Singapore Stock Exchange, which allowsallowed issuance of notes of up to USD 2,000 million, with the unused balance under the program amounting to USD 700 million. The MTN Program has been suspended since 2007.

 

2The Libor (3M), Tibor (3M) and CD(91D)CD (91D) are approximately 0.30%, 0.34%0.247 % and 2.80%,2.66 %, respectively, as of December 31, 2010.2013.

3At the end of the reporting period, the terms and conditions of the convertible bonds are as follows:

    Issuers 

Type

  KT Telecop Co., Ltd.  Korea
HD Broadcasting
Corp.
  KT Music Co., Ltd.  Green point Co.,
Ltd.
 

Issue date

   Jan 20, 2011    Apr 30, 2010    Nov 26, 2012    Oct 1, 2013  

Issue price

  15,000 million   2,000 million   19,502 million   179 million  

Coupon rate

   2  3  0  2

Guaranteed margin ratio

   4  3  3  Compound annual 5

Conversion period

   
 
 
From one year after
the issue date to
December 20, 2015
  
  
  
  
 
 
From one year after
the issue date to
bond maturity
  
  
  
  
 
 
From one year after
the issue date to
November 19, 2015
  
  
  
  
 
 
 
From the day
succeeding the
issue date till bond
maturity
  
  
  
  

Conversion price

  26,000   500   3,380   27,952  

Long-term BorrowingsShort-term borrowings

 

(In millions of Korean won and thousands of
foreign currencies)

      2010.12.31  2009.12.31 

Type

  Annual
Interest
Rates
   Foreign
Currency
   Korean
Won
  Foreign
Currency
   Korean
Won
 

Informatization Promotion Fund1

   3.52%~4.29%    (Won)    (Won)31,371    (Won)    (Won)31,518  

Inter-Korean Cooperation Fund1

   2.00%          6,415         6,415  

Facility and working capital loans

   4.00%~8.43%          357,609         67,411  

General purpose loans

   4.06%~5.80%          185,163         65,815  

Commercial papers

   2.9%~6.60%          85,000         50,000  

Facility loans in foreign currency

   
 
LIBOR(3M)
+2.0%
  
  
  USD 30,000     34,167   USD 70,000     81,732  

Other long-term borrowings in foreign currency

   LIBOR+1.70%    USD16,000     18,222    USD 22,400     26,154  
   
 
 
USD
LIBOR(3M)
+0.99%
  
  
  
   USD 11,000     12,528    USD 15,000     17,514  
   LIBOR+3.5%              RUB 29,380     1,131  
   16.50%     UZS 2,259     1,581   UZS2,047     1,577  
               

Total

       732,056      349,267  

Less: Current portion

       (259,042    (150,340

Present value discounts

             (654
               

Net

      (Won)473,014     (Won)198,273  
               

(in millions of Korean won and
thousands of foreign currencies)

  2012   2013 

Financial institution

  Type Annual
interest rates
  Foreign
Currency
   Korean
won
   Foreign
Currency
   Korean
Won
 

Shinhan Bank

  Commercial papers  2.78~3.75               40,000  
  General loan 1  4.45~5.17%         93,200          81,200  
  Credit loan  4.84~5.84                 12,000  
  Usance 1  
 
Financial bonds(6M)
+1.27%
  
  
                 5,000  

Samsung Securities

  Commercial papers  2.78~4.02       90,000          15,000  

Woori Bank

  General loans  4.88       14,500          500  
  Usance 1  

 

KO-RIBOR(3M)

+1.33%

 

  

                 9,000  

Korea Exchange Bank

  Commercial papers  3.22~3.89       20,000          30,000  

Kookmin Bank

  Commercial papers  2.10              10,494  

Citibank

  General loans  4.88       2,000          1,500  
  Usance 1  
 
3.95%(fixed rate) / CD3M
+1.2%(variable rate)
  
  
       10,000          10,000  

KTB Investment & Securities

  Commercial papers  2.93 ~ 4.02       70,000            

Hanyang Securities

  Commercial papers  2.70 ~ 4.02       50,000          50,000  

SK Securities

  Commercial papers  3.06 ~ 4.12       20,000          10,000  

Korea Development Bank

  Usance 1  
 
Industrial financial
debentures + 1.28
  
       5,000          7,000  

Hana Bank

  General loans  4.45 ~ 4.95       22,500            

IBK Bank

  Credit loans  4.75 ~ 5.89       7,000          8,000  

Daegu Bank

  Commercial papers  5.54 ~ 5.93       11,932            

DGB Capital

  Commercial papers  5.80       5,000            

NH Investment & Securities

  Commercial papers  2.78 ~ 3.04       20,000          10,000  

HYUNDAI Securities

  Commercial papers  2.71 ~ 3.10       30,000          100,000  

Dongbu Securities

  Commercial papers  2.72 ~ 4.12                 95,000  

Woori Investment & Securities

  Commercial papers  2.92 ~ 3.06                 30,000  

Korea Money Brokerage Corporation

  Commercial papers  2.81 ~ 2.91                 20,000  

Meritz Securities

  Commercial papers  2.78 ~ 2.92                 30,000  

Others 2

  General loans  3.98 ~ 4.12       82,201             —     60,000  
      

 

 

     

 

 

 

Total

      553,333      634,694  
      

 

 

     

 

 

 

1KO-RIBOR(3M), CD(91D), Industrial financial debentures(1Y) and Financial Bond(6M, AAA) are approximately 2.66%, 2.66 %, 2.75%, and 2.71 %, respectively, as of December 31, 2013.

2As of December 31, 2012, KT ENS Corporation, a subsidiary of the Company, accounted for the transferred accounts receivable of17,276 million, which do not qualify as derecognition, as secured borrowings.

Long-term borrowings

(in millions of Korean won and
thousands of foreign currencies)

  2012  2013 

Financial institution

 Type Annual
interest rates
  Foreign
currency
  Korean
won
  Foreign
currency
  Korean
won
 

Kookmin Bank

 Informatization
promotion funds
  3.04     911         
 Working capital
loans
  6.30      10,000          
 Facility loans  3.49~4.98      80,000        60,000  

Shinhan Bank

 Informatization
promotion funds 1
  3.22      11,985        6,048  
 General loans 2  3.95~5.70      37,560        20,000  
 loan on real estate  4.00      358          
 Facility loans 2  2.22~5.23      67,723        42,331  

Export-Import Bank of Korea

 Inter-Korean
Cooperation Fund 1
  2.00      6,415        6,415  

Korea Exchange Bank

 General loans 2  LIBOR(3M)+2.03 USD6,520    6,984   USD2,200    2,322  
 General loans  3.94~4.18              25,210  

Woori Bank

 General loans  CD(91D)+1.39~5.98      45,000          

Hana Bank

 General loans  LIBOR(3M)+1.60 USD3,200    3,428          

National Federation of Fisheries Cooperatives

 General loans  4.63      50,000        50,000  

NH Bank

 General loans  3.99~6.00      50,000        60,000  
 Facility loans  4.32~4.68      187,500        135,000  

Korea Development Bank

 General loans  4.32~4.91              3,750  
 Facility loans  4.49      88,750        20,000  

Industrial Bank of Korea

 Facility loans  2.22      1,500        833  

Samsung Securities

 Commercial papers  2.78~3.08      60,000        100,000  

Dongbu Securities

 Commercial papers  4.12      20,000          

SK Securities

 Commercial papers  4.12      10,000          

Cardnet

 General loans  6.50      348          

HYUNDAI Securities

 Commercial papers  2.81~3.08              179,945  
 General loans -  3.08      49,947          

IBK Securities

 Commercial papers  2.78              50,000  

Shinhan invest corp

 Commercial papers  2.93              39,963  

Others

 Redeemable
convertible preferred
stock 3
          51,044        53,736  
 Other  2.75~17.50      7,465        4,423  
    

 

 

   

 

 

 
 Total    846,918     859,976  

Less: Current portion

     (333,422   (200,997
    

 

 

   

 

 

 
 Net   513,496    658,979  
    

 

 

   

 

 

 

 

1The above Informatization Promotion Funds are repayable in installments over three years after a two-year grace period, while Inter-Korean Cooperation Fund is repayable in installments over 1320 years after a seven-year grace period.

Repayment Schedule

2Interest rates of LIBOR (3M) is approximately 0.247% as of December 31, 2013.

3As of the end of the reporting period, the terms and conditions of the redeemable convertible preferred stocks are as follows:

    Issued by 
    Enswers Inc.   Korea HD
Broadcasting
Corp.
   KT Telecop
Co., Ltd.
 

Type

  The  A
Redeemable
convertible
preferred

stock
   The B
Redeemable
convertible
preferred
stock
   The C
Redeemable
convertible
preferred
stock
   Redeemable
convertible
preferred
stock
   Redeemable
convertible
preferred stock
 

Issue date

   2008.08.14     2009.11.24     2011.11.30     2010.12.21     2011.1.20  

Issue price (per share)

  272,000    408,400    893,400    500    5,000  

Number of share issued

   5,875     1,225     11,194     1,900,000     1,346,154  

Conversion price (per share)

  272,000    408,400    893,400    500    26,000  

Exercisable date of conversion rights

  

 
 
 

From the issue
date to
2018.08.14

  
  
  

  

 
 
 

From the issue
date to
2019.11.24

  
  
  

  

 
 
 

From the issue
date to
2021.11.30

  
  
  

  

 
 
 

From the issue
date to
2013.12.21

  
  
  

  

 
 
 
 

From one year
after the issue
date until exercise
date

  
  
  
  

 

Redemption price

  

 
 
 

Issue price +
5% compound
annual interest

  
  
  

  

 
 
 

Issue price +
5% compound
annual interest

  
  
  

  

 
 
 

Issue price +
5% compound
annual interest

  
  
  

  

 
 
 

Issue price +
1% compound
annual interest

  
  
  

   
 

 

 
 

 
 

Issue price of
preferred stock

not converted

+ 5% compound
annual interest

less dividends
received

  
  

  

  
  

  
  

Exercisable date of redemption Rights

  

 
 
 
 

From three
years after the
issue date to
2018.08.14

  
  
  
  

  

 
 
 
 

From three
years after the
issue date to
2019.11.24

  
  
  
  

  

 
 
 
 

From three
years after the
issue date to
2021.11.30

  
  
  
  

  

 
 
 
 

From two
years after the
issue date to
2013.12.21

  
  
  
  

  

 
 
 
 

From five years
(2016.01.20) after
the issue date up
to 3 months

  
  
  
  

Repayment schedule of the Company’sGroup’s bonds payable and long-termborrowings including the portion of current liabilities as of December 31, 2013, is as follows:

  Bonds  Borrowings  Total 

(in millions of Korean
won)

 In local
currency
  In foreign
currency
  Sub-total  In local
currency
  In foreign
currency
  Sub-total  

2014

 1,442,000   738,710   2,180,710   833,369   2,322   835,691   3,016,401  

2015

  1,029,052    472,353    1,501,405    281,463        281,463    1,782,868  

2016

  1,585,179    393,908    1,979,087    335,000        335,000    2,314,087  

2017

  667,000    369,355    1,036,355    40,493        40,493    1,076,848  

Thereafter

  2,824,000    490,437    3,314,437    2,023        2,023    3,316,460  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 7,547,231   2,464,763   10,011,994   1,492,348   2,322   1,494,670   11,506,664  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Book value and fair value of the Group’s bonds payable and borrowings as of December 31, 2010,2012 and 2013, are as follows:

   2012   2013 

(in millions of Korean won)

Type

  Book
Value
   Fair
Value
   Book
Value
   Fair
Value
 

Bonds payable

  10,035,868    10,191,819    9,989,223    10,066,124  

Long-term borrowings (Including current borrowings)

   846,918     820,849     859,976     798,827  

Short-term borrowings

   553,333     553,333     634,694     634,694  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  11,436,119    11,566,001    11,483,893    11,499,645  
  

 

 

   

 

 

   

 

 

   

 

 

 

The fair values of bonds payable and long-term borrowings are calculated by discounting the expected future cash flows at weighted average borrowing rate. The weighted average borrowing rate is approximately 4.53% as of December 31, 2013 (2012: 4.56%).

17.    Provisions

The changes in provisions during the years ended December 31, 2012 and 2013, are as follows:

   2012 

(in millions of Korean won)

  Litigation  Asset retirement obligation  Other 1  Total 

Balance at 2012.1.1

  28,915   108,651    128,085    265,651  

Increase(Transfer)

   9,610    12,533    171,816    193,959  

Usage

   (492  (2,470  (83,753  (86,715

Reversal

   (747  (9,124  (7,501  (17,372

Changes in scope of consolidation

       8        8  
  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at 2012.12.31

  37,286   109,598   208,647   355,531  
  

 

 

  

 

 

  

 

 

  

 

 

 

Current portion

   33,678    54    171,859    205,591  

Non-current portion

   3,608    109,544    36,788    149,940  

   2013 

(in millions of Korean won)

  Litigation  Asset retirement obligation  Other 1  Total 

Balance at 2013.1.1

  37,286   109,598   208,647   355,531  

Increase (Transfer)

   4,440    1,936    55,120    61,496  

Usage

   (714  (1,966  (139,569  (142,249

Reversal

   (1,897  (5,251  (20,276  (27,424

Changes in scope of consolidation

       962        962  
  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at 2013.12.31

  39,115   105,279   103,922   248,316  
  

 

 

  

 

 

  

 

 

  

 

 

 

Current portion

   35,507    46    79,202    114,755  

Non-current portion

   3,608    105,233    24,720    133,561  

1The Company has commitments to pay the subsidies to the customers relating to the handset sales, and the payment commitments are accounted for as deduction from receivables. The Company disposed of its trade receivables arising from handset sales to special purpose entities for securitization and the related payment commitments are accounted for as other provisions.

18.    Net Defined Benefit Liabilities

The amounts recognized in the statements of financial position are determined as follows:

(in millions of Korean won)

  2012  2013 

Present value of defined benefit obligations

  1,724,246   1,636,593  

Fair value of plan assets

   (1,175,003  (1,050,510
  

 

 

  

 

 

 

Liabilities

  549,243   586,083  
  

 

 

  

 

 

 

The changes in the defined benefit obligations for the years ended December 31, 2012 and 2013, are as follows:

(in millions of Korean won)

  2012  2013 

Beginning

  1,474,481   1,724,246  

Current service cost

   206,389    210,466  

Interest expense

   57,156    57,891  

Benefit paid

   (78,625  (97,956

Gains on settlements of plan 1

   (3,630  2,171  

Changes due to settlements of plan 1

   (125,540  (188,512

Remeasurements:

   

Actuarial gains and losses arising from changes in demographic assumptions

   52,497    81,616  

Actuarial gains and losses arising from changes in financial assumptions

   10,326    (144,111

Actuarial gains and losses arising from experience adjustments

   120,579    (9,521

Changes in scope of Consolidation

   10,613    303  
  

 

 

  

 

 

 

Ending

  1,724,246   1,636,593  
  

 

 

  

 

 

 

1A settlement is a transaction that eliminates all further legal or constructive obligations for part or all of the benefits provided under a defined benefit plan. The Group has entitled employees to choose to transfer from defined benefit plans to contribution plans from December 2012.

Changes in the fair value of plan assets for the years ended December 31, 2012 and 2013, are as follows:

(in millions of Korean won)

  2012  2013 

Beginning

  1,048,436   1,175,003  

Interest income

   40,787    42,964  

Remeasurements:

   

Return on plan assets (excluding amounts included in interest income)

   8,800    2,612  

Benefits paid

   (44,448  (57,866

Changes due to settlements of plan 1

   (99,853  (138,220

Employer contributions

   214,981    26,161  

Changes in scope of consolidation

   6,300    (144
  

 

 

  

 

 

 

Ending

  1,175,003   1,050,510  
  

 

 

  

 

 

 

1The Group has operated both defined contribution plans and defined benefit plans from December 2012. The employees are entitled to choose either defined contribution plans and defined benefit plans.

Amounts recognized in the statement of income for the years ended December 31, 2011, 2012 and 2013, are as follows:

(in millions of Korean won)

  2011  2012  2013 

Current service cost

  174,402   206,389   210,466  

Interest cost

   53,320    57,156    57,891  

Interest income

   (40,018  (40,787  (42,964

Costs(gains) on settlements

       (3,630  2,171  

Transfer out

   (4,405  (8,763  (10,502
  

 

 

  

 

 

  

 

 

 

Total expenses

  183,299   210,365   217,062  
  

 

 

  

 

 

  

 

 

 

Principal actuarial assumptions used are as follows:

    2011.12.31   2012.12.31   2013.12.31 

Discount rate

   4.00% ~ 4.80%     3.13% ~ 4.10%     3.10% ~ 4.05%  

Future salary increase

   2.00% ~ 9.30%     3.00% ~ 8.10%     2.10% ~ 8.10%  

Also, the life expectancy is based on the data provided by Korea Insurance Development Institute.

As of December 31, 2013, all of the plan assets are invested in guaranteed financial instruments.

The sensitivity of the defined benefit obligation as of December 31, 2013, to changes in the weighted principal assumptions is:

    Effect on defined benefit obligation 

(in percentage, in millions of Korean won)

  Changes in principal
assumption
  Increase in principal
assumption
  Decrease in principal
assumption
 

Discount rate

   0.50% point  (61,946 65,821  

Salary growth rate

   0.50% point   62,069    (59,111

A decrease in corporate bond yields will increase plan liabilities, although this will be partially offset by an increase in the value of the plans’ bond holdings.

The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. The sensitivity of the defined benefit obligation to changes in principal actuarial assumptions is calculated using the projected unit credit method, the same method applied when calculating the defined benefit obligations recognized on the statement of financial position.

The Group annually reviews funding levels of plan assets and has plan asset policies that require maintaining the funding level of the Group equal to or more than the level required under the Employee Retirement Benefit Security Act. Expected contributions to post-employment benefit plans for the year ending December 31, 2014, are219,753 million.

Expected maturity analysis of undiscounted pension benefits as of December 31, 2013, is as follows:

 

(In millions of Korean won)

 Bonds  Borrowings 

Year ending December 31

 In local
currency
  In foreign
currency
  Sub- total  Borrowings in
local
currency
  Borrowings in
foreign
currency
  Sub-
total
  Total 

2011

 (Won)1,541,213   (Won)636,879   (Won)2,178,092   (Won)205,058   (Won)53,984   (Won)259,042   (Won)2,437,134  

2012

  1,350,000    353,059    1,703,059    210,830    8,871    219,701    1,922,760  

2013

  1,320,000    341,670    1,661,670    237,008    3,643    240,651    1,902,321  

2014

  890,000    683,340    1,573,340    5,161        5,161    1,578,501  

Thereafter

  1,040,000    797,230    1,837,230    7,501        7,501    1,844,731  
                            

Total

 (Won)6,141,213   (Won)2,812,178   (Won)8,953,391   (Won)665,558   (Won)66,498   (Won)732,056   (Won)9,685,447  
                            

(in millions of Korean won)

  Less than
1 year
   Between
1 and 2 years
   Between
2 and 5 years
   Over 5
years
   Total 

Pension benefits

  112,402    139,406    556,304    3,847,327    4,655,439  

The weighted average duration of the defined benefit obligations is 9.06 years.

15.    Accrued Severance Benefits19.    Defined Contribution Plan

Changes in accrued severance benefitsRecognized expense related to the defined contribution plan for the year ended December 31, 20102013, is23,857 million (2012:1,703 million, 2011:230 million).

20.    Commitments and 2009,Contingencies

As of December 31, 2013, major commitments with local financial institutions are as follows:

(in millions of Korean won and
thousands of foreign currencies)

  

Financial institution

  Currency   Limit   Used
amount
 

Bank overdraft

  Kookmin Bank and others   KRW     1,573,500       

Commercial paper factoring

  Korea Exchange Bank   KRW     220,000       

Loan on information and communications fund

  Shinhan Bank   KRW     6,048     6,048  

Green energy factoring

  Shinhan Bank   KRW     374     374  

Collateralized loan on accounts receivable-trade

  Kookmin Bank and others   KRW     757,000     131,175  

Purchase commitment for foreign currency checks

  Korea Exchange Bank   USD     1,000       

Plus electronic notes payable

  Industrial Bank of Korea   KRW     50,000     1,875  

Loans for working capital

  Industrial Bank of Korea   KRW     100,000       

Comprehensive credit line

  Korea Exchange Bank   KRW     65,000     15,277  

Foreign currency transaction

  HSBC   USD     80,000       

Credit line for call loan

  Tongyang Securities Inc   KRW     120,000       

As of December 31, 2013, guarantees received from financial institutions are as follows:

(in millions of Korean won and
thousands of foreign currencies)

Financial institution

CurrencyLimit

Performance guarantee

USD975
DZD125,863

Warranty guarantee

Export-Import Bank of KoreaUSD2,497

Guarantee for advances received

USD2,925
DZD177,589

Bid guarantee

Korea Software Financial CooperativeKRW27,796

(in millions of Korean won and
thousands of foreign currencies)

Financial institution

CurrencyLimit

Guarantees for accounts receivable from the handset sales

Seoul Guarantee InsuranceKRW667,817

Performance guarantee/Warranty guarantee

Korea Software Financial CooperativeKRW201,892

Prepayment and other guarantee

KRW77,284

Guarantee for payment in local currency

Korea Exchange BankKRW3,600
Woori BankKRW1,000

Guarantee for payment in foreign currency

Kookmin BankUSD19,148
Shinhan BankUSD7,471
Hana BankUSD4,000
Korea Exchange BankUSD15,000
PLN223,000

Guarantee for import letters of credit

Korea Exchange BankUSD10,000

Performance guarantees

Hana BankKRW9,222
USD4,148

Performance guarantees

Seoul Guarantee InsuranceKRW60,215

Guarantees for licensing

Seoul Guarantee InsuranceKRW4,052

Guarantees for deposits

Seoul Guarantee InsuranceKRW3,535

Other

Seoul Guarantee InsuranceKRW137,552

Performance guarantees

Korea Federation of small and medium businessKRW5,818

1Algerian Dinar.

2Polish Zloty.

Details of collateral that KT Capital Co., Ltd., a subsidiary, is provided with by third parties as of December 31, 2013, are as follows:

 

(In millions of Korean won)

 

2010Details

 

Amounts

Balance at 2010.1.1Credits

Movables, real-estate, financial collateral (Won)858,4441,488,086

Decrease

(490,055

Provision for severance benefits

233,111

Others

(137

Balance at 2010.12.31

1,231,005

Less : Severance insurance deposits

(870,928

Less : Cumulative deposits to the National Pension Fund

(49

Total

(Won)360,028

(In millions of Korean won)

2009

Balance at 2009.1.1

(Won)1,663,690

Decrease

(409,295

Provision for severance benefits

233,691

Balance at 2009.12.31

1,488,086

Less : Severance insurance deposits

(1,150,544

Less : Cumulative deposits to the National Pension Fund

(18

Total

(Won)337,524

The estimated value of severance benefits for all employees, asAs of December 31, 2010, amounts to(Won)1,231,005 million which are fully recognized as accrued severance benefits. In addition, as of December 31, 2010, accrued severance benefits are funded at approximately 70.75% through2013, guarantees provided by the Group for a severance insurance plan and defined benefit severance pension plan with Samsung Life Insurance.

16.    Provisions

Changes in provisions for the years ended December 31, 2010 and 2009,third party, are as follows:

 

   2010 
   2010.1.1   Increase   Transfer  Decrease  Others   2010.12.31 

(In millions of Korean won)

       Usage  Reversal    

Current portion

           

Litigation1

  (Won)17,010    (Won)9,630    (Won)   (Won)(2,116 (Won)(964 (Won)    (Won)23,560  

KT members points2

   546                  (546         

KT points3

   3,591              (1,639           1,952  

Call bonus points4

   7,271          12,990    (11,942           8,319  

Olleh club points5

             27,013    (7,912           19,101  

Sales warranty reserve

   6,245     5,684         (6,261           5,668  

Others7

   5,178     44,637     (474  (12,763  (7,006  1,009     30,581  
                                

Sub-total

   39,841     59,951     39,529    (42,633  (8,516  1,009     89,181  
                                

Non-current portion

           

KT points3

   2,457                  (1,016       1,441  

Call bonus points4

   6,438     14,711     (12,990               8,159  

Olleh club points5

        29,063     (27,013               2,050  

Asset retirement obligation6

   93,211     22,759     474    (6,936  (8,353       101,155  

Others7

   1,470     656         (47  (431       1,648  
                                

Sub-total

   103,576     67,189     (39,529  (6,983  (9,800       114,453  
                                

Total

  (Won)143,417    (Won)127,140    (Won)   (Won)(49,616 (Won)(18,316 (Won)1,009    (Won)203,634  
                                

   2009 

(In millions of Korean won)

  2009.1.1   Increase   Transfer  Decrease  Others   2010.12.31 
                 Usage  Reversal     

Current portion

           

Litigation1

  (Won)19,572    (Won)2,204    (Won)   (Won)(4,766 (Won)   (Won)    (Won)17,010  

KT members points2

   681              (110  (25       546  

KT points3

   4,774          4,642    (5,825           3,591  

Call bonus points4

   5,504          4,999    (3,232           7,271  

Sales warranty reserve

   5,299     9,285         (8,339           6,245  

Others7

   2,985     5,033         (2,745  (719  624     5,178  
                                

Sub-total

   38,815     16,522     9,641    (25,017  (744  624     39,841  
                                

Non-current portion

           

KT points3

   7,099          (4,642               2,457  

Call bonus points4

   5,109     7,935     (4,999  (1,607           6,438  

Asset retirement obligation6

   71,533     13,997         (6,188  (3,935  17,804     93,211  

Others7

   1,405     374             (309       1,470  
                                

Sub-total

   85,146     22,306     (9,641  (7,795  (4,244  17,804     103,576  
                                

Total

  (Won)123,961    (Won)38,828    (Won)   (Won)(32,812 (Won)(4,988 (Won)18,428    (Won)143,417  
                                

(in millions of Korean won)

  Creditor  Limit   Used amount   Period 

Individuals with the right of ownership of Gimhae apartment

  Shinhan Bank  108,500    36,560     2012.5.21~2014.3.31  

Ssangyong Information & Communication Corporation

  Nonghyup Bank   20,000     47     2011.11.18~2014.11.28  

Other Project Financing 1

  NH Investment & Securities   247,661     246,202     2010.1.31~2025.2.28  

 

1The amount recognizedAs of December 31, 2013, guarantee liabilities and loss of10,538 million in relation to guarantees for Project Financing loan are recorded as litigation provision represents‘other financial liabilities’ and ‘finance costs’ in the estimatefinancial statements. NH Investment & Securities requested early repayment of payments required45,372 million, representing the principal and interest related to settle the obligation.

2Romanian sunlight generation project on February 20, 2014, and KT ENS took over the debt. However, KT ENS could not execute payment guarantee according to the request of early payment ofThe Company recorded provisions49,106 million, representing the principal and interest, on March 12, 2014 and therefore filed for the KT members points with which VIP customers of the fixed-line or mobile telephone service are entitled to receive certain goods and other benefits for up to(Won)25,000 per person.court receivership. (Note 41)

3The amount recognized as call bonus points represents the estimate of payments for call bonus points which are provided to fixed-line customers based on the usage of the services. Once certain criteria are met, customers are entitled to receive certain goods and other benefits from the Company. Such provision is reviewed at each reporting date and adjusted to reflect the current best estimates based on changes in circumstances, or an acquisition of new information or additional experience on the usage rate, expiration of points and others.

4The Company recorded provision for the Let’s 010 (KT-PCS) call bonus points with which its PCS subscribers are entitled to receive certain goods and other benefits from the Company.

5The Company recognized estimated expenses for the integrated mileage program of wireless membership, wired and wireless mileage, Show point service and Shocking package, which commenced in June 2010.

6When the Company is responsible for restoration of leased facility after termination of the lease contract, the present value of expected future expenditure for the restoration is recorded as a liability.

7Points are granted to customers, employees and the customers of business partners. The Company accounts for this points as welfare expense and others based on nature of provision.

17.    Lease

As of December 31, 2013, the Company has provided a payment guarantee to Smart Channel Co., Ltd(“Smart Channel”). The Company pledged investment securities in Smart Channel Co., Ltd. as Lesseecollateral to the creditors of Smart Channel (Note 14). Furthermore, the Company recorded allowance for doubtful receivables of49,362 million against other receivables from Smart Channel.

PropertyThe Company is jointly and equipment acquired through lease arrangementsseverally obligated with GE Capital and othersKT Sat Co., Ltd. to pay KT Sat Co., Ltd.’s outstanding liabilities as of December 4, 2012, spin-off date. As of December 31, 20102013, the Company and KT Sat Co., Ltd. are jointly and severally liable for7,949 million of KT Sat Co., Ltd.’s outstanding liabilities.

For the year ended December 31, 2013, the Company made agreements with the Securitization Specialty Companies Olleh KT Seventh to twelfth Securitization Specialty Co., Ltd. (in

2012: Olleh KT First to Sixth Securitization Specialty Co., Ltd.), and disposed of its trade receivables related to handset sales. The Company also made asset management agreements with each securitization specialty company and will receive the related management fees.

On March 6, 2014, the website of the Company was accessed by unauthorized person and personal information of our customers was stolen by hackers. There is one lawsuit against the Company over this breach seeking damages of approximately20 million. The resolution of the lawsuit cannot yet be reasonably predicted. Also, there may be more lawsuits filed against the Company in the future. However, the size and result of any potential lawsuits cannot yet be reasonably predicted.

As of December 31, 2013, the Group is a defendant in 279 lawsuits, with an aggregate amount of159,434 million. As of December 31, 2013, litigation provisions of39,115 million for various pending lawsuits and unasserted claims are recorded as liabilities for potential loss in the ordinary course of business. On January 24, 2014, the Company lost a lawsuit in relation to the interconnection with SK Telecom Co., Ltd. and recognized expenses of34,636 million relative to this in the 2013 statement of operations. The Company appealed to the Supreme Court and the final outcome of this case cannot yet be predicted.

According to the financial and other covenants included in certain bonds and borrowings, the Group is required to maintain certain financial ratios such as debt to equity ratio, use the funds for the designated purpose and report to the creditors periodically. The covenant also contains restriction on provision of additional collateral and disposal of certain assets. The bond holders may request early repayment upon non-compliance of such covenants. As of December 31, 2013, the Group is in compliance with the related covenants.

KT ENS, a wholly owned subsidiary, has been under investigation by the police and prosecutor’s office due to the allegation in which suppliers of KT ENS borrowed loans from several financial institutions collateralizing accounts receivable from KT ENS, however such collateralized accounts receivable are allegedly fictitious. The investigation has been ongoing to determine the authenticity of the accounts receivable from KT ENS and reasonable due care exercised by financial institutions to approve such loans in their loan approval process. There may be lawsuits depending on the outcome of this investigation. The Group expects the impact of this investigation on the financial statements will not be significant, but the final result cannot be reasonably predicted.

Asia Broadcast Satellite Holdings, Ltd.(ABS) filed an arbitration against the Company and KT Sat, a subsidiary of the Company at The International Court of Arbitration of the International Chamber of Commerce on December 31, 2013, claiming on the ownership of satellite Mugunghwa and compensation of damages due to the breach of sales contract of the satellite, Mugunghwa, In addition, ABS filed an arbitration against the Company and KT Sat, a subsidiary of the Company, at International Centre for Dispute Resolution of the American Arbitration Association on December 24, 2013, claiming on the compensation of damages arising from the breach of entrustment contract. The outcome of these arbitrations cannot yet be reasonably predicted.

21.    Lease

TheGroup’s non-cancellable lease arrangements are as follows:

The Group as the Lessee

Finance Lease

Details of finance lease assets as of December 31, 20102012 and 2013, are as follows:

 

(In millions

(in millions of Korean won)

  2012  2013 

Acquisition costs

  55,477   99,702  

Accumulated depreciation

   (15,282  (27,980
  

 

 

  

 

 

 

Net balance

  40,195   71,722  
  

 

 

  

 

 

 

As of Korean won)

2010

Acquisition costs

(Won)22,332

Accumulated depreciation

(11,342

Net balance

(Won)10,990

The related depreciation amounted to(Won)2,029 million for the year ended December 31, 2010.2013, the Group recognizes financial lease assets as other property and equipment.

Details of future minimum lease payments as of December 31, 20102012 and 2013, under capitalfinance lease contracts are summarized below:

 

(In millions of Korean won)

  Minimum
lease
payments
   Present
values
 

(in millions of Korean won)

  2012 2013 

Total amount of minimum lease payments

   

Within one year

  (Won)6,387    (Won)5,282    15,826   22,498  

From one year to five years

   16,372     14,527     29,474    52,877  

Thereafter

         
          

 

  

 

 

Total

  (Won)22,759    (Won)19,809    45,300   75,375  
          

 

  

 

 

Unrealized interest expense

  (3,654 (7,166
  

 

  

 

 

Net amount of minimum lease payments

   

Within one year

  14,033   19,486  

From one year to five years

   27,613    48,723  

Thereafter

         
  

 

  

 

 

Total

  41,646   68,209  
  

 

  

 

 

Operating Lease

Details of future minimum lease payments as of December 31, 20102012 and 2013, under operating lease contracts are summarized below:

 

(In millions of Korean won)

2010

Within one year

(Won)4,924

From one year to five years

2,670

Total

(Won)7,594

(in millions of Korean won)

  2012   2013 

Within one year

  67,571    78,245  

From one year to five years

   279,906     308,292  

Thereafter

   312,778     246,632  
  

 

 

   

 

 

 

Total

  660,255    633,169  
  

 

 

   

 

 

 

Operating lease expenses incurred for the yearyears ended December 31, 20102012 and 2013, amounted to(Won)28,278 million.41,999 million,61,201 million and77,657 million respectively.

The CompanyGroup as the Lessor

Finance Lease

Details of finance lease investmentsassets as of December 31, 20102012, are as follow:follows:

 

(In millions of Korean won)

  Minimum
lease
payments
   Unguaranteed
residual value
   Gross
investment in
the lease
   Unaccrued
interest
   Net
investment in
the lease
 

(in millions of Korean won)

  Minimum lease
payments
   Gross investment
in the lease
   Unaccrued
interest
 Net investment
in the lease
 

Within one year

  (Won)299,364    (Won)11,903    (Won)311,267    (Won)68,111    (Won)243,156    382,821    382,821    (35,663 347,158  

From one year to five years

   539,092     21,135     560,227     120,216     440,011     550,919     550,919     (25,063  525,856  

Thereafter

   20,644          20,644     1,552     19,092     11,848     11,848     (1,273  10,575  
                      

 

   

 

   

 

  

 

 

Balance at 2010.12.31

  (Won)859,100    (Won)33,038    (Won)892,138    (Won)189,879    (Won)702,259  

Total

  945,588    945,588    (61,999 883,589  
                      

 

   

 

   

 

  

 

 

Bad debts allowances providedDetails of finance lease assets as of December 31, 2013, are as follows:

(in millions of Korean won)

  Minimum lease
payments
   Gross investment
in the lease
   Unaccrued
interest
  Net investment
in the lease
 

Within one year

  337,804    337,804    (38,779 299,025  

From one year to five years

   454,542     454,542     (32,922  421,620  

Thereafter

   10,395     10,395     (913  9,482  
  

 

 

   

 

 

   

 

 

  

 

 

 

Total

  802,741    802,741    (72,614 730,127  
  

 

 

   

 

 

   

 

 

  

 

 

 

Details of bad debt allowance for doubtful minimumfinance lease receivables as of December 31, 20102012 and 2013, are as follow:follows:

 

(in millions of Korean won)

  2012   2013 

Within one year

  7,312    4,817  

From one year to five years

   14,414     15,245  

Thereafter

   208     128  
  

 

 

   

 

 

 

Total

  21,934    20,190  
  

 

 

   

 

 

 

(In millions of Korean won)

2010

Within one year

(Won)2,742

From one year to five years

5,025

Thereafter

230

Total

(Won)7,997

Operating Lease

Annual future lease receipts fromDetails of operating lease agreementsassets as of December 31, 20102012 and 2013, are as follows:

 

(In millions of Korean won)

  Undiscounted
amounts
   Present
values
 

Within one year

  (Won)13,676    (Won)11,879  

From one year to five years

   31,888     28,937  
          

Total

  (Won)45,564    (Won)40,816  
          

(in millions of Korean won)

  2012  2013 

Acquisition costs

  1,556,762   2,073,592  

Accumulated depreciation

   (488,514  (606,148
  

 

 

  

 

 

 

Net balance

  1,068,248   1,467,444  
  

 

 

  

 

 

 

18.    Commitments and Contingencies

AsDetails of December 31, 2010, major commitments with local financial institutions are as follows:

(In millions of Korean won and thousands of foreign currencies)

Financial Institution

Limit

Bank overdraft

Kookmin Bank and others(Won)1,435,000

Commercial papers

Korea Exchange Bank100,000

Loan on information and communications fund

Kookmin Bank and others40,567

Collateralized loan on accounts receivable—trade

Kookmin Bank and others418,000

Collection for foreign currency denominated checks

Korea Exchange BankUSD1,000

Plus commercial papers

IBK Bank(Won)150,000

Letters of credit

Shinhan Bank and others348,000
USD13,000

Others

Shinhan Bank and others(Won)230,000
USD87,005

As of December 31, 2010, guarantees received from financial institutions are as follows:

(In millions of Korean won and thousands of foreign
currencies)

 

Financial Institution

 Limit  Used Amount 

Performance guarantee for construction

 Seoul Guarantee Insurance (Won)76,313   (Won)  

Performance guarantee

 Export-Import Bank of Korea USD4,518   USD4,518  
  SAR735   SAR735  
  DZD25,863   DZD25,863  
 Seoul Guarantee Insurance (Won)15,578   (Won)15,578  
 Korea Software Financial Cooperative and others1  150,000    76,220  
    56,628  

Bid guarantee

 Seoul Guarantee Insurance  30,248    30,248  

Bonds payable in foreign currency guarantee

 Kookmin Bank USD85,652   USD5,652  
 Korea Exchange Bank USD5,000   USD2,191  
 Shinhan Bank USD27,512    USD 21,502  
 HSBC USD80,000   USD  

Advances received guarantee

 Export-Import Bank of Korea USD2,925   USD2,925  
  DZD77,589   DZD 77,589  

General guarantee

 Shinhan Bank (Won)26,398   (Won)26,398  
 Korea Exchange Bank  3,600      

Guarantee for import letter of credit

 Korea Exchange Bank USD5,000   USD  

Others

 Industrial Bank of Korea USD400   USD400  

1The maturities of guarantee contracts have lapsed. However, due to the two-year statute of limitations the Company still receives guarantees amounting to(Won)159,903 million from Korea Software Financial Cooperative as of December 31, 2010.

As of December 31, 2010, guarantees provided by the Company for third parties are as follows:

(In millions of Korean won)

Creditor

Limit

Eun-haeng 1-area urban environment Improving project union

Kookmin Bank(Won)2,600

General guarantee

KEPCO Corp. and others193

Defective guarantee

Samsung C&T Corporation and others19

Performance guarantee

National Federations of Fisheries Cooperative and others41

Permission guarantee and others

Seobu Regional Forest Management Office and others59

Other Project Financing

NH Investment & Securities Co. Ltd and others35,169

Employee Stock Ownership

Hana Bank154

As of December 31, 2010, 127 lawsuits have been filed against the Company as a defendant, with an aggregate amount of(Won)220,300 million. As of December 31, 2010, litigation provision in

relation to the potential loss amounted to(Won)23,560 million and is recorded as liabilities. The final outcome of these cases cannot yet be determined as of the report date.

As of December 31, 2010, the Company’s investment in Smart Channel Co., Ltd. (formerly Mediapuff Plus) is pledged as collateral for the investee’s borrowings.

As of December 31, 2010, KT Capital has an agreement with construction developers to provide a loan covering up to(Won)38,000 million when the construction developers cannot redeem the project financing loan for construction at a maturity date due to the unsold apartments. Under the agreement, KT Capital has rights over the unsold apartments as collateral.

As of December 31, 2010, KT Rental media, one of the subsidiaries, provided two blank promissory notes to several financial institutions as collaterals for the performance guarantee.

In accordance with the debt covenant between KT Rental and the creditor group consisting of Korea Development Bank and National Federation of Fisheries Cooperatives, KT Rental should maintain its ratio of net borrowings to EBITA(Earnings Before Interest, Tax and Amortization) less than four as of each fiscal year end and report the calculation details of this ratio to an agent bank within 90 days from each fiscal year end. In case, KT Rental can not fulfill this condition, the creditors group is entitled to demand early repayment.

As of December 31, 2010, KT Music recorded accrued expenses of(Won)1,124 million as it is probable that Fair Trade Committee will impose the penalty due to price fixing among the on-line music service providers.

As of December 31, 2010, Telecop Service Co., Ltd. and KT Linkus Co., Ltd. have the joint responsibility to pay for the liabilities that KT Linkus Co., Ltd. incurred before its spin-off. Also, KTR Co., Ltd. and KT Rental Co., Ltd. have the joint responsibility to pay for the liabilities that KT Rental Co., Ltd. incurred before its spin-off.

19.    Assets and Liabilities denominated in Foreign Currencies

Major assets and liabilities denominated in foreign currenciesfuture minimum lease payments as of December 31, 20102011, 2012 and 2009,2013, under operating lease contracts are summarized as follows:below:

 

    2010.12.31   2009.12.31 

(In millions of Korean won

and thousands of foreign currencies)

  Foreign
Currencies
   Korean
Won
   Foreign
Currencies
   Korean
Won
 
     

Cash and cash equivalents

   USD     7,997    (Won)9,108     USD     24,013    (Won)28,038  
   JPY     6,271     93     JPY     702     9  
   EUR               EUR     65     110  
   GBP               GBP     10     19  

Short-term investment assets

   USD     15,327     17,456     USD     15,327     17,896  

Accounts receivable

   USD     132,658     151,084     USD     150,281     175,468  
   JPY     36,900     516     JPY     78,500     991  
   SDR     5,721     10,098     SDR     15,225     27,767  
   EUR     237     359     EUR     211     353  
   AUD               AUD     13     14  

Loans receivable

   USD     23,538     26,808     USD     35,769     41,764  

Accounts receivable

   USD     390     444     USD     438     512  

Guarantee deposits paid

   USD               USD     557     650  

Accounts payable

   USD     103,757     118,168     USD     119,636     139,687  
   JPY     240     3     JPY     9,885     125  

(in millions of Korean won)

  2012   2013 

Within one year

  364,404    203,014  

From one year to five years

   347,364     687,162  
  

 

 

   

 

 

 

Total

  711,768    890,176  
  

 

 

   

 

 

 

    2010.12.31   2009.12.31 

(In millions of Korean won

and thousands of foreign currencies)

  Foreign
Currencies
   Korean
Won
   Foreign
Currencies
   Korean
Won
 
     
   SDR     4,256     7,512     SDR     8,566     16,841  
   EUR     153     232     EUR     103     172  

Other accounts payable

   USD     2,483     2,827     USD     125     146  
   JPY     238     3     JPY     1,653     21  
   GBP     44     77     GBP     51     96  
   EUR     113     170     EUR            
   KWD               KWD     288     483  

Bonds (par value)

   USD     2,230,000     2,539,747     USD     2,130,000     2,486,988  
   JPY     19,500,000     272,431     JPY     19,500,000     246,250  

Long-term borrowings

   USD     61,713     70,355     USD     114,683     133,904  
   JPY     17,314     242     JPY     38,645     488  
   EUR     116     175     EUR            

Withholdings

   USD               USD     728     850  

Accrued expenses

   USD     330     376     USD     350     409  
   EUR     39     59     EUR     15     25  

Deposits received

   USD     644     733     USD     14     16  

Others

   USD     1,018     1,159     USD            

As of December 31, 2010, the Company recognized(Won)65,793 million (2009:(Won)240,925 million) and(Won)31,871 million (2009:(Won)17,893 million) of foreign currency translation gain and loss as non-operating income and expense, respectively.

20.    Common22.    Capital Stock

As of December 31, 2010,2012 and 2013, the Controlling Company’s number of authorized shares is one billion, and the details of common stock are as follows:billion.

 

   2010.12.31   2009.12.31 
   Number of
outstanding
shares
   Par value
per share
(Korean won)
   Common stock
(In millions of
Korean won)
   Number of
outstanding
shares
   Par value
per share
(Korean won)
   Common stock
(In millions of
Korean won)
 

Common stock 1

   261,111,808    (Won)5,000    (Won)1,564,499     261,111,808    (Won)5,000    (Won)1,564,499  
   2012   2013 
   Number of
outstanding
shares
   Par value
per share
(Korean
won)
   Common stock
(in millions of
Korean won)
   Number of
outstanding
shares
   Par value
per share
(Korean
won)
   Common stock
(in millions of
Korean won)
 

Common stock 1

   261,111,808    5,000    1,564,499     261,111,808    5,000    1,564,499  

 

1The Controlling Company retired 51,787,959 treasury shares against retained earnings. Therefore, the common stock amount differs from the amount resulting from multiplying the number of shares issued by(Won)5,000 par value per share of common stock.

21.    Treasury Stock23.    Retained Earnings

The details in treasury stock owned by the Controlling CompanyDetails of retained earnings as of December 31, 20102012 and 2009,2013, are as follows:

 

   2010.12.31   2009.12.31 

Number of shares

   17,895,964     17,915,340  

Amounts(In millions of Korean won)

  (Won)955,083    (Won)956,159  

(in millions of Korean won)

  2012   2013 

Legal reserve 1

  782,249    782,249  

Voluntary reserves 2

   4,911,362     4,911,362  

Unappropriated retained earnings

   4,952,772     4,325,778  
  

 

 

   

 

 

 

Total

  10,646,383    10,019,389  
  

 

 

   

 

 

 

1The Commercial Code of the Republic of Korea requires the Company to appropriate, as a legal reserve, an amount equal to a minimum of 10% of cash dividends paid until such reserve equals 50% of its issued capital stock. The reserve is not available for the payment of cash dividends, but may be transferred to capital stock with the approval of the Company’s Board of Directors or used to reduce accumulated deficit, if any, with the ratification of a company’s of majority shareholders.

2Reserve for research and development discretionary reserves is accumulated separately when taxable reserves are appropriated to retained earnings. According to the Tax Reduction and Exemption Control Act, taxable reserves are included in deductible expenses when returns are adjusted in the process of calculating tax expenses. The reversed amount from the reserve can be allocated according to the related tax act.

24.    Accumulated Other Comprehensive Income and Other Components of Equity

As of December 31, 2012 and 2013, the details of the Group’s accumulated other comprehensive income attributable to owners of the Company are as follows:

(in millions of Korean won)

  2012  2013 

Investments in associates and joint ventures

  (15,251 (12,681

Gain or loss on derivatives

   (4,626  (9,337

Available-for-sale

   23,738    55,836  

Foreign currency translation adjustment

   (2,536  (9,280
  

 

 

  

 

 

 

Total

  1,325   24,538  
  

 

 

  

 

 

 

Changes in accumulated other comprehensive income for the years ended December 31, 2012 and 2013, are as follows:

   2012 

(in millions of Korean won)

  Beginning  Increase/decrease  Reclassification as
gain or loss
  Ending 

Investments in associates and joint ventures

  (6,811 (8,819 379   (15,251

Gain or loss on derivatives

   (30,254  (129,239  154,867    (4,626

Available-for-sale

   11,719    15,543    (3,524  23,738  

Foreign currency translation adjustment

   2,481    (5,017      (2,536
  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  (22,865 (127,532 151,722   1,325  
  

 

 

  

 

 

  

 

 

  

 

 

 

   2013 

(in millions of Korean won)

  Beginning  Increase/decrease  Reclassification as
gain or loss
   Ending 

Investments in associates and joint ventures

  (15,251 2,570       (12,681

Gain or loss on derivatives

   (4,626  (71,778  67,067     (9,337

Available-for-sale

   23,738    25,814    6,284     55,836  

Foreign currency translation adjustment

   (2,536  (6,744       (9,280
  

 

 

  

 

 

  

 

 

   

 

 

 

Total

  1,325   (50,138 73,351    24,538  
  

 

 

  

 

 

  

 

 

   

 

 

 

As of December 31, 2012 and 2013, the Group’s other components of equity are as follows:

(in millions of Korean won)

  2012  2013 

Treasury stock

  (931,132 (922,175

Gain(loss) on disposal of treasury stock1

   (6,797  (2,170

Share-based payments

   3,912    (9,609

Others2

   (409,269  (386,989
  

 

 

  

 

 

 

Total

  (1,343,286 (1,320,943
  

 

 

  

 

 

 

1The tax effect directly reflected in equity is693 million (2012:2,170 million) as of December 31, 2013.

2Profit and loss occurred from transactions with non-controlling interest and investment difference occurred from change in proportion of subsidiaries are included.

As of December 31, 2012 and 2013, the details of treasury stock are as follows:

   2012   2013 

Number of shares

   17,476,002     17,308,160  

Amounts(In millions of Korean won)

  931,132    922,175  

Treasury stock is expected to be used foras stock compensation for the Company’s directors and employees and other purposes.

22.25.    Share-Based Payments

The Company’sdetails of share-based compensation programs include the employee stock options and stock grants. The Company measures and recognizes compensation cost for all share-based payment awards made to employees and directors, including grants of employee stock options and employee stock grants.

The fair value of awards granted that are expected to ultimately vest is recognized as expense over the requisite service periods. The number of options expected to vest equals the total options granted less an estimation of the number of forfeitures expected to occur prior to vesting. The forfeiture rate is calculated based on historical data and is adjusted if actual forfeitures differ significantly from the original estimates. The effect of any change in estimated forfeitures would be recognized through a cumulative adjustment that would be included in compensation cost in the period of the change in estimate.

Stock Options

The Company has granted stock options to its executive officers and directorspayments as of December 31, 2010 in accordance with the stock option plan approved by its board of directors, details of which are as follows:

   KT Co.  KT Hitel 
   4th grant  KTF-4th1  1st grant   2nd grant 

Grant date

  2005.2.4  2005.3.4  2010.8.27   2010.10.14 

Grantee

  Former
executives
  Former
executives and
former outside
directors
  Former
executives
   Former
executives
 

Number of basic allocated shares upon grant

   50,800    92,637    165,923     140,741  

Number of additional shares related to business performance upon grant

   20,000               

Number of shares expected to be exercised upon grant

   60,792    92,637    165,923     140,741  

Number of settled or forfeited shares

   (10,800  (13,437         

Number of expired shares as of December 31, 2010

                  

Number of settled or forfeited additional shares related to business performance

   (19,847             

Number of allocated shares as of December 31, 2010

   40,000    79,200    165,923     140,741  

Number of additional shares related to business performance as of December 31, 2010

   3,153               

Total number of shares as of December 31, 2010

   43,153    79,200    165,923     140,741  

Number of shares expected to be exercised

   43,153    79,200    165,923     140,741  

Fair value per share (in Korean won)

  (Won)12,322   (Won)4,328   (Won)3,435    (Won)3,332  

Total compensation cost (in millions of Korean won)

  (Won)531   (Won)343   (Won)570    (Won)469  

Exercise price per share

  (Won)54,600   (Won)42,684   (Won)6,750    (Won)8,060  

Exercise period

   

 

2007.02.05~

2012.02.04

  

  

  
 
2007.03.05~
2012.03.04
  
  
  

 

2012.08.27~

2015.08.26

  

  

   
 
2012.10.14~
2015.10.13
  
  

Valuation method

   
 
Black-scholes
model
  
  
  
 
Black-scholes
model
  
  
  
 
Black-scholes
model
  
  
   
 
Black-scholes
model
  
  

1The stock options granted to the directors, officers or employees of KTF prior to the merger were converted into KT stock options on June 1, 2009, granting the rights to purchase the stock of KT based on the merger ratio.

Upon exercise, the Company can elect one of the following settlement methods: issuance of new shares, issuance of treasury stock or cash settlement, subject to certain circumstances.

The stock option of KT Hitel is a cash settlement option.

The Company adopted the fair value method to measure compensation costs based on the various valuation assumptions and methods, which are as follows:

   KT Co.  KT Hitel 
   4th grant  KTF-4th 1  1st grant  2nd grant 

Risk free interest rate

   4.43  2.78  3.38  3.38

Expected duration(year)

   4.5 ~ 5.5    1.5    3.5    3.5  

Expected volatility

   33.41% ~ 42.13  35.03  59.04  59.04

Expected dividend yield ratio

   5.86  3.54  0.00  0.00

1The compensation costs for the stock options granted to the directors, officers or employees of KTF were recalculated considering risk-free rate, expected duration and other on the date of the merger.

Of the total compensation costs calculated using the fair value method, the compensation costs recognized for the year ended December 31, 2010 are as follows:

   KT Co.   KT Hitel     

(In millions of Korean won)

  4th grant  KTF-4th   1st grant   2nd grant   Total 

Total compensation costs before adjustment

  (Won)749   (Won)343    (Won)689    (Won)525    (Won)2,306  

Total compensation costs cancelled

   (218                 (218

Total compensation costs after adjustment

   531    343     689     525     2,088  

Compensation costs recognized in prior periods

   531    343               874  

Compensation costs recognized in the current period

            119     56     175  

Compensation costs to be recognized after the current period

            570     469     1,039  

Other share-based compensation

The Company provided stock grants subject to both the service period and business performance goals.

The fair value of each stock grant awarded was estimated on the date of grant for performance based grants assuming that performance goals will be achieved. The expected term for grants is generally one year. The stock grants are settled with the new shares issued or treasury stock owned by the Company upon vesting. The fair value is based on the market price of the Company’s stock on the grant date. Compensation cost is recognized over the requisite vesting period and adjusted for actual forfeitures before vesting

The details of stocks grants as of December 31, 20102013, are as follows:

 

   

4th grant7th

Grant date

  2010.4.292013.04.26

Grantee

  CEOs,CEO, inside directors, outside directors, executives

Estimated number of shares granted

142,436 shares

Estimated number of shares to be exercisable

142,436 shares

Vesting conditions (both conditions required)

  

Service condition: 1 year

Non-market performance condition: achievement of performance

Fair value per option (in Korean won)

  (Won)47,700 35,750

Total compensation costs (in Korean won)

  (Won)6,794 4,082 million

Estimated exercise date (exercise date)

  During 20112014

Valuation method

  Fair value method

Above compensation costs were calculated based onThe changes in the fair value methodnumber of stock options and were charged to current operationsthe weighted-average exercise price, as of December 31, 2012 and 2013, are as follows:

 

   2012 
   Beginning   Granted   Expired   Exercised 1   Ending   Number of
shares
exercisable
 

5th grant

   190,658          90,869     99,789            

6th grant

        255,110               255,110       

Total

   190,658     255,110     90,869     99,789     255,110       

   2013 
   Beginning   Granted   Expired   Forfeited   Exercised 1   Ending   Number of
shares
exercisable
 

6th grant

   255,110          154,137          100,973            

7th grant

        288,459          6,231          282,228       

Total

   255,110     288,459     154,137     6,231     100,973     282,228       

(In millions of Korean won)

14th grantThe weighted average price of common stock at the time of exercise during 2013 was

Total compensation costs

40,300 (2012:(Won)6,79428,700).

Compensation costs recognized in prior periods

Compensation costs recognized in the current period

6,794

Compensation costs to be recognized after the current period

23.    Retained Earnings

The Commercial Code of the Republic of Korea requires the Controlling Company to appropriate, as a legal reserve, an amount equal to a minimum of 10% of cash dividends paid until such reserve equals 50% of its issued capital stock. The reserve is not available for the payment of cash dividends, but may be transferred to capital stock with the approval of the Controlling Company’s Board of Directors or used to reduce accumulated deficit, if any, with the ratification of the Controlling Company’s majority shareholders.

The Controlling Company appropriates a certain portion of retained earnings, pursuant to a shareholder resolution, as voluntary reserves. These reserves may be reversed and transferred to unappropriated retained earnings through a resolution of shareholders, and may be distributed as dividends after the reversal.

24.26.    Operating Revenues

Operating revenues for the years ended December 31, 2010, 20092011, 2012 and 20082013, are as follows:

 

(In millions of Korean won)

  2010   2009   2008 

Internet

  (Won)2,567,001    (Won)2,448,607    (Won)2,481,171  

Data communication

   1,309,010     1,313,936     1,335,769  

Fixed-line telephone

   4,269,782     4,696,980     5,199,534  

PCS

   7,083,345     6,646,389     6,424,414  

Goods sold1

   4,395,230     3,396,886     3,065,858  

Other operating revenues2

   1,706,945     1,141,014     1,080,496  
               

Operating revenues

  (Won)21,331,313    (Won)19,643,812    (Won)19,587,242  
               

(in millions of Korean won)

  2011   2012   2013 4 

Sales of services

  16,941,430    19,266,545    19,663,014  

Sale of goods

   4,369,375     4,589,830     4,065,659  

Others 1, 2, 3

   777,025     787,397     329,208  
  

 

 

   

 

 

   

 

 

 

Operating revenues

  22,087,830    24,643,772    24,057,881  
  

 

 

   

 

 

   

 

 

 

 

1Goods sold represent revenue from the saleDisposed land and building (carrying amount:171,989 million) for470,347 million K-REALTYCR-REIT 1 and leased them in 2011. The Company recognized gain on disposal of handsetsproperty and others.equipment298,358 million and accounted for as an operating lease.

 

2Revenues from the system integrationDisposed land and real estate are included.building (carrying amount:93,250 million) for232,000 million to AJU-KTM private funding real-estate investment trust No.1 and leased them in September 2012. The Company recognized gain on disposal of property and equipment of138,750 million and accounted for as an operating lease.

Details of construction contracts, related to the other operating revenue, as of December 31, 2010, 2009 and 2008 are as follows:

3Disposed land and building (carrying amount:32,232 million) for144,100 million to K-REALTYCR-REIT 2 and leased them in November 2012. The Company recognized gain on disposal of property and equipment of111,868 million and accounted for as an operating lease.

 

  2010 

(In millions of Korean won

and us dollars in thousands)

 Beginning
contract
balance
  Increase  Change in
contracts
  Recognized as
revenue
  Ending
contract
balance
 

Bugae-dong, Incheon

 (Won)4,335   (Won)   (Won)   (Won)(4,335 (Won)  

Sungsu-dong, Seoul (Factory building)

  18,714            (18,714    

Garak-dong, Seoul (Office building)

  40,733            (28,905  11,828  

Yeongdeungpo-gu, Seoul (Factory building)

      146,733        (6,417  140,316  

Incheon rural IT facility construction

  2,295            (1,423  872  

Pyeongtaek Cheongbuk area land development electrical facility construction

  1,130        500    (1,630    

Dang-dong, Gunpo (2)C-1BL apartment IT facility construction Section 4

  2,734            (355  2,379  

DC link construction between Jindo and Jeju

  

 

USD 82,367

11,436

  

  

  

 


  

  

  

 


  

  

  

 

(USD 25,990

(3,609


  

 

USD 56,377

7,827

  

  

Submarine cable construction between Wando and Chungsando, Jeonnam

      10,255        (1,865  8,390  

Test solar concentrator

      1,182        (1,182    

Buoy installation

      871        (871    

Ocean Bottom Seismometer

      1,016        (1,016    

Others

  439                439  

APCN2 submarine cable repair work

      USD 1,713        (USD 1,713    
                    

Total (Korean won)

 (Won)81,816   (Won)160,057   (Won)500   (Won)(70,322 (Won)172,051  

Total (USD)

  USD 82,367    USD 1,713        (USD 27,703  USD 56,377  
                    

  2009 

(In millions of Korean won

and us dollars in thousands)

 Beginning
contract
balance
  Increase  Change in
contracts
  Recognized as
revenue
  Ending
contract
balance
 

Bugae-dong, Incheon

 (Won)78,872   (Won)   (Won)   (Won)(74,537 (Won)4,335  

Sungsu-dong, Seoul (Hyundai apartment)

  13,528            (13,528    

Sungsu-dong, Seoul (Factory building)

  64,477            (45,763  18,714  

Garak-dong, Seoul (Office building)

      48,873        (8,140  40,733  

Deep ocean water intake and drainage facilities construction

          716    (716    

Incheon rural IT facility construction

  2,998        224    (927  2,295  

Pyeongtaek Cheongbuk area land development electrical facility construction

      4,113    2,728    (5,711  1,130  

Marine research technical service for DC link construction between Jindo and Jeju

      2,013    (31  (1,982    

DC link construction between Jindo and Jeju

      USD 82,367            USD 82,367  
      11,436            11,436  

Dang-dong, Gunpo (2)C-1BL apartment IT facility construction Section4

      2,790        (56  2,734  

Others

  439    421    (20  (401  439  

TPE submarine cable construction

  USD 3,044            (USD 3,044    

AAG submarine cable repair work

  USD 1,228        USD 790    (USD 2,018    

RJK cable system dismantlement

      USD 1,927    (USD 241  (USD 1,686    

APCN2 submarine cable repair work

      USD 1,953        (USD 1,953    

TPE 3M PLIB construction

      USD 3,595    (USD 154  (USD 3,441    
                    

Total (Korean won)

 (Won)160,314   (Won)69,646   (Won)3,617   (Won)(151,761 (Won)81,816  

Total (USD)

  USD 4,272    USD 89,842    USD 395    (USD12,142  USD 82,367  
                    
  2008 

(In millions of Korean won

and us dollars in thousands)

 Beginning
contract
balance
  Increase  Change in
contracts
  Recognized as
revenue
  Ending
contract
balance
 

Jeongja-dong, Suwon

  279            (279    

Bugae-dong, Incheon

  157,092            (78,220  78,872  

Sungsu-dong, Seoul (Hyundai apartment)

  63,836            (50,308  13,528  

Sungsu-dong, Seoul (Factory building)

      64,689        (212  64,477  

NAIMS system construction work/ Cable raising and laying

  714        80    (794    

Deep ocean water intake and drainage facilities construction

      13,850        (13,850    

Incheon rural IT facility construction

      3,631        (633  2,998  

Electrical facility construction Section 1 in Highway between busan- and Ulsan

      2,446    830    (3,276    

Maintenance of HVDC submarine cable, construction of protecting facilities for remained section

      852    81    (933    

Others

      1,735    13    (1,309  439  

TPE submarine cable construction

  USD 11,022        USD 14,096    USD (22,074  USD 3,044  

KOC submarine cable construction

  USD 1,151            USD (1,151    

AAG submarine cable construction

      USD 8,900    USD 722    USD (9,622    

AAG submarine cable repair work

      USD 2,761        USD (1,533  USD 1,228  

JAKABARE cable system PLGR work

      USD 1,215        USD (1,215    
                    

Total(Korean won)

 (Won)221,921   (Won)87,203   (Won)1,004   (Won)(149,814 (Won)160,314  

Total(USD)

  USD 12,173    USD 12,876    USD 14,818    (USD 35,595  USD 4,272  
                    

During the years ended December 31, 2010, 2009 and 2008, the changes in remaining contract balance of major system integration business included in other operating revenue are as follows:

    2010 

(In millions of Korean won)

  Beginning
contract balance
   Increase   Recognized
as revenue
  Ending
contract balance
 

Lease type private investment of advanced U-City broadband information network CCTV Construction, Ansan

  (Won)2,043    (Won)    (Won)(2,043 (Won)  

Construction of information highway, Busan

   11,393          (346  11,047  

Construction and support for infrastructure and service operation of digital textbook research school

   68          (68    

Second phase construction of national defense transportation information system

   5,587          (2,568  3,019  

System integration of SMRT Mall IT and advertising facility construction in Seoul Metropolitan Rapid Transit Corporation

        69,759     (61,409  8,350  

Management and operation of SMRT Mall business

        82,000     (4,762  77,238  
                   

Total

  (Won)19,091    (Won)151,759    (Won)(71,196 (Won)99,654  
                   

   2009 

(In millions of Korean won)

  Beginning
contract balance
   Increase   Recognized
as revenue
  Ending
contract balance
 

Lease type private investment of advanced U-City broadband information network CCTV Construction, Ansan

  (Won)    (Won)13,116    (Won)(11,073 (Won)2,043  

Construction of information highway, Busan

   12,612          (1,219  11,393  

Construction and support for infrastructure and service operation of digital textbook research school

        9,727     (9,659  68  

Second phase construction of national defense transportation information system

        7,973     (2,386  5,587  
                   

Total

  (Won)12,612    (Won)30,816    (Won)(24,337 (Won)19,091  
                   
    2008 

(In millions of Korean won)

  Beginning
contract balance
   Increase   Recognized
as revenue
  Ending
contract balance
 

Construction of information highway, Busan

   22,781          (10,169  12,612  

Construction of U-City, Hwaseong Dongtan

   423          (423    

Extension of combined Wireless communications, The National Emergency Management Agency’s

   115          (115    

Second phase in the Establishment of system, National Health Service’s IP customer services

   7,808          (7,808    

Construction of Frequency resource analysis system

   1,603          (1,603    

Second phase in the construction of U-City, Hwaseong Dongtan

        9,883     (9,883    

Adoption of Navy’s main computer system-08

        8,951     (8,951    
                   

Total

  (Won)32,730    (Won)18,834    (Won)(38,952 (Won)12,612  
                   

4Off-plan sales amounting to45,010 million, which should have been recorded as a deduction of operating revenue in 2012, was recorded as a deduction of operating revenue in 2013.

25.27.    Operating Expenses

Operating expenses for the years ended December 31, 2010, 20092011, 2012 and 20082013, are as follows:

 

(In millions of Korean won)

  2010  2009  2008 

Salaries and wages

  (Won)2,162,812   (Won)2,192,935   (Won)2,267,967  

Provision for severance benefits

   242,770    1,128,352    360,968  

Employee welfare

   374,300    587,011    565,738  

Utilities

   254,085    250,664    248,777  

Taxes and dues

   240,050    207,234    269,168  

Rent

   278,049    257,405    249,101  

Depreciation

   2,819,639    2,873,831    3,213,917  

Amortization

   360,044    402,792    410,458  

Repairs and maintenance

   551,389    500,203    580,333  

Commissions

   1,450,286    1,261,852    1,353,903  

Advertising

   195,759    182,032    221,754  

Research

   268,802    239,508    235,508  

Interconnection charges

   1,245,451    1,227,088    1,234,473  

Cost of services

   804,108    581,762    525,948  

International call settlement

   284,849    263,749    263,464  

Cost of goods sold

   4,086,813    3,118,512    2,364,669  

Promotion

   1,227,632    1,121,880    1,080,089  

Sales commission

   1,621,430    1,804,583    2,129,675  

Provision for doubtful accounts

   171,195    103,852    147,190  

Other

   569,764    406,289    461,524  
             

Total

   19,209,227    18,711,534    18,184,624  

Less : Transfer to other accounts

   (52,996  (38,269  (40,197
             

Net

  (Won)19,156,231   (Won)18,673,265   (Won)18,144,427  
             

(in millions of Korean won)

  2011   2012  2013 2 

Salaries and wages

  2,854,361    3,096,766   3,288,942  

Depreciation

   2,644,796     2,894,400    3,107,792  

Amortization of intangible assets

   312,693     379,678    458,382  

Commissions 1

   3,313,431     3,655,057    3,575,488  

Interconnection charges

   1,115,792     901,314    885,479  

International interconnection fee

   333,659     309,955    265,467  

Purchase of inventories

   4,518,983     4,851,295    3,565,948  

Changes of inventories

   35,673     (259,078  320,971  

Service Cost

   1,331,302     1,264,218    1,834,425  

Utilities

   262,454     271,277    309,497  

Taxes and Dues

   219,245     299,567    257,931  

Rent

   327,274     371,030    432,543  

Insurance premium

   11,925     243,666    313,056  

Installation fee

   339,860     291,057    260,498  

Advertising expenses

   172,183     150,399    161,013  

Research and development

   147,825     153,171    171,461  

Expenses

     

Card service cost

   707,588     2,771,383    2,702,653  

Others

   1,451,690     1,318,518    1,822,951  
  

 

 

   

 

 

  

 

 

 

Total

  20,100,734    22,963,673   23,734,497  
  

 

 

   

 

 

  

 

 

 

26.    Income Tax Expense

1The sales commission is included in commissions

232,835 million of Operating expenses related to off-plan sales, which should have been recorded as a deduction of operating expenses in 2012, was recorded as a deduction of operating expenses in 2013.

Income tax expense

Details of salaries and wages for the years ended December 31, 2010, 20092011, 2012 and 2008, consists of:

The components of income tax expense

(In millions of Korean won)

  2010  2009  2008 

Current income tax expense

  (Won)354,525   (Won)144,272   (Won)294,620  

Changes in deferred income tax assets and liabilities related to temporary differences

   (75,344  (28,985  (74,116

Changes in deferred income tax assets and liabilities related to tax credits

   80,328    (38,020  (59,547

Changes in deferred income tax assets and liabilities directly reflected in shareholders’ equity

   8,925    1,044    3,000  

Income tax expense directly added to shareholders’ equity

   94           31,539    50  

Others

             3,315    (2,087           3,852  
             

Income tax expense

  (Won)371,843   (Won)107,763   (Won)167,859  
             

Deferred tax assets and liabilities directly reflected in shareholders’ equity

(In millions of Korean won)

  2010  2009    

Gain on valuation of available-for-sale securities

  (Won)(2,519 (Won)(2,023 

Loss on valuation of available-for-sale securities

   177    14   

Increase in equity of associates

   (438  (252 

Decrease in equity of associates

   7,606    1,386   

Gain and loss on valuation of derivatives

   10,458    530   

Other capital adjustments

   (5,443  1,261   
          

Total

  (Won)9,841   (Won)916   
          

A reconciliation of the income tax expense and the income before income tax expense

(In millions of Korean won)

  2010  2009  2008 

Income before income tax expense

   (Won)1,561,773    (Won)719,275    (Won)710,176  
                

Expected tax expense at statutory tax rate

   (Won)395,533    (Won)174,064    (Won)195,285  

Differences

       

Non-taxable benefit

   (4,750   (4,473      

Non-deductible expense

   29,874     27,147     25,412   

Impact of not recording deferred taxes on

certain temporary differences

   (5,631   4,507     83,892   

Changes in tax adjustment, additional income tax and tax refund for prior periods

   8,678     12,758     (4,377 

Tax credit carryforwards and deductions

   (54,658   (110,969   (203,070 

Changes in tax rates

   7,023     3,194     72,839   

Others, net

   (4,226  (23,690  1,535    (66,301  (2,122  (27,426
                         

Income tax expense

   (Won)371,843    (Won)107,763    (Won)167,859  
                

Effective tax rate

    23.8   14.98   23.64
                

Deferred tax assets and liabilities from the tax effects of temporary differences, including available tax credit carryforwards

    2010 
   Temporary Differences  Deferred Income Tax
Assets (Liabilities)
 

(In millions of Korean won)

  Beginning
Balance
  Increase
(Decrease)
  Ending
Balance
  Beginning
Balance
  Ending
Balance
 

Deferred tax arising from temporary differences

      

Deferred tax arising from temporary differences

      

Allowance for doubtful accounts

  (Won)511,003   (Won)31,972   (Won)542,975   (Won)122,873   (Won)126,675  

Derivatives

   (132,351  (3,564  (135,915  (27,959  (30,583

Inventory valuation reserve

       4,656    4,656        1,125  

Available-for-sale securities

   41,606    (4,338  37,268    9,154    8,495  

Equity method investments

   58,035    44,169    102,204    12,773    22,513  

Depreciation

   101,206    61,589    162,795    22,265    35,471  

Contribution for construction

   178,624    (35,782  142,842    39,297    31,202  

Inventories

   6,633    (5,431  1,202    1,174    291  

Accrued expenses

   140,169    222,531    362,700    33,918    87,997  

Provisions

   58,338    92,485    150,823    13,919    34,176  

Provision for severance indemnities

   1,157,978    (302,469  855,509    254,760    188,409  

Refundable deposits for telephone installation

   43,677    (1,484  42,193    9,609    9,283  

Accrued revenues

   (7,657  4,288    (3,369  (1,855  (818

Deposits for severance benefits

   (1,136,144  290,344    (845,800  (250,007  (186,019

Reserve for technology and human resource development

       (3,900  (3,900      (858

Others

   935,826    (44,719  891,107    217,541    212,448  

Tax loss carryforwards

   281,201    (15,054  266,147    61,882    60,999  
                     

Total

   2,238,144    335,293    2,573,437    519,344    600,806  

Not recognized as deferred income tax assets

   (623,401  (26,636  (650,037  (138,740  (144,858
                     

Recognized as deferred income tax assets

  (Won)1,614,743   (Won)308,657   (Won)1,923,400    380,604    455,948  
                     

Deferred tax assets arising from the carryforwards

      

Total tax credit carryforwards

  (Won)195,983   (Won)(89,372 (Won)106,611    195,983    88,794  

Not recognized as deferred income tax assets

   (26,861  18,910    (7,951  (26,861    
                     

Recognized as deferred income tax assets

  (Won)169,122   (Won)(70,462 (Won)98,660    169,122    88,794  
                     

Net deferred income tax assets

     (Won)549,725   (Won)544,742  
            

Current deferred income tax assets

     (Won)437,525   (Won)363,492  

Non-current deferred income tax assets

      113,266    185,724  

Current deferred income tax liabilities

      (1  (1,817

Non-current deferred income tax liabilities

      (1,065  (2,657

    2009 
   Temporary Differences  Deferred Income Tax
Assets (Liabilities)
 

(in millions of Korean won)

  Beginning
Balance
  Increase
(Decrease)
  Ending
Balance
  Beginning
Balance
  Ending
Balance
 

Deferred tax arising

from temporary differences

      

Allowance for doubtful accounts

  (Won)497,672   (Won)13,331   (Won)511,003   (Won)119,855   (Won)122,873  

Derivatives

   (479,015  346,664    (132,351  (108,503  (27,959

Available-for-sale securities

   39,337    2,269    41,606    8,840    9,154  

Equity method investment securities

   1,455,549    (1,397,514  58,035    320,220    12,773  

Depreciation

   (23,595  124,801    101,206    (5,191  22,265  

Contribution for construction

   233,106    (54,482  178,624    51,283    39,297  

Inventories

   20,392    (13,759  6,633    4,543    1,174  

Accrued expenses

   222,590    (82,421  140,169    53,825    33,918  

Provisions

   182,556    (124,218  58,338    43,422    13,919  

Provision for severance indemnities

   1,152,303    5,675    1,157,978    253,508    254,760  

Refundable deposits for telephone installation

   50,932    (7,255  43,677    11,205    9,609  

Accrued revenues

   (11,652  3,995    (7,657  (2,798  (1,855

Deposits for severance benefits

   (1,111,846  (24,298  (1,136,144  (244,640  (250,007

Reserve for technology and human resource development

   (106,667  106,667        (25,813    

Others

   1,140,412    (204,586  935,826    256,236    217,541  

Tax loss carryforwards

   223,560    57,641    281,201    49,183    61,882  
                     

Total

   3,485,634   (Won)(1,247,490  2,238,144    785,175    519,344  
         

Not recognized as deferred income tax assets

   (1,962,652   (623,401  (433,556  (138,740
                  

Recognized as deferred income tax assets

  (Won)1,522,982    (Won)1,614,743   (Won)351,619   (Won)380,604  
                  

Deferred tax assets

arising from the carryforwards

      

Total tax credit carryforwards

  (Won)153,193   (Won)42,790   (Won)195,983    153,193    195,983  

Not recognized as deferred income tax assets

   (22,091   (26,861  (22,091  (26,861
                  

Recognized as deferred income tax assets

  (Won)131,102    (Won)169,122    131,102    169,122  
                  

Net deferred income tax assets

     (Won)482,721   (Won)549,725  
            

Current deferred income tax assets

     (Won)249,941   (Won)437,525  

Non-current deferred income tax assets

      235,514    113,266  

Current deferred income tax liabilities

          (1

Non-current deferred income tax liabilities

      (2,734  (1,065

The possibility of realization on deferred tax asset depends on many factors, such as the Company’s ability, overall economic environment, and industry prospects, within the realization period of temporary differences. The Company assesses such factors periodically, and recognizes the deferred tax assets as of December 31, 2010, as all deductable temporary differences2013, are considered realizable. However, the Company did not recognize the income tax assets resulting from the net operating loss carryforwards and equity-method investments to the extent the Company does not expect the related temporary differences to be reversed within the foreseeable future.

27.    Income From Discontinued Operations

Doremi Media Co., Ltd is excluded from the consolidation as of December 31, 2010. The net income (loss) of Doremi Media and other subsidiaries for the years ended December 31, 2010, 2009 and 2008 are reclassified into income (loss) from discontinued operations, as follows:

 

  2010  2009  2008 

(in millions of Korean won)

 Doremi
Media
  Doremi
Media
  Olive
Nine
  KT FDS  Total  Doremi
Media
  Olive
Nine
  KT FDS  Total 

Book Value

         

Assets of discontinued operations

 (Won)   (Won)8,026   (Won)   (Won)   (Won)8,026   (Won)10,375   (Won)43,666   (Won)9,292   (Won)63,333  
                                    

Liabilities of discontinued operations

      8,409            8,409    8,676    29,453    9,132    47,261  
                                    

Income (loss) from discontinued operations

         

Operating and non-operating loss

 (Won)(574 (Won)(4,212 (Won)(7,432 (Won)(3,911 (Won)(15,555 (Won)(2,980 (Won)(22,600 (Won)(3,447 (Won)(29,027

Gain on disposal of discontinued operations

  3,186        4,035    4,246    8,281                  

Tax effect

          4,305    1,152    5,457                  
                                    

Income (loss) from discontinued operations

 (Won)2,612   (Won)(4,212 (Won)908   (Won)1,487   (Won)(1,817 (Won)(2,980 (Won)(22,600 (Won)(3,447 (Won)(29,027
                                    

(in millions of Korean won)

  2011   2012   2013 

Short-term employee benefits

  2,598,889    2,855,024    3,031,435  

Post-employment benefits(Defined benefit plan)

   183,299     210,365     217,062  

Post-employment benefits(Defined contribution plan)

   230     1,703     23,857  

Post-employment benefits (Others)

   65,217     25,762     12,506  

Share-based payment

   6,726     3,912     4,082  
  

 

 

   

 

 

   

 

 

 

Total

  2,854,361    3,096,766    3,288,942  
  

 

 

   

 

 

   

 

 

 

The consolidated statements28.    Financial Income and Expenses

Details of financial income for the years ended December 31, 20092011, 2012 and 2008 have been retrospectively adjusted for discontinued operations.2013, are as follows:

28.    Comprehensive Income

(in millions of Korean won)

  2011   2012   2013 

Interest income

  151,634    203,214    108,794  

Foreign currency transaction gain

   46,161     20,159     37,371  

Foreign currency translation gain

   6,161     266,623     106,135  

Gain on settlement of derivatives

   496     2,824     13,878  

Gain on valuation of derivatives

   63,959     118     627  

Others

   1,581     5,719     12,544  
  

 

 

   

 

 

   

 

 

 

Total

  269,992    498,657    279,349  
  

 

 

   

 

 

   

 

 

 

Comprehensive incomeDetails of financial expenses for the years ended December 31, 2010, 20092011, 2012 and 2008 consists of:2013, are as follows:

 

(in millions of Korean won)

  2010  2009  2008 

Net income

  (Won)1,192,542   (Won)609,695   (Won)513,290  

Other comprehensive income

    

Cumulative effect of changes in accounting policies

           3,852  

Gain on valuation of available-for-sale securities

   2,816    (113  (8,939

Loss on valuation of available-for-sale securities

   (748  7,687    (7,545

Changes in equity-method investees with accumulated comprehensive income

   85    (10,204  9,954  

Changes in equity-method investees with accumulated comprehensive expense

   7,820    (10,138  961  

Gain on valuation of financial derivatives

   (6,769  486    9,374  

Loss on valuation of financial derivatives

   (28,384  (26,223  (18,370

Gain on translation of foreign operations

   6,885    (8,642  13,559  

Loss on translation of foreign operations

   (23,198  (18,656  11,779  
             

Comprehensive income

  (Won)1,151,049   (Won)543,892   (Won)527,915  
             

Attributable to : Equity holders of the parent

  (Won)1,129,900   (Won)439,425   (Won)462,258  

Minority interests

   21,149    104,467    65,657  

(in millions of Korean won)

  2011   2012   2013 

Interest expense

  480,609    472,917    450,302  

Foreign currency transaction loss

   35,725     17,974     31,611  

Foreign currency translation loss

   86,597     7,249     6,518  

Loss on settlement of derivatives

   27,055     7,804     16,384  

Loss on valuation of derivatives

   9,147     241,358     105,691  

Others 1

   3,222     34,691     36,994  
  

 

 

   

 

 

   

 

 

 

Total

  642,355    781,993    647,500  
  

 

 

   

 

 

   

 

 

 

1The Company recognized funding obligation to Smart Channel Co., Ltd. as financial liabilities and recognized5,393 million as an expense in 2012.

29.    Deferred Income Tax and Income Tax Expense

The analyses of deferred tax assets and deferred tax liabilities as of December 31, 2012 and 2013, are as follows:

(in millions of Korean won)

  2012  2013 

Deferred tax assets

   

Deferred tax assets to be recovered within 12 months

  261,217   396,831  

Deferred tax assets to be recovered after more than 12 months

   764,563    741,047  
  

 

 

  

 

 

 
  1,025,780   1,137,878  
  

 

 

  

 

 

 

Deferred tax liabilities

   

Deferred tax liability to be recovered within 12 months

  (973 (1,015

Deferred tax liability to be recovered after more than 12 months

   (551,332  (599,384
  

 

 

  

 

 

 
   (552,305  (600,399
  

 

 

  

 

 

 

Deferred tax assets (liabilities), net

  473,475   537,479  
  

 

 

  

 

 

 

The gross movements on the deferred income tax account for the years ended December 31, 2012 and 2013, are calculated as follows:

(in millions of Korean won)

  2012   2013 

Beginning

  404,210    473,475  

Charged(credited) to the income statement

   24,409     98,680  

Charged(credited) to other comprehensive income

   32,670     (34,676

Changes in scope of consolidation

   12,186       
  

 

 

   

 

 

 

Ending

  473,475    537,479  
  

 

 

   

 

 

 

The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows:

    2012 

(in millions of Korean won)

  Beginning  Income
statement
  Other
comprehensive
income
  Changes in
scope of
consolidation
  Ending 

Deferred tax liabilities

      

Derivative financial assets

  (37,861 37,294   270      (297

Available-for-sale financial assets

   (12,945  7,732    (6,094  638    (10,669

Investment in joint venture and associates

   (200  (4,643  3,148    43    (1,652

Depreciation

   (84,366  51,350        1,118    (31,898

Deposits for severance benefits

   (271,233  (23,283  (1,261  (1,339  (297,116

Accrued income

   (1,855  243        (61  (1,673

Prepaid expenses

       220            220  

Reserve for technology and human resource development

   (63,491  (1,079          (64,570

Other

   (149,388  7,190        (2,452  (144,650
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   (621,339  75,024    (3,937  (2,053  (552,305
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Deferred tax assets

      

Derivatives

       30,155    (8,436      21,719  

Allowance for doubtful accounts

   112,203    23,965        3,108    139,276  

Inventory valuation

   594    (292          302  

Contribution for construction

   29,301    (2,169          27,132  

Accrued expenses

   24,397    3,316            27,713  

Provisions

   55,260    7,115        321    62,696  

Retirement benefit obligations

   257,248    18,981    42,922    1,758    320,909  

Withholding of facilities expenses

   9,389    (528          8,861  

Accrued payroll expenses

   28,670    3,193        322    32,185  

Deduction of installment receivables

   78,880    (67,356          11,524  

Present value discount

   34,176    (19,276          14,900  

Assets retirement obligation

   16,283    2,478            18,761  

Gain or loss foreign currency translation

   97,942    (77,215          20,727  

Deferred revenue

   51,183    15,645            66,828  

Real-estate sales

   6,456    (5,762          694  

Tax credit carryforwards

   80,854    69,480            150,334  

Foreign operation translation difference

   386        2,121        2,507  

Other

   142,327    (52,345      8,730    98,712  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   1,025,549    (50,615  36,607    14,239    1,025,780  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net balance 1

  404,210   24,409   32,670   12,186   473,475  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

1Deferred tax liabilities, amounting to1,680 million (2012: Deferred tax liabilities of43,693 million) that are related to the tax receivable of certain subsidiaries’ undistributed profit, are not recognized as of December 31, 2013. This undistributed profit is permanently reinvested. As of December 31, 2013, temporary difference of unrecognized deferred tax liabilities is381,666 million (2012:399,339 million).

    2013 

(in millions of Korean won)

  Beginning  Income
statement
  Other
comprehensive
income
  Changes in
scope of
consolidation
   Ending 

Deferred tax liabilities

       

Derivative financial assets

  (297 (116        —    (413

Available-for-sale financial assets

   (10,669  (5,198  (17,985       (33,852

Investment in joint venture and associates

   (1,652  (30,140  (780       (32,572

Depreciation

   (31,898  (38,229           (70,127

Deposits for severance benefits

   (297,116  29,963    (10       (267,163

Accrued income

   (1,673  65             (1,608

Prepaid expenses

   220    70             290  

Reserve for technology and human resource development

   (64,570  20,681             (43,889

Other

   (144,650  (6,415           (151,065
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 
   (552,305  (29,319  (18,775       (600,399
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Deferred tax assets

       

Derivatives

  21,719   9,377   1,499       32,595  

Allowance for doubtful accounts

   139,276    13,538             152,814  

Inventory valuation

   302    1             303  

Contribution for construction

   27,132    (6           27,126  

Accrued expenses

   27,713    27,576             55,289  

Provisions

   62,696    (28,976           33,720  

Retirement benefit obligations

   320,909    16,263    (18,055       319,117  

Withholding of facilities expenses

   8,861    (521           8,340  

Accrued payroll expenses

   32,185    14,536             46,721  

Deduction of installment receivables

   11,524    (4,479           7,045  

Present value discount

   14,900    (9,931           4,969  

Assets retirement obligation

   18,761    485             19,246  

Gain or loss foreign currency translation

   20,727    (10,491           10,236  

Deferred revenue

   66,828    (2,388           64,440  

Real-estate sales

   694    4,720             5,414  

Tax credit carryforwards

   150,334    14,067             164,401  

Foreign operation translation difference

   2,507        655         3,162  

Other

   98,712    84,228             182,940  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 
   1,025,780    127,999    (15,901       1,137,878  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Net balance

  473,475   98,680   (34,676     537,479  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

The tax impacts directly to equity as of December 31, 2011, 2012 and 2013, are as follows

  2011  2012  2013 

(in millions of
Korean won)

 Before
recognition
  Tax
effect
  After
recognition
  Before
recognition
  Tax
effect
  After
recognition
  Before
recognition
  Tax
effect
  After
recognition
 

Available-for-sale valuation gain (loss)

 78,441   (18,983 59,458   25,181   (6,094 19,087   74,317   (17,985 56,332  

Hedge instruments valuation gain (loss)

  37,165    (8,994  28,171    33,743    (8,166  25,577    (6,195  1,499    (4,696

Remeasurements from net defined benefit liabilities

  (137,635  33,308    (104,327  (172,153  41,661    (130,492  74,648    (18,065  56,583  

Shares of gain(loss) of joint ventures and associates

  (10,087  2,441    (7,646  (13,009  3,148    (9,861  3,221    (780  2,441  

Foreign operation translation difference

  37,658    (9,113  28,545    (8,766  2,121    (6,645  (2,708  655    (2,053
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 5,542   (1,341 4,201   (135,004 32,670   (102,334 143,283   (34,676 108,607  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Details of income tax expenses for the years ended December 31, 2011, 2012 and 2013, are calculated as follows:

(in millions of Korean won)

  2011  2012  2013 

Current income tax expenses

  230,378   282,499   160,319  

Adjustments of the current income tax expenses of prior year

       15,988    (5,910

Impact of change in temporary difference

   162,121    (24,409  (104,830

Impact of change in tax rate

   (18,144        
  

 

 

  

 

 

  

 

 

 

Total income tax expense

  374,385   274,078   49,579  
  

 

 

  

 

 

  

 

 

 

Income tax expense from continued operations

   318,459    277,869    49,579  

Income tax expense for discontinued operations

   55,926    (3,791    

The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities as follows:

(in millions of Korean won)

  2011  2012  2013 

Profit from continuing operations before income tax expenses

  1,609,222   1,414,842   (38,166
  

 

 

  

 

 

  

 

 

 

Expected tax expense at statutory tax rate

   389,432    342,392    9,263  

Tax effects of Income not subject to tax

   (393,557  (1,407  (25,130

Expenses not deductible for tax purposes

   396,673    39,136    87,220  

Tax credit carry forwards and deductions

   (169,217  (83,311  (15,673

Supplementary pay of corporation tax

       59,755    (5,910

Changes in unrealizable deferred tax assets

   10,188    (55,006  10,815  

Deferred tax effects due to changes in tax rates and others

   85,146    (17,656  (62

Tax effect and adjustment on consolidation

           (4,251

Others

   (206  (6,034  (6,693
  

 

 

  

 

 

  

 

 

 

Income tax expenses for continuing operations

  318,459   277,869   49,579  
  

 

 

  

 

 

  

 

 

 

30.    Earnings Per Share

Basic and dilutedCalculation of earnings per share for the years ended December 31, 2010, 20092011, 2012 and 2008 are2013, is as follows:

Basic earnings per share from continuing operations

(in millions of Korean won, except for per share amounts)

  2010   2009   2008 

Income from continuing operations attributable to common shares

  (Won)1,166,733    (Won)488,517    (Won)470,540  

Weighted-average number of common shares outstanding

   243,207,149     219,512,696     202,891,015  

Basic earnings per share from continuing operations

  (Won)4,797    (Won)2,225    (Won)2,319  

Basic earnings per share from discontinued operations

(in millions of Korean won, except for per share amounts)

  2010   2009   2008 

Income (loss) from discontinued operations attributable to common shares

  (Won)1,272    (Won)6,329    (Won)(20,730

Weighted-average number of common shares outstanding

   243,207,149     219,512,696     202,891,015  

Basic earnings per share from discontinued operations

  (Won)5    (Won)29    (Won)(102

Basic earnings per share

(in millions of Korean won, except for per share amounts)

  2010   2009   2008 

Net income attributable to common stock

  (Won)1,168,005    (Won)494,846    (Won)449,810  

Weighted-average number of common stock outstanding

   243,207,149     219,512,696     202,891,015  

Basic earnings per share

  (Won)4,803    (Won)2,254    (Won)2,217  

Weighted-average number of common shares outstanding is adjusted to reflect weighted-average number of treasury stock for the years ended December 31, 2010, 2009 and 2008.

Diluted earnings per share from continuing operations

(in millions of Korean won, except for per share amounts)

  2010   2009   2008 

Income from continuing operations attributable to common stock

  (Won)1,166,733    (Won)488,517    (Won)470,540  

Exchangeable bond interest

        4,395       

Adjusted income from continuing operations

   1,166,733     492,912     470,540  

Dilutive potential common shares outstanding

   18,081     4,655,062       

Weighted-average number of common shares outstanding and dilutive common shares

   243,225,230     224,167,758     202,891,015  

Diluted earnings per share from continuing operations

  (Won)4,797    (Won)2,199    (Won)2,319  

Diluted earnings per share from discontinued operations

(in millions of Korean won, except for per share amounts)

  2010   2009   2008 

Net income from discontinued operations attributable to common stock

  (Won)1,272    (Won)6,329    (Won)(20,730

Adjusted income (loss) from discontinued operations

  (Won)1,272    (Won)6,329    (Won)(20,730

Dilutive potential common shares outstanding

   18,081     4,655,062       

Weighted-average number of common shares outstanding and dilutive common shares

   243,225,230     224,167,758     202,891,015  

Diluted earnings per share from discontinued operations

  (Won)5    (Won)28    (Won)(102

Diluted earnings per share

(in millions of Korean won, except for per share amounts)

  2010   2009   2008 

Net income attributable to common stock

  (Won)1,168,005    (Won)494,846    (Won)449,810  

Exchangeable bond interest

        4,395       

Adjusted net income attributable to common stock

   1,168,005     499,241     449,810  

Dilutive potential common shares outstanding

   18,081     4,655,062       

Weighted-average number of common shares outstanding and dilutive common shares

   243,225,230     224,167,758     202,891,015  

Diluted earnings per share

  (Won)4,802    (Won)2,227    (Won)2,217  

Diluted net income per share is calculated by dividing adjusted net incomethe profit from operations attributable to equity holders of the Company by the weighted average number of common sharesstocks outstanding during the period, excluding common stocks purchased by the Company and dilutive common shares. Stock options and other share-based payments, which have no dilutive effect for each reporting period, are excluded from the calculation of dilutedheld as treasury stock (Note 24).

Basic earnings per share.

Potential common shares as of December 31, 2010, 2009 and 2008 are as follows:

   Par
Value
  

Issue
Date

 

Maturity Date

 

Exercisable Period

 Common shares to be issued 
            2010.12.31  2009.12.31  2008.12.31 

Stock options

  1   Dec. 26, 2002 Dec. 26, 2009 From 2 years after grant date until maturity date          371,632  

Stock options

  1   Sept. 16, 2003 Sept. 16, 2010 From 2 years after grant date until maturity date      3,000    3,000  

Stock options

  2   Feb. 4, 2005 Feb. 4, 2012 Increase in the number of exercisable shares by 1/3 every year after two years from grant date  43,153    43,153    43,153  

Stock options

  3   March 25, 2002 March 25, 2010 From 3 years after grant date until maturity date      20,570      

Stock options

  4   Sept. 8, 2003 Sept. 8, 2010 From 2 years after grant date until maturity date      219,909      

Stock options

  5   March 4, 2005 March 4, 2012 From 2 years after grant date until maturity date  79,200    79,200      

Other share-based payment

  6   June 20, 2007 Exercised in first half of 2010 

On maturity date, subject to the

resolution of board of directors

      11,790      

Other share-based payment

  6   March 27, 2008 Exercised in first half of 2010 

On maturity date, subject to the

resolution of board of directors

      13,345    29,481  

Other share-based payment

  6   May 7, 2009 Exercised in first half of 2010 

On maturity date, subject to the

resolution of board of directors

      29,055      

Other share-based payment

  6   April 29, 2010 Expected to be exercised in 2011 

On maturity date, subject to the

resolution of board of directors

  142,436          
                

Total

      264,789    420,022    447,266  
                

1Exercise price of(Won)57,000 per common share.

2Exercise price of(Won)54,600 per common share.

3Exercise price of(Won)62,814 per common share.

4Exercise price of(Won)41,711 per common share.

5Exercise price of(Won)42,684 per common share.

6Shares to be given subject to performance.

30.     Dividends

The details of dividends for common stocks included in the Controlling Company’s non-consolidated statements of appropriations of retained earningsshare from operations for the years ended December 31, 2010, 20092012 and 20082013, is calculated as follows:

   2011   2012   2013 

Profit (loss) from continuing operations attributable to common stock
(in millions of Korean won)

  1,280,015    1,075,694    (189,931

Profit (loss) from discontinued operations attributable to common stock
(in millions of Korean won)

   165,675     29,567       
  

 

 

   

 

 

   

 

 

 
   1,445,690     1,046,127     (189,931
  

 

 

   

 

 

   

 

 

 

Weighted average number of common stock outstanding

   243,268,052     243,517,103     243,737,431  

Basic earnings (loss) per share

  5,943    4,296    (779

Basic earnings (loss) per share from continuing operations
(in Korean won)

   5,262     4,417     (779

Basic earnings (loss) per share from discontinued operations
(in Korean won)

   681     121       

Diluted earnings per share from operations are calculated by adjusting the weighted average number of common stocks outstanding to assume conversion of all dilutive potential common stocks. The Company has dilutive potential common stocks from stock options.

Diluted earnings per share from operations for the years ended December 31, 2011, 2012 and 2013, is calculated as follows:

  2011  2012  2013 

Adjusted profit(loss) from continuing operations attributable to common stock
(in millions of Korean won)

 1,280,015   1,075,694   (190,485

Adjusted profit(loss) from discontinued operations attributable to common stock
(in millions of Korean won)

  165,675    (29,567    
 

 

 

  

 

 

  

 

 

 
 1,445,690   1,046,127   (190,485
 

 

 

  

 

 

  

 

 

 

Number of dilutive potential common shares outstanding

  32,960    23,851      

Weighted-average number of common shares outstanding and dilutive common shares

  243,301,012    243,540,954    243,737,431  

Diluted earnings per share

 5,942   4,296   (782

Diluted earnings per share from continuing operations
(in Korean won)

  5,261    4,417    (782

Diluted earnings per share from discontinued operations
(in Korean won)

  681    121      

31.    Dividend

The dividends paid by the Controlling Company in 2011, 2012 and 2013 were586,150 (2,410 per share),486,602 million (2,000 per share) and487,445 million (2,000 per share), respectively. A dividend in respect of the year ended December 31, 2013, of800 per share, amounting to a total dividend of195,112 million, was approved at the shareholders’ meeting on March 21, 2014. These consolidated financial statements do not reflect this dividend payable.

32.    Cash Generated from Operations

Cash flows from operating activities for the years ended December 31, 2011, 2012 and 2013, are as follows:

 

   2010  2009  2008 

Number of shares eligible for dividends

   243,215,844    243,196,468    202,035,296  

Dividend rate

   48.2  40.0  22.4

Dividend amount(in millions of Korean won)

  (Won)586,150   (Won)486,393   (Won)226,280  

Payout ratio (Dividend / Net income)

   50.20  98.29  50.31

Dividend yield ratio (Dividend Per Share / Stock price at year end)

   5.21  5.12  2.99

(in millions of Korean won)

  2011  2012  2013 

1. Profit(loss) for the year

  1,455,357   1,105,439   (87,745

2. Adjustments to reconcile net income (loss)

    

Income tax expenses

   318,459    277,869    49,579  

Interest income

   (325,374  (387,396  (279,392

Interest expense

   587,560    589,727    548,129  

Dividend income

   (7,823  (6,370  (20,841

Depreciation

   2,676,495    2,925,170    3,141,846  

Amortization of intangible assets

   319,949    388,663    478,902  

Provision for severance benefits

   183,299    219,128    227,564  

Bad debt expense

   149,667    150,389    189,665  

Income from jointly controlled entities and associates

   2,947    (24,308  (10,222

Gain on disposal of jointly controlled entities and associates

   (190,631  (125,754  1,254  

Impairment loss on jointly controlled entities and associates

   5,107    3,202    6,006  

Gain or loss on disposal of property and equipment

   (287,932  (407,485  393,567  

Gains or loss on disposition of intangible assets

   (1,528  (1,402  52,008  

Loss on impairment of intangible assets

   2,376    6,115    36,207  

Foreign currency translation gain

   80,436    (259,374  (99,617

Gain or loss on valuation of derivatives

   (28,370  242,979    105,248  

Others

   (51,529  (96,416  (53,907

3. Changes in operating assets and liabilities

    

Decrease(increase) in trade receivables

   (1,419,033  1,848,011    938,495  

Decrease(increase) in other receivables

   875,140    (533,319  (7,194

Decrease(increase) in loans receivable

   (152,497  47,990    (156,418

Decrease(increase) in finance lease receivables

   (183,669  130,987    147,735  

Increase in other assets

   (77,528  (86,993  (721,127

Decrease(increase) in inventories

   31,896    (286,513  169,567  

Increase(decrease) in trade payables

   98,761    177,577    (145,363

Increase(decrease) in other payables

   (1,069,737  948,480    (69,265

Increase(decrease) in other liabilities

   63,975    (196,076  181,610  

Increase(decrease) in provisions

   28,423    (86,715  (150,457

Increase(decrease) in deferred revenue

   196,511    153,034    (66,519

Decrease(increase) in plan assets

   (126,384  (165,755  249,102  

Payment of severance benefits

   (235,068  (111,192  (371,157
  

 

 

  

 

 

  

 

 

 

4. Net cash provided by operating activities (1+2+3)

  2,919,255   6,439,692   4,677,260  
  

 

 

  

 

 

  

 

 

 

31.     SupplementalThe Company entered into agreements with securitization specialty companies and disposed of its trade receivables related to handset sales (Note 20). Cash Flows Information

Theflows from the disposals are presented as cash and cash equivalents stated on statements of cash flows are the same amount of cash and cash equivalents less government grants on statements of financial position.generated from operations.

Significant transactions not affecting cash flows for the years ended December 31, 2010, 20092011, 2012 and 20082013, are as follows:

 

(in millions of Korean won)

  2010   2009   2008 

Reclassification of the current portion of bonds payable

  (Won)1,925,773    (Won)1,539,203    (Won)1,311,944  

Reclassification of construction-in-progress to property and equipment

   2,379,598     2,246,210     3,080,337  

Acquisition of equity-method investments through issuance of exchangeable bond

        319,160       

Reissuance of treasury stock in exchange of exchangeable bonds

        451,157       

32.     Related Party Transactions

(in millions of Korean won)

  2011   2012   2013 

Reclassification of the current portion of bonds payable

  1,181,049    2,157,522    1,791,454  

Reclassification of construction-in-progress to property and equipment

   3,279,678     3,142,858     2,314,925  

Reclassification of provisions

        183,806     43,522  

Reclassification of accounts payable from property and equipment

        68,766     181,816  

Reclassification of accounts payable from intangible assets

   252,690          567,550  

Write-off of loans and receivables

   33,999     13,245     43,186  

Transfer of prepaid lease

   23,529     127,111     94,196  

Valuation of available-for-sale financial assets

   8,016     31,599     65,670  

Contributions in kind of non-controlling interest

             84,122  

The list of subsidiaries of the Company as of December 31, 2010 is as follows:

Type of control

Subsidiaries

Ultimate Controlling Company

KT Co.

Direct control

KT Hitel, KT Submarine Co., KT Networks Corporation, KT Powertel, KT Linkus Co., KT Telecop Co., Ltd., KT Rental, KT Capital, Sidus FNH Co., Ltd., KTDS, Nasmedia, Inc., KT Edui Co., Ltd. (formerly “JungBoPremiumEdu Co., Ltd.”), Sofnics Inc., KT Tech, KT M Hows, KT M&S, KT Msusic, KT Innotz Inc., KT Estate Inc., KT Internal Venture Fund No.2, Sidus FNH Benex Cinema Investment Fund (formerly “Sidus FNH Benex Cinema Investment Fund”), KT New Business Fund No.1, KT Capital Media Contents Fund No.2, Gyeonggi-KT Green Growth Fund, KT Strategic Investment Fund No.1, Korea Telecom America, Inc., New Telephone Company Inc., Korea Telecom Japan Co., Ltd., Korea Telecom China Co., Ltd., KTSC Investment Management B.V., PT. KT Indonesia

Indirect control through KT Hitel

KT Commerce Inc.

Indirect control through KT Capital

Vanguard Private Equity Fund, KTC Media Contents Fund 1, KT-LIG ACE Private Equity Fund Co., Ltd.

Indirect control through KT Rental

KTR

Indirect control through KTSC
Investment Management B.V.

East Telecom and Super iMax

Indirect control through NTSC

Helios TV and Novaya Svyaz

The Controlling Company’s significant transactions and balances with subsidiaries as of December 31, 2010, 2009 and 2008 and for the years then ended are as follows:

(in millions of Korean won)

  Operating
Revenue
   Operating
Expense
   Receivables   Payables 

KT Powertel Co., Ltd.

  (Won)15,287    (Won)3,773    (Won)957    (Won)1,259  

KT Networks Corporation

   64,347     119,356     8,133     53,280  

KT Telecop Co., Ltd.

   12,336     48,727     426     18,439  

KT Hitel Co., Ltd.

   10,197     67,777     753     38,147  

KT Tech, Inc.

   1,296     312,244     159     92,300  

KTR Co., Ltd.

   4,802     11,982     2     66,795  

KT Rental Co., Ltd.

   9,783     36,615     61     7,409  

KT Capital Co., Ltd.

   80     4,992     7     47,379  

KTDS

   10,137     335,534     4,532     97,465  

KT M&S Co., Ltd.

   656,631     137,673     16,029     54,380  

Others

   34,623     252,119     5,234     36,087  
                    

2010 Total

  (Won)819,519    (Won)1,330,792    (Won)36,293    (Won)512,940  
                    

2009 Total

  (Won)594,026    (Won)1,217,351    (Won)63,120    (Won)453,338  
                    

2008 Total

  (Won)528,311    (Won)1,263,863    (Won)68,654    (Won)435,501  
                    

Significant balances and transactions among the subsidiaries as of December 31, 2010, 2009 and 2008 and for the years then ended are as follows:

(in millions of Korean won)

  Receivables and
Payables
   Operating Revenue and
Expense
 

2010 Total

  (Won)120,745    (Won)75,085  
          

2009 Total

  (Won)121,528    (Won)502,106  
          

2008 Total

  (Won)157,327    (Won)1,115,712  
          

The Controlling Company’s significant transactions and balances with equity-method investees as of December 31, 2010, 2009 and 2008 and for the years then ended are as follows:

(in millions of Korean won)

  2010   2009   2008 

Operating Revenue

  (Won)164,778    (Won)122,036    (Won)118,269  

Operating Expense

   905,504     668,979     585,555  

Receivables

   15,530     11,140     9,031  

Payables

   142,015     89,290     100,824  

Details of the Controlling Company’s ownership in the related parties, acquisition cost, fair value (or net asset) and book values are in Note 2 and Note 8.

Key management compensation for the years ended December 31, 2010, 2009 and 2008 consists of:

(in millions of Korean won)

  2010   2009   2008   

Description

Benefits

  (Won)33,744    (Won)17,068    (Won)20,203    

Salaries, bonuses, other allowances, retirement benefits, medical benefits and others

Compensation expenses

   6,794     1,052     1,420    

Compensation expenses associated with stock options, stock grants

                 

Total

  (Won)40,538    (Won)18,120    (Won)21,623    
                 

Key management consists of vice presidents and higher positions, who have the authority and responsibility for planning, operation and control and are in charge of a business unit or division, and non-permanent directors.

33.    Segment Information

The Company’sGroup’s operating segments are as follows:

 

Details

  

Business service

PersonalTelecom & Convergence/ Customer Group (“Personal”)

  PersonalTelecommunication service to mass customers using PCS and WiBro
convergence business

Home CustomerGlobal & Enterprise Group (“Home”) Enterprise Customer Group (“Enterprise”)

  Telephone, internet,Telecommunication service to global market and enterprise customers and data and othersservice

Finance / Rental Business Group

Credit card, loan, lease and others

Others

  Global, real estate,Satellite TV, and others

Details of each segment for the years ended December 31, 2010, 20092011, 2012, and 2008,2013 are as follows:

 

  2010 
  Personal  Home/
Enterprise
  Others  Total  Elimination  Consolidated
amount
 

Operating revenues

 (Won)10,387,800   (Won)9,845,716   (Won)3,346,111   (Won)23,579,627   (Won)(2,248,314 (Won)21,331,313  

Operating income

  1,477,844    575,453    149,391    2,202,688    (27,606  2,175,082  

Depreciation and Amortization

  928,600    1,985,755    256,632    3,170,987    7,414    3,178,401  

Property and equipment and Intangible assets

  4,700,790    10,385,029    1,324,175    16,409,994    50,730    16,460,724  
  2009 
  Personal  Home/
Enterprise
  Others  Total  Elimination  Consolidated
amount
 

Operating revenues

 (Won)9,313,751   (Won)10,108,769   (Won)2,423,569   (Won)21,846,089   (Won)(2,202,277 (Won)19,643,812  

Operating income

  1,040,025    (44,044  (4,742  991,239    (20,692  970,547  

Depreciation and Amortization

  1,013,685    2,054,897    199,853    3,268,435    7,374    3,275,809  

Property and equipment and Intangible assets

  4,757,330    10,653,089    619,465    16,029,884    24,176    16,054,060  
  2008 
  Personal  Home/
Enterprise
  Others  Total  Elimination  Consolidated
amount
 

Operating revenues

 (Won)8,346,220   (Won)11,784,835   (Won)2,353,821   (Won)22,484,876   (Won)(2,897,634 (Won)19,587,242  

Operating income

  454,381    1,113,389    28,944    1,596,714    (153,899  1,442,815  

Depreciation and Amortization

  1,117,879    2,205,496    158,399    3,481,774    142,601    3,624,375  

Property and equipment and Intangible assets

  4,937,833    10,825,720    660,152    16,423,705    239,164    16,662,869  
   2011 

(in millions of Korean won)

  Operating
revenues
  Operating
income(loss)
   Depreciation
and Amortization
 

Telecom & Convergence/Customer

  16,156,235   1,139,933    2,330,200  

Global & Enterprise

   3,167,398    525,989     504,593  

Finance/Rental

   1,010,502    36,937     16,988  

Others

   4,039,112    105,399     121,557  
  

 

 

  

 

 

   

 

 

 
   24,373,247    1,808,258     2,973,338  

Adjustment 1

   (2,285,417  178,838     (15,849
  

 

 

  

 

 

   

 

 

 

Consolidated amount

  22,087,830   1,987,096    2,957,489  
  

 

 

  

 

 

   

 

 

 
   2012 

(in millions of Korean won)

  Operating
revenues
  Operating
income (loss)
   Depreciation
and Amortization
 

Telecom & Convergence/Customer

  15,932,278   733,461    2,440,338  

Global & Enterprise

   2,930,958    327,300     485,267  

Finance/Rental

   3,717,181    185,220     181,904  

Others

   4,252,074    83,039     147,238  
  

 

 

  

 

 

   

 

 

 
   26,832,491    1,329,020     3,254,747  

Adjustment 1

   (2,188,719  351,079     19,331  
  

 

 

  

 

 

   

 

 

 

Consolidated amount

  24,643,772   1,680,099    3,274,078  
  

 

 

  

 

 

   

 

 

 

   2013 

(in millions of Korean won)

  Operating
revenues
  Operating
income (loss)
  Depreciation
and Amortization
 

Telecom & Convergence/Customer

  14,938,037   51,853   2,445,321  

Global & Enterprise

   2,917,116    235,728    486,258  

Finance/Rental

   4,053,481    279,856    400,223  

Others

   5,093,995    287,482    233,322  
  

 

 

  

 

 

  

 

 

 
   27,002,629    854,919    3,565,124  

Adjustment 1

   (2,944,748  (531,535  1,050  
  

 

 

  

 

 

  

 

 

 

Consolidated amount

  24,057,881   323,384   3,566,174  
  

 

 

  

 

 

  

 

 

 

1The basis of accounting for any transactions between reportable segments such as elimination, etc.

Information by IndustryThe regional segment information provided to the management for the reportable segments as of December 31, 2011, 2012 and 2013, and for the years ended December 31, 20102012 and 2009 is2013, are as follows:

(in millions of Korean won)

  Operating revenues   Non-current assets 3 
    2011   2012   2013   2012   2013 

Location

          

Domestic

  22,032,296    24,609,126    23,999,635    20,136,194    21,143,152  

Overseas

   55,534     34,646     58,246     39,023     176,700  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  22,087,830    24,643,772    24,057,881    20,175,217    21,319,852  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

1Non-current assets include fixed assets, intangible assets (excluding goodwill) and investment property.

Assets and liabilities by industryof each segments as of December 2012 and 2013, are as follows:

(in millions of Korean won)

  2012 
    Non-finance   Finance
/Rental
   Total   Adjustment  Consolidated
amount
 

Assets

         

Current

  7,870,747    3,363,384    11,234,131    (716,712 10,517,419  

Trade and other receivables

   4,767,604     1,620,451     6,388,055     (480,547  5,907,508  

Short-term loans

        777,095     777,095     (108,982  668,113  

Inventories

   931,979     30,434     962,413     (27,380  935,033  

Other assets

   2,171,164     935,404     3,106,568     (99,803  3,006,765  

Non-current

   23,278,749     3,389,520     26,668,269     (2,627,780  24,040,489  

Trade and other receivables

   1,050,481     51,075     1,101,556     (28,590  1,072,966  

Long-term loans

        520,603     520,603     (8,016  512,587  

Property, equipment and intangible assets (including investment property)

   18,022,270     1,518,491     19,540,761     634,456    20,175,217  

Other assets

   4,205,998     1,299,351     5,505,349     (3,225,630  2,279,719  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total assets

  31,149,496    6,752,904    37,902,400    (3,344,492 34,557,908  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Liabilities

         

Current

  8,617,269    3,324,813    11,942,082    (675,316 11,266,766  

Trade and other payables

   5,742,946     2,064,281     7,807,227     (585,925  7,221,302  

Borrowings

   2,066,871     1,123,754     3,190,625     6,404    3,197,029  

Other liabilities

   807,452     136,778     944,230     (95,795  848,435  

Non-current

   7,681,087     2,621,156     10,302,243     (229,076  10,073,167  

Trade and other payables

   547,830     168,589     716,419     (15,059  701,360  

Borrowings

   6,005,239     2,274,466     8,279,705     (40,615  8,239,090  

Other liabilities

   1,128,018     178,101     1,306,119     (173,402  1,132,717  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total liabilities

  16,298,356    5,945,969    22,244,325    (904,392 21,339,933  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

   2013 

(in millions of Korean won)

  Non-finance   Finance
/Rental
   Total   Adjustment  Consolidated
amount
 

Assets

         

Current

  7,023,358    3,920,164    10,943,522    (971,603 9,971,919  

Trade and other receivables

   4,142,237     1,864,709     6,006,946     (767,377  5,239,569  

Short-term loans

        889,418     889,418     (50,694  838,724  

Inventories

   649,754     25,596     675,350     (1,732  673,618  

Other assets

   2,231,367     1,140,441     3,371,808     (151,800  3,220,008  

Non-current

   24,060,958     3,730,135     27,791,093     (2,912,895  24,878,198  

Trade and other receivables

   796,622     68,877     865,499     (52,028  813,471  

Long-term loans

        542,267     542,267     (32,394  509,873  

Property, equipment and intangible assets (including investment property)

   18,817,659     1,931,006     20,748,665     571,187    21,319,852  

Other assets

   4,446,677     1,187,985     5,634,662     (3,399,660  2,235,002  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total assets

  31,084,316    7,650,299    38,734,615    (3,884,498 34,850,117  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

   2013 

(in millions of Korean won)

  Non-finance   Finance
/Rental
   Total   Adjustment  Consolidated
amount
 

Liabilities

         

Current

  8,452,101    3,716,585    12,168,686    (944,570 11,224,116  

Trade and other payables

   5,866,180     2,344,098     8,210,278     (796,455  7,413,823  

Borrowings

   1,785,879     1,224,852     3,010,731     9,975    3,020,706  

Other liabilities

   800,042     147,635     947,677     (158,090  789,587  

Non-current

   8,238,497     2,938,773     11,177,270     (388,685  10,788,585  

Trade and other payables

   919,486     168,630     1,088,116     (29,232  1,058,884  

Borrowings

   6,024,803     2,561,893     8,586,696     (123,509  8,463,187  

Other liabilities

   1,294,208     208,250     1,502,458     (235,944  1,266,514  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total liabilities

  16,690,598    6,655,358    23,345,956    (1,333,255 22,012,701  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

34.    Related Party Transactions

The list of related parties of the Group as of December 31, 2010 and 2009

   2010   2009 
   Non-financial   Financial   Consolidated
amount
   Non-financial   Financial   Consolidated
amount
 

Assets

            

Current assets

            

Quick assets

  (Won)6,433,581    (Won)983,219    (Won)7,416,800    (Won)6,587,387    (Won)685,060    (Won)7,272,447  

Inventories

   655,831          655,831     699,402          699,402  
                              

Sub-total

   7,089,412     983,219     8,072,631     7,286,789     685,060     7,971,849  
                              

Non-current assets

            

Investments

   696,623     86,568     783,191     512,953     48,417     561,370  

Property and equipment

   15,185,606     42,252     15,227,858     14,750,631     23,929     14,774,560  

Intangible assets

   1,232,395     471     1,232,866     1,279,236     264     1,279,500  

Other

   1,597,541     799,372     2,396,913     1,352,597     680,441     2,033,038  
                              

Sub-total

   18,712,165     928,663     19,640,828     17,895,417     753,051     18,648,468  
                              

Total assets

  (Won)25,801,577    (Won)1,911,882    (Won)27,713,459    (Won)25,182,206    (Won)1,438,111    (Won)26,620,317  
                              

Liabilities

            

Current liabilities

  (Won)7,053,092    (Won)376,538    (Won)7,429,630    (Won)6,145,841    (Won)795,382    (Won)6,941,223  

Non-current liabilities

   7,326,898     1,461,259     8,788,157     8,423,158     588,497     9,011,655  
                              

Total liabilities

  (Won)14,379,990    (Won)1,837,797    (Won)16,217,787    (Won)14,568,999    (Won)1,383,879    (Won)15,952,878  
                              

Results of operations by industry for the years ended December 31, 2010, 2009 and 2008

   2010 
   Non-financial   Financial   Consolidated
amount
 

Operating revenues

  (Won)21,165,515    (Won)165,798    (Won)21,331,313  

Operating expenses

   19,016,819     139,412     19,156,231  
               

Operating income

   2,148,696     26,386     2,175,082  

Non-operating revenues

   522,722     95     522,817  

Non-operating expenses

   1,136,118     8     1,136,126  
               

Income from continuing operations before income tax

   1,535,300     26,473     1,561,773  

Income tax on continuing operations

   363,157     8,686     371,843  
               

Income from continuing operations

   1,172,143     17,787     1,189,930  

Income (loss) from discontinued operations

   2,612          2,612  
               

Net income

  (Won)1,174,755    (Won)17,787    (Won)1,192,542  
               

   2009 
   Non-financial  Financial   Consolidated
amount
 

Operating revenues

  (Won)19,508,859   (Won)134,953    (Won)19,643,812  

Operating expenses

   18,555,188    118,077     18,673,265  
              

Operating income

   953,671    16,876     970,547  

Non-operating revenues

   806,521    970     807,491  

Non-operating expenses

   1,058,757    6     1,058,763  
              

Income from continuing operations before income tax

   701,435    17,840     719,275  

Income tax on continuing operations

   101,863    5,900     107,763  
              

Income from continuing operations

   599,572    11,940     611,512  

Income (loss) from discontinued operations

   (1,817       (1,817
              

Net income

  (Won)597,755   (Won)11,940    (Won)609,695  
              

   2008 
   Non-financial  Financial   Consolidated
amount
 

Operating revenues

  (Won)19,478,880   (Won)108,362    (Won)19,587,242  

Operating expenses

   18,039,553    104,874     18,144,427  
              

Operating income

   1,439,327    3,488     1,442,815  

Non-operating revenues

   1,050,331    22     1,050,353  

Non-operating expenses

   1,782,921    71     1,782,992  
              

Income from continuing operations before income tax

   706,737    3,439     710,176  

Income tax on continuing operations

   166,419    1,440     167,859  
              

Income from continuing operations

   540,318    1,999     542,317  

Income (loss) from discontinued operations

   (29,027       (29,027
              

Net income

  (Won)511,291   (Won)1,999    (Won) 513,290  
              

34.    Employee Welfare

Cost on the various employee welfare programs of the Company for the years ended December 31, 2010, 2009 and 2008 totaled(Won)374,300 million,(Won)587,011 million and(Won)565,738 million, respectively.

35.    Subsequent Events

Subsequent to December 31, 2010, the Controlling Company has issued the unsecured public bonds as follows:

(in thousands)

 Issue
Date
  Par Value  

Interest

Rate

 Maturity
Date
  

Repayment Method

USD denominated unsecured public bond (178-1st) with floating rate

  2011.1.11   USD100,000   Libor(3M) + 1.00%  2013.1.18   Lump sum repayment at maturity

USD denominated unsecured public bond (178-2nd) with floating rate

  2011.1.11   USD100,000   Libor(3M) + 1.05%  2014.1.17   Lump sum repayment at maturity

JPY denominated foreign public bond

  2011.1.20   JPY35,000,000   1.58%  2013.1.25   Lump sum repayment at maturity

Unsecured public bond (179t)

  2011.3.29   (Won)260,000   4.47%  2018.3.29   Lump sum repayment at maturity

Unsecured public bond (180-1st)

  2011.4.26   (Won)210,000   4.35%  2016.4.26   Lump sum repayment at maturity

Unsecured public bond (180-2nd)

  2011.4.26   (Won)380,000   4.71%  2021.4.26   Lump sum repayment at maturity

On January 27, 2011 the Controlling Company acquired from Dutch Savings Holdings B.V 5,600,000 of redeemable convertible preferred stock with voting rights and the bonds convertible into 5,600,000 of common stock of Korea Digital Satellite Broadcasting CO., Ltd. for(Won)246,000 million. The accrued interest of(Won)7,969 million are also included in the amount of the convertible bond. Accordingly, the Controlling Company’s ownership in Korea Digital Satellite Broadcasting Co., Ltd. has increased from 32.12% to 46.41%. If the potential voting rights are also considered, the ownership increases to 53.05%.

As approved by the Board of Directors on May 4, 2011, the Company has decided to sell New Telephone Company, Inc. 5,309,189 shares (79.96%) to VIMPEL-COMMUNICATIONS. The selling price is $ 346,628 thousand.

As approved by the Board of Directors on February 3, 2011, KT Capital decided to acquire 1,489,400 of the common stocks of BC Card owned by Shinhan Bank, representing 33.85% of total outstanding shares, for(Won)231,602 million.

KT Rental and KTR merged on March 1, 2011, as approved by the Board of Directors on January 7, 2011.

36.    Merger with KTF

On January 20, 2009, the Controlling Company entered into a merger agreement with KTF, which was subsequently approved by the shareholders on March 27, 2009. On June 1, 2009, the Controlling Company, as the surviving company, merged with KTF.

The Controlling Company issued 0.7192335 share of KT common stock with a par value per share of(Won)5,000 for one share of KTF. However, the Controlling Company did not issue any new common stock for the shares of KTF common stock held by the Controlling Company or for the treasury shares of KTF as of the date of the merger.

Details of merged companies:

CEO

Business

Relationship

KT Corporation (KT)

Lee Suk ChaeTelephone service, new media business, telecommunication products sales and otherParent

KT Freetel Co., Ltd. (KTF)

Kwon Haing MinMobile telecommunication service and otherSubsidiary

Accounting treatment

As this was a merger between parent and subsidiary, the Controlling Company accounted for the merger using the carrying amounts in its consolidated financial statements and accordingly, the excess of merger consideration given over the carrying amount of net assets acquired was recognized as capital adjustment after offsetting capital surplus, if any, from the similar type of transaction.

Decrease in Minority interest (a):

(Won)(1,553,491)

Changes in equity :

Increase in common stock

3,501

Decrease in treasury stock

2,436,659

Decrease in gain on disposal of treasury stock

(375

Decrease in accumulated other comprehensive income

(6,932

Decrease in capital adjustments

(879,362

Sub-total (b) :

1,553,491

Changes in total equity (a+b):

(Won)

Goodwill

Changes in goodwill for the year ended December 31, 2010 and 2009 are as follows:

January 1, 2009

(Won) 195,170

Amortization

(130,113

December 31, 2009

65,057

Amortization

(65,057

December 31, 2010

(Won)

The above goodwill includes the goodwill arising from the acquisition of KTF shares by KT in stages and the goodwill recorded in the book of KTF prior to the merger of KT and KTF. Goodwill is amortized on a straight-line basis over ten years and, as of June 30, 2010, the goodwill had been fully amortized.

Financial statements of the merged companies

Statements of financial position

   KT   KTF 

(in millions of Korean won)

  2009.6.1   2008.12.31   2009.6.1   2008.12.31 

Current assets

  (Won)4,926,684    (Won)3,778,105    (Won)2,716,833    (Won)2,199,857  

Investment assets

   3,846,019     3,517,906     270,019     396,903  

Property and equipment

   9,932,337     10,428,674     3,919,107     4,165,339  

Intangible assets

   344,330     397,046     783,254     780,242  

Other non-current assets

   503,787     563,191     559,353     513,781  
                    

Total assets

  (Won)19,553,157    (Won)18,684,922    (Won)8,248,566    (Won)8,056,122  
                    

Current liabilities

  (Won)2,871,186    (Won)2,585,875    (Won)2,657,350    (Won)2,031,871  

Non-current liabilities

   8,274,862     7,267,158     1,282,719     1,658,402  
                    

Total liabilities

   11,146,048     9,853,033     3,940,069     3,690,273  
                    

Total equity

   8,407,109     8,831,889     4,308,497     4,365,849  
                    

Total liabilities and equity

  (Won)19,553,157    (Won)18,684,922    (Won)8,248,566    (Won)8,056,122  
                    

Statements of income

   KT   KTF 

(in millions of Korean won)

  For the period
from Jan. 1, 2009
to June 1, 2009
   For the year
ended

Dec. 31,  2008
   For the period
from Jan. 1, 2009
to June 1, 2009
   For the year
ended

Dec. 31, 2008
 

Operating revenues

  (Won)4,662,137    (Won)11,784,835    (Won)3,516,358    (Won)8,346,220  

Operating expenses

   4,078,756     10,671,446     3,131,947     7,891,839  

Non-operating revenues

   329,587     855,289     43,656     201,470  

Non-operating expenses

   372,047     1,408,633     152,858     469,496  

Income tax expense

        105,765     110,235     45,833     21,776  
                    

Net income

  (Won)435,156    (Won)449,810    (Won)229,376    (Won)164,579  
                    

37.     Adoption of K-IFRS

The Controlling Company plans to prepare its financial statements in accordance with K-IFRS starting from the year ending December 31, 2011. Since “the Roadmap to K-IFRS Adoption” has been announced in March 2007, the Controlling Company organized a task force team, conducted training, and analyzed the impact of the adoption of K-IFRS. The Controlling Company has analyzed the key differences and potential impact on financial statements.

Significant differences between the accounting policies chosen by the Controlling Company under K-IFRS and under current generally accepted accounting principles in the Republic of Korean (K-GAAP) are as follows:

K-IFRSK-GAAP
First time adoption of K-IFRSBusiness combinationNot applying IFRS 3 retrospectively to a past business combinationNot available
Fair value or revaluation as deemed costRecognition of fair value in its opening IFRS statement of financial position as deemed cost for an item of property and equipmentNot available
Borrowing costsCapitalization of borrowing costs for qualifying assets acquired after the date of transition (January 1, 2010)Not available
Decommissioning liabilities included in the cost of property, plant and equipmentRegarding changes in a decommissioning, restoration or similar liability to be added to or deducted from the cost of the asset to which it relates, the Company had not applied the requirements under IFRS for changes in such liabilities that occurred before the date of transition to IFRS(January 1, 2010).Not available
Transfers of Assets from CustomersA first-time adopter may apply the transitional provisions set out in paragraph 22 of K-IFRS 2118‘Transfers of Assets from Customers’,which provides accounting guidance for the items including cash and property received from the customers that must be used to provide those customers with the related service. In that paragraph, reference to the effective date shall be interpreted as 1 July 2009 or the date of transition to K-IFRS, whichever is later. In addition, a first-time adopter may designate any date before the date of transition to IFRS and apply K-IFRS 2118 to all transfers of assets from customers received on or after that date.Not available

Initiation fee revenue

The amount of Initiation fee is deferred and recognized as a part of service revenue over the period during which the service is performed.The total amount of initiation fee is recognized as revenue when the fee is paid

Real estate revenue

According to revenue recognition arising from the sale of goods, real estate revenue is recognized at the time of the transfer of the legal title.Considered as a construction contract, the real estate revenue is recognized on a percentage of completion basis.

Customer Loyalty Programmes

The sales transaction in which they are granted is allocated to the separately identifiable component. The revenue is deferred and recognized as earned.The amount of future obligation is recognized as an expense and liability provision at the time of the sale transaction.
Change in scope of consolidated financial statementsRegardless of size of each subsidiary, consolidated financial statements shall include all entities controlled by the parent.According to “the Act on External Audit of Stock Companies”, Section 1 paragraph 3 item 2, consolidated financial statement shall include all subsidiaries except for the entities of which the total assets as of prior year end were less than(Won)10 billion
Capitalization of borrowing costsAn entity shall capitalize borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset, acquired after the date of transition, as part of the cost of that asset.All borrowing costs are recognized as expense.

K-IFRSK-GAAP

Transfer of financial assets

Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership.Transfers of financial assets must satisfy the control criteria for the transferred financial assets to be derecognized.

Employee benefits

For the employees who elect the defined benefit plan, the defined benefit obligations are measured using actuarial method. For the others, the accrued expenses are recognized using actuarial method.Accrued employee benefits represent the amount which would be payable assuming all eligible employees and directors were to terminate their employment as of the date of statement of financial position. The other employee benefits are recognized when obligations to pay the benefits are determined.

Goodwill

Goodwill is not amortized, but impairment test is performed annually at the year-end of reporting period, and a bargain purchase is recognized in profit or loss on the acquisition date.Goodwill recognized at the business combination is amortized using the straight-line method. Negative goodwill(a bargain purchase) is reversed as income when actual loss occurs, or during the period of weighted average useful life of amortizable assets on the straight-line method basis.

Deferred tax

Deferred tax assets or liabilities on investments in subsidiaries and associates are recognized by reflecting the tax consequences of each temporary difference.

An entity shall classify all deferred tax assets and liabilities as non-current.

Deferred tax assets or liabilities on investments in subsidiaries and associates are recognized by the net amount of temporary differences from each investment.

An entity classifies deferred tax assets and liabilities as current or non-current according to the period in which the temporary differences are reversed.

38.    RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The consolidated financial statements of the Company are prepared in accordance with generally accepted accounting principles in the Republic of Korea (“Korean GAAP”), which differs in certain significant respects from generally accepted accounting principles in the United States of America (“U.S. GAAP”). Application of U.S. GAAP would have affected the consolidated financial position of the company and subsidiaries as of December 31, 2010 and 2009 and the related consolidated net income for the three years ended December 31, 2010, 2009 and 2008 to the extent described below.

A description of the significant differences between Korean GAAP and U.S. GAAP as they relate to the Company are discussed in detail below.

(a) Reconciliation of Net Income from Korean GAAP to U.S. GAAP

(in millions of Korean won)

  

Note reference

  2010  2009  2008 

Net income in accordance with Korean GAAP

    (Won)1,192,542   (Won)609,695   (Won)513,290  

Adjustments:

      

Goodwill impairment

  38 (e)       (1,132)  (13,948

Equity in income of affiliates:

      

Reversal of amortization of goodwill

  38 (e)   93,391    140,169    166,422  

Impairment loss relating to affiliates

  38 (e)           (9,466

Additional acquisitions of affiliates

  38 (g)   3,094    (23,282)  6,351  

Intangible assets

  38 (h)   (14,764)  (14,819)  (14,329

Property and equipment

  38 (i)   (52,811)  (44,999)  (114,744

Interest capitalization (including related depreciation), net

  38 (j)   (1,750)  (7,238)  (2,128

Service installation fees

  38 (k)   18,783    232,505    5,865  

Deferred income tax—methodology difference

  38 (l)   (10,496)  (6,357)  4,275  

Deferred income tax effects of U.S. GAAP adjustments

  38 (l)   13,008    (34,698)  (15,228

Capitalized foreign exchange transactions, net

  38 (m)   (299)  6,473    880  

Loan Impairment

  38 (f)   (22,450)        

Miscellaneous accounts

  38 (l)   (7,773)  (16,707)  35,230  

Noncontrolling interest income

  38 (c) and others   (14,335)  1,015    10,953  
               
     3,598   (Won)230,930   (Won)60,133  
               

Net income as adjusted in accordance with U.S. GAAP

    (Won)1,196,140   (Won)840,625   (Won)573,423  
               

Net income attributable to stockholders

    (Won)1,185,918   (Won)741,921   (Won)518,245  

Net income attributable to noncontrolling interest

    (Won)10,222   (Won)98,704   (Won)55,178  
               

(b) Reconciliation of Total Equity from Korean GAAP to U.S. GAAP

(in millions of Korean won)

  

Note reference

  2010  2009 

Total equity in accordance with Korean GAAP

    (Won)11,495,672   (Won)10,667,439  

Adjustments:

     

Goodwill impairment

  38 (e)   (28,027)  (28,027)

Equity in earnings of affiliates:

     

Reversal of goodwill amortization

  38 (e)   1,235,977    1,152,896  

Impairment loss relating to affiliates

  38 (e)   (1,471,474)  (1,471,474)

Additional acquisitions of affiliates

  38 (g)   767,105    764,011  

Different useful life of intangibles

  38 (h)   111,631    111,631  

Intangible assets

  38 (h)   9,098    23,862  

Accumulated depreciation

  38 (i)   (722,575)  (669,764)

Interest capitalization, net

  38 (j)   56,706    58,456  

Service installation fees

  38 (k)   (224,465)  (243,248)

Deferred tax—methodology difference

  38 (l)   16,011    26,507  

Deferred tax effects of U.S. GAAP adjustments

  38 (l)   169,751    179,986  

Capitalized foreign exchange transactions, net

  38 (m)   3,158    3,457  

Loan Impairment

  38 (f)   (22,450    

Miscellaneous accounts

  38 (l)   8,277    16,105  

Noncontrolling interest

  38 (c) and others   (304,242)  (135,393)
           
     (395,519)  (210,995)
           

Total equity as adjusted in accordance with U.S. GAAP

    (Won)11,100,153   (Won)10,456,444  
           

Stockholders’ equity

    (Won)10,929,157   (Won)10,287,594  

Noncontrolling interest

    (Won)170,996   (Won)168,850  
           

(c) Companies Included in Consolidation

Under Korean GAAP, all majority-owned subsidiaries and entities of which the Company or a controlled subsidiary owns more than 30% of total outstanding voting stock and is the largest stockholder are consolidated. However, U.S. GAAP generally requires that majority-owned subsidiaries be consolidated and that an entity in which the Company has significant influence, generally including those in which it owns 20-50% of total outstanding voting stock, should not be consolidated; rather that entity should be accounted for under the equity method of accounting.

The following table shows the Company’s percentage of ownership and carrying value of each of its affiliates that are excluded from consolidation under U.S. GAAP and instead are accounted for under the equity method (in millions of Korean won):

    Percentage of ownership (%)   Carrying value 

Entity

  2010   2009   2008   2010   2009   2008 

Listed :

            

KTSM

   36.9     36.9     36.9    (Won)25,497    (Won)14,775    (Won)11,072  

KT Music (formerly, “KTF Music Corporation”)

   48.7     35.3     35.3    (Won)16,008    (Won)21,899    (Won)18,705  

Unlisted :

            

Olivenine

             19.5    (Won)    (Won)    (Won)2,769  

KTP

   44.9     44.9     44.9    (Won)43,515    (Won)37,430    (Won)31,633  

SFNH BF-(1)

   43.3     43.3     43.3    (Won)6,645    (Won)6,660    (Won)10,505  

KTR Co., Ltd.

   58.0              (Won)19,627    (Won)    (Won)  

KT Rental

   58.0              (Won)165,724    (Won)    (Won)  

KT-LIG ACE Private Equity Fund

   9.0              (Won)4,882    (Won)    (Won)  

Vanguard Private Equity Fund

   28.1     16.1         (Won)5,155    (Won)5,650    (Won)  

Doremi Media(*1)

        64.2     64.2    (Won)    (Won)    (Won)  

(*1)Disposed during 2010. Prior to disposal, it was consolidated by KT Music

The quoted market values (based on closing KOSDAQ prices) of KTSM and KT Music shares held by the Company are(Won)33,229 million and(Won)39,279 million as of December 31, 2010, respectively.

Presented below is the summarized combined financial information of those entities that are consolidated under Korean GAAP but not for U.S. GAAP, prepared in accordance with Korean GAAP as of December 31, 2010 and 2009, and for each of the three years in the period ended December 31, 2010:

(in millions of Korean won)

  2010   2009 

Current assets

  (Won)439,409    (Won)175,096  

Non-current assets

   1,183,498     160,738  
          

Total assets

   1,622,907     335,834  
          

Current liabilities

   403,857     87,964  

Non-current liabilities

   648,157     41,404  
          

Total liabilities

   1,052,014     129,368  
          

Net assets

  (Won)570,893    (Won)206,466  
          

   2010  2009  2008 

Operating revenues

  (Won)646,069   (Won)232,746   (Won)272,407  

Operating income

  (Won)63,402   (Won)224,110   (Won)268,978  

Net income

  (Won)32,149   (Won)7,203   (Won)(15,551)
   2010  2009  2008 

Net cash provided by operating activities

  (Won)168,399   (Won)62,018   (Won)30,172  

Net cash used in investing activities

   (209,374)  (31,534)  (53,271)

Net cash provided by (used in) financing activities

   47,909    (21,502)  (2,546)

Effect of changes in consolidated entities

   (2,418)  20,580      
             

Net increase (decrease) in cash and cash equivalents

   4,516    29,562    (25,645)

Cash and cash equivalents at beginning of the year

   71,448         19,046      47,185  
             

Cash and cash equivalents at end of the year

  (Won)75,964   (Won)48,608   (Won)21,540  
             

Condensed consolidated balance sheets as of December 31, 2010 and 2009 and condensed consolidated statements of cash flows of the Company under U.S GAAP for the three years in the period ended December 31, 2010 are presented in Note 38(u).

(d) Debt and Equity Securities

Under Korean GAAP, non-marketable securities classified as available-for-sale securities are carried at cost or fair value if applicable with unrealized holding gains and losses reported as a capital adjustment, net of tax. For U.S. GAAP purposes, investment in non-marketable equity securities are accounted for under the cost method or the equity method of accounting in accordance with ASC Topic 323 “Investments Equity Method and Joint Ventures” and ASC Topic 325 “Investments Other.”

Under Korean GAAP, available-for-sale securities, whose likelihood of being disposed within one year from the balance sheet date is probable, are classified as current. Under U.S. GAAP, when the disposition of available-for-sale securities within one year is reasonably expected, available-for-sale securities are classified as current.

For U.S. GAAP purposes, the Company accounts for marketable equity and debt investments under the provisions of ASC Topic 320 “Debt and Equity Securities.” This guidance requires that marketable equity securities and all debt securities be classified in three categories and accounted for as follows:

Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost.

Debt and equity securities that are bought and held principally for the purpose of selling in the short term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.

Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders’ equity until realized.

Information under U.S. GAAP with respect to investments under ASC Topic 320 at December 31, 2010 and 2009 are as follows:

   2010 

(in millions of Korean won)

  Cost or
amortized cost
   Gross
unrealized
holding gains
   Gross
unrealized
holding losses
  Fair
value
 

Equity securities (available-for-sale)

  (Won)24,352    (Won)12,202    (Won)(879) (Won)35,672  

Debt securities (available-for-sale)

   9,313     69         9,382  
                   
  (Won)33,665    (Won)12,271    (Won)(879) (Won)45,057  
                   
   2009 
   Cost or
amortized cost
   Gross
unrealized

holding gains
   Gross
unrealized
holding losses
  Fair
value
 

Equity securities (available-for-sale)

  (Won)18,726    (Won)7,484    (Won)(104) (Won)26,106  

Debt securities (available-for-sale)

   4,877     420         5,297  
                   
  (Won)23,603    (Won)7,904    (Won)(104) (Won)31,403  
                   

The proceeds from sales of available-for-sale securities were(Won)6,148 million in 2010,(Won)6,833 million in 2009 and 614,405 million in 2008. The realized gains on those sales were(Won)274 million in 2010,(Won)1,716 million in 2009 and(Won)5,587 million in 2008. The average-cost method is used to calculate gains or losses from the sale of available-for-sale securities.

Under Korean GAAP, when the subsequent recoveries of impaired available-for-sale securities and held-to-maturity securities result in an increase of their carrying amount, the recovery gains are reported in current operations up to the previously recognized impairment loss as reversal of loss on impairment of investment securities.

Under U.S. GAAP, the subsequent increase in carrying amount of the impaired and written down held-to-maturity securities is not allowed. The subsequent increase in fair value of available-for-sale securities is reported in other comprehensive income.

(e) Goodwill Impairment including Investor-level Goodwill

Under Korean GAAP, goodwill, which represents the excess of the acquisition cost over the fair value of net identifiable assets acquired, is amortized on a straight-line basis over its estimated economic useful life not exceeding 20 years. When it is no longer probable that goodwill will be recovered from expected future economic benefits, it is expensed immediately. Also, for investments in affiliated companies accounted for using the equity method, the excess of acquisition cost of the affiliates over the Company’s share of their net assets at the acquisition date is amortized by the straight-line method over its estimated useful life.

Under U.S. GAAP, goodwill and indefinite-lived intangible assets are not amortized, but instead are tested for impairment at least annually. In accordance with ASC Topic 350, “Intangibles-Goodwill and Other”, goodwill is tested for impairment on an annual basis by comparing the fair value of the Company’s reporting units to their carrying amounts. The investor-level goodwill is tested for impairment in accordance with ASC Topic 323. The investor-level goodwill, which is recorded only at the investor’s financial statements, represents the excess of the acquisition cost of equity method investees over the fair value of investor’s share of net identifiable assets acquired.

The changes in the carrying amount of goodwill which is recorded in the Personal Customer Group for the years ended December 31, 2009 and 2010 are as follows (in millions of Korean won):

Balance as of January 1, 2009

(Won)538,132

Goodwill acquired during the year

Balance as of December 31, 2009

538,132

Goodwill acquired during the year

Balance as of December 31, 2010

(Won)538,132

(f) Loan Impairment

KT Capital Inc., a subsidiary of KT Corporation, estimates the allowances for the doubtful loan receivables based on the forward looking criteria (“FLC’), which is the regulatory guideline for assessing the collectability of the receivables applicable to the financial institutes in Korea, as permitted under Korean GAAP.

However, under U.S. GAAP, the impairment on the loans receivable is recorded when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.

(g) Additional Equity Investments in and Transactions of Subsidiaries

Under Korean GAAP, subsequent to acquiring a controlling financial interest in a subsidiary, additional equity investments by the Company in a subsidiaries stock and other equity transactions of subsidiaries are accounted for assuming such transactions occur as of the date of audited or reviewed financial statements of the acquired subsidiary closest to the date of acquisition. In addition, the difference between the Company’s cost of the acquired additional interest and the corresponding share of stockholders’ equity of the acquired subsidiary is presented as an adjustment to capital surplus.

Under U.S. GAAP, such equity investments in and transactions of affiliates and subsidiaries are recorded and accounted for as of the date the transaction occurs. As a result, the Company has a different basis in its equity investments in the subsidiaries under Korean GAAP as compared to U.S. GAAP. Therefore, any gains or losses recorded by the Company (which are recorded as capital transactions in stockholders’ equity) when an equity investee sells shares of its stock will be different under U.S. GAAP as compared to Korean GAAP. In addition, prior to the fiscal year beginning on or after December 15, 2008, under U.S. GAAP, the cost of an additional equity interest would be allocated based on the fair value of net tangible and identifiable assets acquired and liabilities assumed, with the excess allocated to goodwill.

(h) Intangible Assets

Under Korean GAAP, the frequency usage right related to the second generation (“2G”) paid by the initial stockholders to obtain the operating licenses prior to the establishment of KTM.Com Co., Ltd. (“KTM”), which was merged into KTF in 2001, was not recognized as an intangible asset in applying purchase accounting of KTM by KT in 2000.

Under U.S. GAAP, the 2G frequency usage right was considered as indefinite lived intangible asset and thus in the process of purchase accounting of KTM, KT recognized the frequency usage right at fair value. However, on December 31, 2005, the Korea Communication Act (“Act”) was revised effective July 1, 2006. Under the revised Act, the frequency usage right of 2G will expire by June 2011. Thus, the Company amortizes the frequency usage right of 2G over the remaining useful life under U.S. GAAP beginning from the year ended December 31, 2006.

In addition, the frequency usage right related to the third generation (“3G”) acquired in 2000 has been accounted for in the same manner under Korean GAAP and U.S. GAAP.

Identifiable intangible assets determined in accordance with U.S. GAAP as of December 31, 2010 and 2009 are presented below.

   2010 

(In millions of Korean won)

  Gross carrying
amount
   Accumulated
amortization
   Net amount 

Amortizable intangible assets:

      

Internal-use software

 ��(Won)1,316,036    (Won)807,422    (Won)508,614  

Frequency usage rights

   1,464,821     858,668     606,153  

Buildings and facility utilization rights

   164,277     93,836     70,441  

Other

   317,506     291,823     25,683  
               

Total

  (Won)3,262,640    (Won)2,051,749    (Won)1,210,891  
               

   2009 

(In millions of Korean won)

  Gross carrying
amount
   Accumulated
amortization
   Net amount 

Amortizable intangible assets:

      

Internal-use software

  (Won)1,070,786    (Won)686,739    (Won)384,047  

Frequency usage rights

   1,465,990     726,088     739,902  

Buildings and facility utilization rights

   130,179     85,702     44,477  

Other

   316,586     251,834     64,752  
               

Total

  (Won)2,983,541    (Won)1,750,363    (Won)1,233,178  
               

Amortization expense:

For the year ended December 31, 2010

(Won)304,811million

For the year ended December 31, 2009

314,102 million

For the year ended December 31, 2008

306,000 million

Estimated amortization expense (in millions of Korean won):

Year ending December 31,

    

2011

  (Won)288,798  

2012

   235,224  

2013

   190,792  

2014

   144,876  

2015

   129,133  

Thereafter

   222,067  

The weighted-average amortization period of total amortized intangible assets, internal-use software, frequency usage rights and utilization rights are 9 years, 6 years, 11 years and 20 years, respectively. The Company has no identifiable intangible assets that are not subject to amortization.

(i) Depreciation

In 1995, KT adopted a method of depreciation, as allowed under Korean GAAP, whereby property and equipment placed in service at any time during the first half of the year received a full year of depreciation expense, and property and equipment placed in service at any time during the

second half of the year received one-half year of depreciation. Also, as permitted under Korean GAAP, depreciation of these assets was based on lives which are shorter than their economic useful lives. In 1996, KT adopted the policy, also acceptable under Korean GAAP, whereby property and equipment is depreciated from the actual date it is placed in service, while continuing to use useful lives which are shorter than the economic useful lives of such assets. In 1998, under Korean GAAP, as required under a ruling by the National Tax Service (which is also applicable under Korean GAAP), the Company changed the estimated useful lives of certain assets, including underground access to cable tunnels and concrete and steel telephone poles acquired after 1995, from 6 years to periods ranging from 20 years to 40 years, and changed the depreciation method from the declining-balance method to the straight-line method.

In 1999, under Korean GAAP, the Company changed its depreciation method for buildings and structures acquired before December 31, 1994, from the declining-balance method to the straight-line method in order to be consistent with the method applied to buildings and structures acquired after January 1, 1995.

Under U.S. GAAP, property and equipment is generally depreciated over its estimated useful life in a systematic and rational manner. In addition, the depreciation method in the year of acquisition based on the Company’s in-service dates for its capital additions in 1995 described above, does not comply with U.S. GAAP in that significant depreciation expense is recognized prior to the actual use of the asset. The change in estimated useful lives in 1998, and the changes in 1998 and 1999 from the declining-balance method to the straight-line method would also not be appropriate under U.S. GAAP. Accordingly, adjustments have been reflected for U.S. GAAP purposes for the effect of each of these items.

Under U.S. GAAP, property and equipment is depreciated by using the declining-balance method except for the assets of certain subsidiaries, buildings and structures acquired in 1995 and thereafter which are depreciated using the straight-line method.

Under U.S. GAAP, the useful lives of property and equipment are summarized as follows:

Estimated Useful Lives

Buildings and structures

5-60 years

Underground access to cable tunnels, and concrete and steel telephone poles

10-40 years

Machinery and equipment

3-15 years

Vehicles

3-10 years

Tools, furniture and fixtures:

Steel safe boxes

20 years

Tools, computer equipment, furniture and fixtures

2-8 years

(j) Interest Capitalization

Under Korean GAAP, prior to January 1, 2003, interest was capitalized on borrowings related to the construction of all property and equipment and IMT-2000 frequency usage right, incurred prior to completing the acquisition, as part of the cost of such assets. Effective January 1, 2003, Korean GAAP was revised to allow a company to charge such interest expense to current operations. For Korean GAAP purpose, the Company adopted in 2003 the accounting policy not to capitalize such financing costs prospectively.

Under U.S. GAAP, interest costs related to certain assets that are routinely manufactured or otherwise produced in large quantities on a regular basis are not in the scope of interest capitalization. In addition, interest is capitalized in the amount that would have theoretically been avoided had expenditures not been made for assets which require a period of time to get them ready for their intended use.

Under U.S. GAAP, details of interest capitalization for the years ended December 31, 2010, 2009 and 2008 are as follows (in millions of Korean won):

   2010   2009   2008 

Total interest costs incurred

  (Won)519,021    (Won)512,309    (Won)471,816  

Interest capitalized

   16,886     8,330     15,376  

Amounts charged to expense

  (Won)502,135    (Won)503,979    (Won)456,440  

(k) Revenue Recognition

Under Korean GAAP, non-refundable service installation fees for telephone and initial subscription fees for PCS and leased-line services are recognized as revenue when installation and initiation services are rendered.

Under U.S. GAAP, service installation fees and initial subscription fees related to activation of service are deferred and recognized as revenue over the expected terms of customer relationships. In 2009, due to a change in the market condition the Company changed the estimate of the expected terms of customer relationships of telephone, PCS, and leased-line service from 15 years to 11 years, from 4 years to 2 years and from 3 years to 6 years, respectively. The change in the estimated expected terms of customer relationships is accounted for as a change in accounting estimate on a prospective basis effective January 1, 2009 under the accounting standard related to change in accounting estimates. As a result, net income for the year ended December 31, 2009 increased by(Won)153 billion.

Under Korean GAAP, handset subsidy paid by the Company is accounted for as expenses. However, under U.S. GAAP, the handset subsidy is treated as reduction of revenue in accordance with ASC Topic 605, “Revenue Recognition.”

Under Korean GAAP, the sales of the certain real estate are accounted for as the revenue and the costs of the related real estate are recorded as the cost of sales under certain circumstances permitted under Korean GAAP. However, under U.S. GAAP, gains and losses from the sale of the property used for operation are required to be recorded as a component of operating income in net of the proceeds from the sale and the related costs.

(l) Income Taxes

Under Korean GAAP, recognition of deferred income tax benefit from equity in losses of affiliates requires realization of the benefit within the near future, which is interpreted to mean within 5 years. The Company does not believe it is probable to realize such benefit within 5 years.

Under U.S. GAAP, deferred income tax assets are recognized for an excess of the tax basis over the amount for financial reporting of domestic and foreign investments accounted for on the equity method (except for corporate joint ventures). However, deferred income tax assets related to consolidated subsidiaries are recognized only if it is apparent that the temporary difference will reverse in the foreseeable future.

Under Korean GAAP, in accordance with SKAS No. 16, effective from January 1, 2005, the Company did not recognize deferred income tax liabilities related to equity in gains of affiliates when it 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.

Under U.S. GAAP, deferred income tax liabilities are fully recognized for an excess of the amount for financial reporting over the tax basis of an investment in domestic subsidiaries and corporate joint ventures, unless the investment in the subsidiary can be recovered tax-free under local

tax laws and management expects that it will ultimately use that means. However, deferred income tax liabilities are not recognized in an investment in a more than 50 percent-owned foreign subsidiary or foreign corporate joint venture that is essentially permanent in duration.

Under U.S. GAAP, on January 1, 2007, the Company adopted accounting guidance which clarifies the accounting guidance for uncertainties in income taxes. The guidance requires that the tax effect(s) of a position be recognized only if it is “more-likely-than-not” to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the tax position are to be recognized. The more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. With the adoption of the accounting guidance, companies are required to adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained.

(m) Foreign Currency Transactions

Under Korean GAAP, prior to January 1, 2003, all unrealized foreign currency translation gains and losses on monetary assets and liabilities, except for amounts included in the cost of property and equipment, were included in the results of operations. Effective January 1, 2003 the Company adopted SKAS No. 7, “Capitalization of Financing Costs”. As allowed by the standard, the Company elected to include all unrealized foreign currency translation gains and losses (including property and equipment) in the results of operations.

Under U.S. GAAP, all foreign exchange transaction gains and losses (referred to as translation gains and losses under Korean GAAP) are included in the results of operations for the current period and therefore, the amounts included in property and equipment and related depreciation expense under Korean GAAP are reversed.

Under Korean GAAP, the convertible notes denominated in a foreign currency are regarded as non-monetary liabilities since they have equity-like characteristics, and the Company does not recognize the associated foreign currency translation gain and loss.

Under U.S. GAAP, the convertible notes denominated in a foreign currency are translated at the rate of exchange on the balance sheet date, and the resulting foreign currency transaction gain and loss is included in the results of operations.

(n) Noncontrolling Interest

Under Korean GAAP, minority interest in consolidated subsidiaries, which is noncontrolling interest under US GAAP, is presented as a separate component of equity in the consolidated balance sheet.

Under U.S. GAAP, as described in Note 38 (r) in 2009 the Company retrospectively adopted the presentation and disclosure provisions of new accounting guidance on a noncontrolling interest in its consolidated financial statements, which required noncontrolling interest to be presented as a separate component of equity in the consolidated financial statements as well as modified the presentation of net income and other comprehensive income to be attributed to controlling and noncontrolling interest. Consequently, there is no GAAP difference any longer in terms of presentation of noncontrolling interest in the consolidated financial statements except for terminology.

(o) Other

Korean GAAP requires gains and losses from the sale of property and equipment, impairment write-downs and other bad debt expenses to be included as part of non-operating income (expense). Under U.S. GAAP, gains and losses from the sale of property and equipment, impairment write-downs and other bad debt expenses are required to be recorded as a component of operating income.

Under Korean GAAP, purchase of treasury stock is regarded as temporary and does not impact the ownership percentages of stockholders unless there is an explicit purpose of retirement of the repurchased shares in accordance with resolution of board of directors or stockholders’ meeting. Under U.S. GAAP, purchase of treasury stock results in a change of an entity’s ownership structure and ownership percentages of stockholders.

(p) Comprehensive Income

Prior to January 1, 2007, Korean GAAP did not require the presentation of comprehensive income, however, effective January 1, 2007, the Company adopted SKAS No. 21, “Preparation and Presentation of Financial Statements 1”, which requires separate disclosure of the details of comprehensive income. Consequently, there is no GAAP difference any longer in terms of disclosure of comprehensive income and its components.

Under U.S. GAAP, comprehensive income and its components must be presented in the financial statements. Comprehensive income includes all changes in total equity during a period except those resulting from investments by, or distributions to, owners, including certain items not included in the current results of operations.

Comprehensive income for the years ended December 31, 2010, 2009 and 2008 is summarized as follows (in millions of Korean won):

   2010  2009  2008 

Attributable to stockholders :

    

Net income as attributable to stockholdersadjusted in accordance with U.S. GAAP

  (Won)1,185,918   (Won)741,921   (Won)518,245  

Other comprehensive income, net of tax :

    

Foreign currency translation adjustments

   (13,018  (19,389  16,921  

Unrealized gains on investments :

    

Unrealized holding gains (losses), net of tax of(Won)(3,739) million,(Won)384 million and(Won) (1,907) million in 2010, 2009 and 2008, respectively

   (13,257  1,362    (6,762)

Reclassification adjustment for losses realized in net earnings due to disposal, net of tax of(Won)88 million,(Won)378 million and(Won)687 million in 2010, 2009 and 2008, respectively

   274    1,388    2,436  

losses on valuation of derivatives for cash flow hedge, net of tax of(Won)(9,915) million,(Won)(5,840) million and(Won)(1,297) million in 2010, 2009 and 2008, respectively

   (35,153  (20,705  (4,598)
             

Comprehensive income as adjusted in accordance with U.S. GAAP

   1,124,764    704,577    526,242  
             

   2010  2009  2008 

Attributable to noncontrolling interest :

    

Net income as adjusted in accordance with U.S. GAAP

   10,222    98,704    55,178  

Other comprehensive income, net of tax :

    

Foreign currency translation adjustments

   (3,295  (7,910  8,418  

Others

   146    (2,938  (8,183)
             

Comprehensive income as adjusted in accordance with U.S. GAAP

   7,073    87,856    55,413  
             

Total Comprehensive Income

  (Won)1,131,837   (Won)792,433   (Won)581,655  
             

(q) Statements of Cash Flows

Statements of cash flows under Korean GAAP include the cash flows of KTSM, KTP, SFNH BF-(1), KT Music (formerly, “KTF Music Corporation”), KTR Co., Ltd, KT Rental, KT-LIG ACE Private Equity Fund, Vanguard Private Equity Fund and Doremi Media, which are accounted for under the equity method under U.S. GAAP.

Under Korean GAAP, cash flows from contributions that are restricted for the purposes of constructing assets are included in investing activities. For U.S. GAAP purposes, those cash flows are included in financing activities. In addition, under Korean GAAP cash flows from initial consolidation or deconsolidation of a subsidiary is presented as a separate line whereas for U.S. GAAP purposes, it is categorized as investing activities net of cash paid or received.

(r) Significant Recent Accounting Pronouncements

(i)In June 2009, the FASB amended the consolidation rules related to Variable Interest Entities (“VIEs”). The new rules expand the primary beneficiary analysis to incorporate a qualitative review of which entity controls and directs the activities of the VIE. The amendments also modify the rules regarding the frequency of ongoing reassessments of whether a company is the primary beneficiary. Under the revised guidance, companies are required to perform ongoing reassessments as opposed to only when certain triggering events occur, as was previously required. This guidance is effective in 2010 and there is no material impact on the consolidated financial statements.

(ii)In October 2009, the FASB issued ASU 2009-13 “Multiple-Deliverable Revenue Arrangements.” The update addresses how revenues should be allocated among all products and services included in sales arrangements. It establishes a selling price hierarchy for determining the selling price of each product or service, with vendor-specific objective evidence (“VSOE”) at the highest level, third-party evidence of selling price at the intermediate level, and a best estimate of the selling price at the lowest level. It replaces “fair value” with “selling price” in revenue allocation guidance, eliminates the residual method as an acceptable allocation method, and requires the use of the relative selling price method as the basis for allocation. It also significantly expands the disclosure requirements for such arrangements, including, potentially, certain qualitative disclosures. ASU 2009-13 will be effective prospectively for sales entered into or materially modified in fiscal years beginning on or after June 15, 2010. The FASB permits early adoption of ASU 2009-13, applied retrospectively, to the beginning of the year of adoption. The Company has not early adopted the accounting standard in 2010.

(iii)In October 2009, the FASB issued ASU 2009-14 “Certain Revenue Arrangements That Include Software Elements.” The update clarifies the guidance for allocating and measuring revenue, including how to identify software that is out of the scope. The update also amends accounting and reporting guidance for revenue arrangements involving both tangible products and software that is “more than incidental to the tangible product as a whole.” That type of software and hardware will be outside of the scope of software revenue guidance, and the hardware components will also be outside of the scope of software revenue guidance and may result in more revenue recognized at the time of the hardware sale. Additional disclosures will discuss allocation of revenue to products and services in sales arrangements and the significant judgments applied in the revenue allocation method, including impacts on the timing and amount of revenue recognition. ASU 2009-14 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. ASU 2009-14 has the same effective date, including early adoption provisions, as ASU 2009-13. The Company has not early adopted the accounting standard in 2010.

(iv)In December 2009, the FASB issued ASU 2009-16 “Transfers and Servicing.” This update removes the concept of a qualifying special-purpose entity (“QSPE”) and creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale. To determine if a transfer is to be accounted for as a sale, the transferor must assess whether it and all of the entities included in its consolidated financial statements have surrendered control of the assets. This standard is effective from January 1, 2010, with adoption applied prospectively for transfers that occur on and after the effective date. The elimination of the QSPE concept requires to retrospectively assess all current off-balance sheet QSPE structures for consolidation under ASC Topic 810, “Consolidation,” and record a cumulative-effect adjustment to retained earnings for any consolidation change. Retrospective application of ASU 2009-16, specially the QSPE removal, is being assessed as part of the analysis required from ASU 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” Refer to the section below for further information related to ASU 2009-17.

(v)In January 2010, the FASB amended the disclosure guidance related to fair value measurements. The amended disclosure guidance requires new fair value measurement disclosures and clarifies existing fair value measurement disclosure requirements. The amended disclosure guidance related to disclosures about purchases, sales, issuances and settlements of Level 3 instruments will be effective for fiscal years beginning after December 15, 2010. The remaining amended disclosure guidance will be effective for annual reporting periods beginning after December 15, 2009. The Company adopted the guidance in 2010 with no material impact on the consolidated financial statements.

(vi)In January 2010, the FASB issued authoritative guidance for improving disclosures about fair value measurements, which requires new and amended disclosure requirements for classes of assets and liabilities, inputs and valuation techniques and transfers between levels of fair value measurements and accounting for distributions to shareholders with components of stock and cash, which clarifies the accounting for distributions to shareholders that offer them the ability to elect to receive their entire distribution in cash or shares of equivalent value. The Company adopted the guidance in 2010 with no material impact on the consolidated financial statements.

(vii)The FASB issued ASU 2010-09 on February 24, 2010 to amend ASC 855, Subsequent Events to address certain implementation issues. The amendments remove the requirement for an SEC filer to disclose a date in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. Additionally, it has clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. That amendment is effective for interim or annual periods ending after June 15, 2010. The Company adopted the standard in 2010 with no material impact on the consolidated financial statements.

(viii)The FASB issued ASU 2010-20 on July 21, 2010 to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. This amendment is intended to provide additional information to assist financial statement users in assessing and entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The Company adopted the standard in 2010 and accordingly, disclosed the additional information related to credit risk.

(s) Income per Share

The following table sets forth the computation of basic and diluted income per share attributable to stockholders for the years ended December 31, 2010, 2009 and 2008:

  2010  2009  2008 
  Diluted  Basic  Diluted  Basic  Diluted  Basic 

CONSOLIDATED (in millions of Korean won)

      

Net income from continuing operations

 (Won)1,185,918   (Won)1,185,918   (Won)746,849   (Won)742,454   (Won)521,692   (Won)521,692  

Net income (loss) from discontinued operations

          (533)  (533)  (3,447)  (3,447)

Net income

 (Won)1,185,918   (Won)1,185,918   (Won)746,316   (Won)741,921   (Won)518,245   (Won)518,245  

AVERAGE EQUIVALENT SHARES

      

Shares of common stock outstanding

  243,207,149    243,207,149    219,512,696    219,512,696    202,891,015    202,891,015  

Dilutive effect of exchangeable bond

          4,655,062              

Dilutive effect of stock option and grant

  18,081                      

Total average equivalent shares

  243,225,230    243,207,149    224,167,758    219,512,696    202,891,015    202,891,015  

PER SHARE AMOUNTS (in Korean won)

      

Net income from continuing operations

 (Won)4,876   (Won)4,876   (Won)3,332   (Won)3,382   (Won)2,571   (Won)2,571  

Net income (loss) from discontinued operations

          (2)  (2)  (17)  (17)
                        

Net income per share

 (Won)4,876   (Won)4,876   (Won)3,330   (Won)3,380   (Won)2,554   (Won)2,554  
                        

Basic income per share is computed on the basis of the weighted-average number of common stock outstanding. Diluted income per share is computed on the basis of the weighted-average number of common stock outstanding plus the effect of outstanding exchangeable bonds, stock option and other stock compensation using the “if-exchanged method” and the “treasury stock” method if dilutive. The denominator of the diluted income per share computation is adjusted to include the number of additional common stock that would have been outstanding had the dilutive potential common stock been issued at the beginning of the period or since issued. In addition, the numerator is adjusted to include the after-tax amount of interest and foreign currency translation gain (loss) recognized associated with the exchangeable bonds. 43,153 shares, 365,832 shares and 417,785 shares of stock options outstanding as of December 31, 2010, 2009 and 2008, respectively, were not considered when calculating dilutive income per share because the exercise price of the stock options was greater than the average market price of the shares and, therefore the effect would have been antidilutive.

(t) Condensed Consolidated U.S. GAAP Financial Information

Condensed consolidated balance sheets in accordance with U.S. GAAP as of December 31, 2010 and 2009 are presented as follows (in millions of Korean won):

   2010   2009 

Current assets

    

Accounts receivable—trade

  (Won) 3,744,375    (Won) 3,596,936  

Other current assets

   3,996,880     4,232,602  
          

Total current assets

   7,741,255     7,829,538  

Investments

   870,456     463,701  

Property and equipment, net

   13,681,924     14,040,901  

Goodwill

   560,808     560,834  

Other assets

   3,748,335     3,630,526  
          

Total assets

  (Won)26,602,778    (Won)26,525,500  
          

Current liabilities

    

Accounts payable—trade

  (Won) 1,492,008    (Won) 1,478,667  

Other current liabilities

   5,664,760     5,505,811  
          

Total current liabilities

   7,156,768     6,984,478  

Long-term debt, excluding current portion

   6,719,071     7,515,257  

Other long-term liabilities

   1,626,786     1,569,321  
          

Total liabilities

   15,502,625     16,069,056  
          

Stockholders’ equity

   10,929,157     10,287,594  

Noncontrolling interest

   170,996     168,850  

Total equity

   11,100,153     10,456,444  
          

Total liabilities and equity

  (Won)26,602,778    (Won)26,525,500  
          

Condensed consolidated statements of cash flows in accordance with U.S. GAAP for the years ended December 31, 2010, 2009 and 2008 are set out below (in millions of Korean won):

   2010  2009  2008 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

  (Won)1,196,140   (Won)840,625   (Won)573,423  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

   3,112,991    3,287,343    3,663,037  

Provision for doubtful accounts

   191,009    91,863    139,441  

Loss on disposal of property and equipment

   79,845    118,925    89,734  

Equity in loss of associates

   (91,239)  (81,078)  (164,336)

Deferred income tax benefit

   17,922    (20,522)  (115,337)

Gain on disposition of available-for-sale securities, net

   (356)  (1,716)  (5,587)

Impairment losses of equity method affiliates

           22,058  

Foreign currency translation loss (gain), net

   (32,793)  (245,748)  753,592  

Loss (Gain) on settlement and valuation of derivatives, net

   7,576    172,717    (649,360)

Changes in assets and liabilities related to operating activities:

    

Notes and accounts receivable

   (101,763)  (620,909)  (161,287)

Inventories

   (6,900)  (287,367)  (142,512)

Advance payments

   (59,995)  (20,687)  (2,795)

Notes and long-term accounts receivable

   (773,393)  (533,925)  (654,248)

Accounts payable

   36,639    1,612,516    (423,619)

Advance receipts

   (24,370)  52,707    19,783  

Income taxes payable

   298,990    (169,092)  (153,173)

Prepaid expenses

   (4,704)  (19,915)  (44,291)

Withholdings

   64,825    (129,912)  26,404  

Accrued expenses

   77,837    (39,298)  24,904  

Refundable deposits for telephone installation

   (80,581)  (85,129)  (59,437)

Payment of severance indemnities

   (1,002,871)  (214,965)  140,352  

Deposits for severance indemnities

   281,576    49,861    (148,822)

Other, net

   (164,804)  (418,286)  160,633  
             

Net Cash Provided by Operating Activities

   3,021,581    3,338,008    2,888,557  
             

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Acquisition of property and equipment

   (3,019,378)  (2,759,777)  (3,322,381)

Disposal of property and equipment

   27,109    69,777    53,606  

Decrease (increase) in short-term financial instruments, net

   252,216    (39,287)  209,474  

Disposal of available-for-sale securities

   6,148    6,833    614,405  

Proceeds from the sale of equity method investments

   56,260    1,322    1,047  

Collection of held-to-maturity securities

       14,093    5  

Acquisition of available-for-sale securities

   (88,980)  (79,847)  (692,289)

Acquisition of equity method investment securities

   (86,798)  (18,191)  (123,171)

Acquisition of held-to-maturity securities

       (5)  (13,988)

Acquisition of assets and liabilities of consolidated subsidiaries

   (39,689)  37,580    (5,619)

Acquisition of intangible assets

   (348,736  (209,644  (181,937

Other, net

   (35,001)  159,391    (41,422)
             

Net Cash Used in Investing Activities

   (3,276,849)  (2,817,755)  (3,502,270)
             

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Payment of dividends

   (493,156)  (228,332)  (408,242)

Increase in short-term borrowings

   257,263    101,395    55,440  

Repayment of long-term borrowings and current portion of long-term debt

   (1,534,873)  (1,431,343)  (2,121,831)

Increase in long-term borrowings

   1,610,833    1,498,630    3,735,500  

Acquisition of treasury stock

   (54)  (528,143)  (73,807)

Outflows from capital transactions of consolidated entities

   9,576    (276,388)  (110,917)

Other, net

   33,550    (37,542)  70,702  
             

Net Cash Provided by (Used in) Financing Activities

   (116,861)  (901,723)  1,146,845  
             

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

   (372,130)  (381,470)  533,132  

CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR

   1,489,514    1,870,984    1,337,852  
             

CASH AND CASH EQUIVALENTS AT END OF THE YEAR

  (Won)1,117,384   (Won)1,489,514   (Won)1,870,984  
             

Supplemental schedule:

    

Cash paid for interest (net of amounts capitalized)

  (Won)462,560   (Won)498,299   (Won)406,485  

Cash paid for income taxes

  (Won)134,649   (Won)274,302   (Won)453,532  

39.    ADDITIONAL U.S. GAAP DISCLOSURES

(a) Income Tax Expense

The components of income tax expense for the years ended December 31, 2010, 2009 and 2008 are as follows (in millions of Korean won):

   2010   2009  2008 

Current income tax expense

  (Won)331,010    (Won)138,194   (Won)293,512  

Deferred income tax benefit

   43,020     (20,522)  (115,337)
              

Income tax expense

  (Won)374,030    (Won)117,672   (Won)178,175  
              

Substantially all income before income taxes and related income tax expense (benefit) are attributable to domestic operations. The provision for income taxes using statutory tax rates differs from the actual provision for the years ended December 31, 2010, 2009 and 2008 for the following reasons (in millions of Korean won):

   2010  2009  2008 

Provision for income taxes at statutory tax rates

  (Won)379,955   (Won)232,025   (Won)207,625  

Tax credits

   (54,578)  (110,825)  (197,492)

Additional income tax payment (refund) related to prior year

   8,208    12,692    (4,716)

Non-temporary difference

   12,553    15,985    24,863  

Changes in deferred income tax unrecognized

   17,642    (35,338)  (65)

Tax rate changes

   6,922    3,421    142,437  

Others

   3,328    (288)  5,523  
             

Actual provision for income taxes

  (Won)374,030   (Won)117,672   (Won)178,175  
             

The effective tax rates after adjustments of certain differences between amounts reported for financial accounting and income tax purpose, were approximately 23.8%,12.3% and 23.6% for the years ended December 31, 2010, 2009 and 2008, respectively.

The tax effects of temporary differences that resulted in significant portions of the deferred income tax assets and liabilities at December 31, 2010 and 2009, computed under U.S. GAAP, and a description of financial statement items that created these differences are as follows (in millions of Korean won):

   2010  2009 

Deferred income tax assets:

   

Allowance for doubtful accounts

  (Won)132,099   (Won)122,873  

Refundable deposits for telephone installation

   9,283    9,609  

Investment securities

   8,495    9,154  

Inventories

   1,416    1,174  

Property and equipment

   181,393    156,079  

Unearned revenue

   50,989    55,121  

Equity method investment securities

   2,923    23,737  

Tax credit carryforwards

   88,794    169,122  

Tax loss carryforwards

   60,999    61,882  

Accrued expenses

   87,997    33,918  

Other

   238,774    266,453  
         

Total deferred income tax assets

   863,162    909,122  
         

Valuation allowance

   (144,858)  (88,229)
         

Deferred income tax assets

   718,304    820,893  
         

Deferred income tax liabilities:

   

Equity method investment securities

       (47,623)

Accrued interest income

   (818)  (1,855)
         

Deferred income tax liabilities

   (818)  (49,478)
         

Net deferred income tax assets

  (Won)717,486   (Won)771,415  
         

In 2010 and 2009, valuation allowances were recognized by certain subsidiaries as realization of deferred income tax asset was not assessed as more likely than not mainly due to lack of expected future taxable income.

In 2010, the Company was eligible for tax credits of(Won)257,331 million. However, due to the minimum tax provisions, the Company utilized only(Won)150,720 million. The remaining tax credit will expire in 2015. During 2010, the Company concluded that the remaining tax credits was more likely than not of realization in the future based on future taxable income estimates. As a result, the Company recorded an income tax benefit of(Won)88,794 million of the tax credit. The tax loss carryforwards of(Won)266,147 million as of December 31, 2010 will expire through 2020. During 2010, certain subsidiaries including KT Tech did not recognize deferred income tax assets amounting to(Won)57,620 million which resulted from the tax effects of tax loss carryforwards of(Won)261,909 million in excess of taxable differences and future taxable income. The valuation allowances reflect the uncertainty surrounding the Company’s ability to generate sufficient future taxable income in certain tax jurisdictions to utilize its net operating losses and the Company’s ability to generate sufficient capital gains to utilize all capital losses.

In assessing the realizability of deferred income tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and tax carryforwards are utilizable. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred income tax assets are deductible or utilized, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the valuation allowance recorded at December 31, 2010 and 2009. The amount of the deferred income tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced.

The amount of unrecognized tax benefits that would favorably affect the effective income tax rate was(Won)5,761 million and ((Won)25,872) million for the years ended December 31, 2010 and 2009, respectively. The liability for uncertain tax positions is classified as a non-current liability in accordance with the guidance.

A reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of the period is as follows (in millions of Korean won):

   2010  2009  2008 

Balance at January 1,

  (Won)(1,618 (Won)4,252   (Won)6,450  

Additions to tax positions recorded during the current year

   6,281    (5,293)  573  

Additions to tax positions recorded during prior years

   605    347    268  

Reductions to tax positions recorded during prior years

   (602  (360)  (226)

Reductions for settlement

       (564)  (2,813)
             

Balance at December 31,

  (Won)4,666   (Won)(1,618) (Won)4,252  
             

The Company’s practice is to classify interest on uncertain tax positions in non-operating expense whereas penalties are classified in income tax expense. The Company recognized(Won)605 million and(Won)347 million in penalties for the years ended December 31, 2010 and 2009, respectively. As of December 31, 2010 and 2009, the Company had(Won)1,514 million and(Won)909 million accrued for the payment of penalties.

The Company has open tax years ranging from 2006 to 2010, by which its taxes remain subject to examination. However, the Company does not anticipate that the total amount of unrecognized tax benefits will significantly change in the next 12 months.

(b) Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). GAAP establishes a valuation hierarchy for prioritizing the inputs and the hierarchy places greater emphasis on the use of observable market inputs and less emphasis on unobservable inputs. When determining fair value, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of the hierarchy are as follows: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Following is a description of the valuation methodologies the Company used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

(i) Recurring Fair Value

Securities

The Company classifies its securities within Level 1 of the valuation hierarchy where quoted prices are available in an active market.

Derivatives

The Company generally classifies derivatives within Level 2 of the valuation hierarchy. The derivative financial instruments consist of cross currency interest rate swap and forward. The cross currency interest swaps and forward are valued using valuation models that use as their basis readily observable market inputs, such as time value, forward interest rates, volatility factors and current and forward market prices for foreign currency.

The following fair value hierarchy table presents information regarding the assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 and 2009, respectively (in millions of Korean won):

   2010 
   Level 1   Level 2   Level 3   Total 

ASSETS

        

Securities

        

• Beneficiary certificates

  (Won)67,826    (Won)    (Won) —    (Won)67,826  

• Trading securities

   2,000               2,000  

• Available-for-sale securities

   20,121               20,121  

• Held-to-maturity securities

        7          7  

Derivative instruments assets :

        

• Interest rate swap

        1,213          1,213  

• Currency swap

        34,193          34,193  

• Combined interest rate currency swap

        212,388          212,388  

• Currency forwards

        136          136  
                    

Total

  (Won)89,947    (Won)247,937    (Won)    (Won)337,884  
                    

LIABILITIES

        

Derivative instruments liabilities :

        

• Interest rate swap

        214          214  

• Currency swap

        6,560          6,560  

• Combined interest rate currency swap

        13,277          13,277  

• Currency forwards

        420          420  
                    

Total

  (Won)    (Won)20,471    (Won)    (Won)20,471  
                    
   2009 
   Level 1   Level 2   Level 3   Total 

ASSETS

        

Securities

        

• Beneficiary certificates

  (Won)84,199    (Won)    (Won)    (Won)84,199  

• Trading securities

   15,470               15,470  

• Available-for-sale securities

   31,403               31,403  

• Held-to-maturity securities

        82          82  

Derivative instruments assets :

        

• Interest rate swap

        23          23  

• Currency swap

        47,547          47,547  

• Combined interest rate currency swap

        417,731          417,731  

• Currency forwards

        288          288  
                    

Total

  (Won)131,072    (Won)465,671    (Won)    (Won)596,743  
                    

LIABILITIES

        

Derivative instruments liabilities :

        

• Interest rate swap

        5,775          5,775  

• Currency swap

        3,781          3,781  

• Currency forwards

        1,723          1,723  
                    

Total

  (Won)    (Won)11,279    (Won)    (Won)11,279  
                    

(ii) Non-recurring Fair Value

In 2009, the Company adopted the provisions of the authoritative guidance on fair value measurements for nonfinancial assets and nonfinancial liabilities that the Company does not recognize or disclose at fair value on a recurring basis (at least annually). These include reporting units measured at fair value in a goodwill impairment test, other nonfinancial assets or liabilities measured at fair value for impairment testing, and nonfinancial assets acquired and liabilities assumed in a business combination. In connection with the adoption of this guidance the Company analyzed and evaluated

them to determine whether nonfinancial assets and liabilities had any evidences of impairment. As a result of the evaluation, the Company noted that it currently does not have significant non-financial assets or non-financial liabilities that are required to be measured at fair value on a non-recurring basis.

(c) Fair Value of Financial Instruments

The following method and assumptions were used to estimate the fair value of each significant class of financial instrument for which it was practicable to estimate such value:

(i) Cash and cash equivalents, short-term financial instruments, accounts receivable, accounts payable and short-term borrowings

The carrying amount approximates fair value due to the short-term maturity of these instruments and credit risk.

(ii) Loans to employees

The carrying amount of short-term loans approximates fair value due to the short term maturities of these loans. The fair value of long-term loans is estimated based on discounted cash flows using current rates offered for loans of the similar remaining maturities.

(iii) Long-term debt

The fair value of the long-term debt, including current portion, is estimated based on quoted market prices for the same or similar issues or on the current rates offered for debt of the same remaining maturities.

The estimated fair values of the Company’s significant financial instruments at December 31, 2010 and 2009 are summarized as follows (in millions of Korean won):

   2010   2009 
   Carrying amount   Fair value   Carrying amount   Fair value 

Cash and cash equivalents

  (Won)1,124,810    (Won)1,124,810    (Won)1,489,674    (Won)1,489,674  

Short-term financial instruments

   67,826     67,826     84,199     84,199  

Notes and accounts receivable

   4,282,543     4,282,543     4,082,386     4,082,386  

Loans to employees

   5,093     4,727     53,020     52,801  

Accounts payable

   1,492,019     1,492,019     1,479,812     1,479,812  

Short-term borrowings

   436,160     436,160     358,205     358,205  

Long-term debt, including current portion

   8,924,843     8,827,137     9,219,764     9,154,905  

(d) Accrued Severance Indemnities

The Company expects to pay the following future benefits to its employees upon their normal retirement age (in millions of Korean won):

Year ending December 31,

    

2011

  (Won)3,224  

2012

   2,937  

2013

   5,952  

2014

   16,317  

2015

   45,783  

2016-2020

   395,467  

(e) Loan Receivables

Loan receivables by type as of December 31, 2010, are as follows:

   2010 

(in millions of

Korean won)

     Original
Amount
   Allowance for
doubtful accounts
  Carrying
Value
 

Loans receivable

  Factoring receivables  (Won)35,737    (Won)(647 (Won)35,090  
  Loans   1,021,702     (27,934  993,768  
  Accounts receivable-loans   13,307     (2,402  10,905  

Loan for installment credit

  Loans for installment credit   54,364     (2,573  51,791  
  

Accounts receivable-loans for

installment credit

   528     (82  446  

Loan for new technology

  

New technology financial

investment assets

   3,984     (1,124  2,860  
  New technology financial loans   10,786     (181  10,605  
                
  Total  (Won)1,140,408    (Won)(34,943 (Won)1,105,465  
                

The Company provides the allowance for the doubtful accounts for overdue receivables based on the aging analysis, historical bad debt experience and other relevant factors.

The aging analysis of loans receivables as of December 31, 2010,2013, is as follows:

 

(in millionsType of Korean won)control

  

2010Related parties

CurrentAssociates and jointly controlled entities

  Korea Information & Technology Investment Fund, WiBro Infra Co., Ltd.,(Won)K-REALTY CR REIT 1, KTCS Corporation, KTIS Corporation, Mongolian Telecommunications,KT-SB1,066,046 Venture Investment Fund, Company K Movie Asset Fund No.1, Boston Global Film & Contents Fund L.P., Metropol Property LLC, KTF-CJ Music Contents Investment, QTT Global (Group) Company Limited, Korea Telephone Directory Co., Ltd., CU Industrial Development Co., Ltd., MOS Facilities Co., Ltd., Exdell Corporation, Information Technology Solution Bukbu Corporation, Information Technology Solution Nambu Corporation, Information Technology Solution Seobu Corporation, Information Technology Solution Busan Corporation, Information Technology Solution Jungbu Corporation, Information Technology Solution Honam Corporation, Information Technology Solution Daegu Corporation, VANGUARD Private Equity Fund, KT-LIG ACE Private Equity Fund, Smart Channel Co., Ltd., HooH Healthcare Inc., KD Living, Inc., ChungHo EZ-Cash Co., Ltd., JNK Retech Co., Ltd., Harex Info Tech Inc., Boston Film Fund, KT-DoCoMo Mobile Investment Fund, MOS GS Co., Ltd., MOS Daegu Co., Ltd., MOS Chungcheong Co., Ltd., MOS Gangnam Co., Ltd., MOS GB Co., Ltd., MOS BS Co., Ltd., MOS Honam Co., Ltd., ANIMAX BROADCASTING KOREA Co., Ltd., SPERA Private Equity Fund, QCP New Technology Investment Fund No. 20, KT-IMM Investment Fund, Mirae Asset Good Company Investment Fund No.3, 2010 KIF-IMM IT Investment Fund, Saehacoms Co., Ltd., Oscar Ent. Co., Ltd., KoFC KTC-ORIX Korea-Japan Partnership Private Equity Fund II, Texno Pro Sistem, East Telecom Networks LLC, Hyundai Swiss Smartmall Private Special Asset Investment Trust, KT-CKP New Media Investment Fund, KT-Michigan Global Contents Fund, SP1 Private Equity Fund, LoginD Co., Ltd., Tosster Media Co., Ltd.

Past due but not impaired

Less than 31 days past due

9,954

31 ~ 60 days past due

18,050

61 ~ 90 days past due

3,069

91 ~ 180 days past due

over 180 days

31,073

Impaired loan

Impaired loans on individual basis

10,392

Allowance for doubtful accounts

(3,784

Impaired loans as a group

32,897

Allowance for doubtful accounts

(31,159
8,346

Total

(Won)1,105,465

The maximum exposure to credit risk of each class ofrelated receivables is equal to the book value of each class of receivableand payables as of December 31, 2010.2012 and 2013, are as follows:

  2012 
  Receivables  Payables 

(in millions of Korean won)

 Trade
receivables
  Loans  Other
receivables
  Trade
payables
  Other
payables
 

Associates and jointly controlled entities

 KTCS Corporation 2,597      162      23,307  
 KTIS Corporation  3,587    654    57    1,897    26,782  
 Information Technology Solution Bukbu Corporation  2                3,410  
 Information Technology Solution Nambu Corporation  1        9        3,961  
 Information Technology Solution Seobu Corporation  5                3,703  
 Information Technology Solution Busan Corporation  1        1    34    1,561  
 Information Technology Solution Jungbu Corporation  2                3,282  
 Information Technology Solution Honam Corporation  103                3,152  
 Information Technology Solution Daegu Corporation  100                1,698  
 KT Wibro Infra Co., Ltd.                  214,866  
 Smart Channel Co., Ltd.  7,824    9,638    39,724    1,589    1,668  
 K-REALTY CR REIT1  948        36,000          
 MOS GS Co., Ltd.  64        1    1,552    773  
 MOS Daegu Co., Ltd.  11        6    1,181    8  
 MOS Chungcheong Co., Ltd.  1        1    962    85  
 MOS Gangnam Co., Ltd.  20        8        58  
 MOS GB Co., Ltd.  96        5    2,045    400  
 MOS BS Co., Ltd.  2        1    1,169    13  
 MOS Honam Co., Ltd.  4        2    1,310    220  
 Others  187        110    273    3,339  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  15,555   10,292   76,087   12,012   292,286  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  2013 
  Receivables  Payables 

(in millions of Korean won)

 Trade
receivables
  Loans  Other
receivables
  Trade
payables
  Other
payables
 

Associates and jointly controlled entities

 KTCS Corporation 2,079      606   765   14,372  
 KTIS Corporation  1,388        95    137    35,416  
 Information Technology Solution Bukbu Corporation  3        610    2    4,555  
 Information Technology Solution Nambu Corporation  2        9        3,989  
 Information Technology Solution Seobu Corporation  8        577        4,095  
 Information Technology Solution Busan Corporation  1        191    20    1,810  
 Information Technology Solution Jungbu Corporation  2        375        3,697  
 Information Technology Solution Honam Corporation  2        239        3,110  
 Information Technology Solution Daegu Corporation  3        198        2,257  
 KT Wibro Infra Co., Ltd.                  172,081  
 Smart Channel Co., Ltd.  9,717    9,638    39,724    2,261    75  
 K-REALTY CR REIT1  949        36,000          
 MOS GS Co., Ltd.  74        1        1,813  
 MOS Daegu Co., Ltd.  4            1,154    17  
 MOS Chungcheong Co., Ltd.  39        1    1,186    230  
 MOS Gangnam Co., Ltd.  2        1        180  
 MOS GB Co., Ltd.  94        5    2,442    131  
 MOS BS Co., Ltd.  3        1    1,006    53  
 MOS Honam Co., Ltd.  1        2    1,517    183  
 Others  226    400    1,889    52    1,989  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  14,597   10,038   80,524   10,542   250,053  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Significant transactions with related parties for the years ended December 31, 2011, 2012 and 2013, are as follows:

   2011 

(in millions of Korean won)

  Sales   Purchases 

Associates and jointly controlled entities

  KTCS Corporation  16,613    279,840  
  KTIS Corporation   28,545     258,902  
  Information Technology Solution Bukbu Corporation   3,091     27,249  
  Information Technology Solution Nambu Corporation   3,505     33,220  
  Information Technology Solution Seobu Corporation   1,874     37,862  
  Information Technology Solution Busan Corporation   2,736     22,001  
  Information Technology Solution Jungbu Corporation   3,946     30,004  
  Information Technology Solution Honam Corporation   2,698     41,790  
  Information Technology Solution Daegu Corporation   1,862     14,961  
  KT Wibro Infra Co., Ltd.   6     2,294  
  K-REALTY CR REIT1   3,315       
  MOS GS Co., Ltd.   677     16,625  
  MOS Daegu Co., Ltd.   197     11,829  
  MOS Chungcheong Co., Ltd   333     9,385  
  MOS Gangnam Co., Ltd.   65     13,881  
  MOS GB Co., Ltd.   692     20,694  
  MOS BS Co., Ltd.   335     15,434  
  MOS Honam Co., Ltd.   309     13,691  
  Others   18,653     74,909  
    

 

 

   

 

 

 
    89,452    924,571  
    

 

 

   

 

 

 

   2012 

(in millions of Korean won)

  Sales   Purchases 

Associates and jointly controlled entities

  KTCS Corporation  44,649    262,227  
  KTIS Corporation   38,144     273,938  
  Information Technology Solution Bukbu Corporation   4,081     26,004  
  Information Technology Solution Nambu Corporation   3,344     31,156  
  Information Technology Solution Seobu Corporation   4,589     33,548  
  Information Technology Solution Busan Corporation   2,750     18,327  
  Information Technology Solution Jungbu Corporation   4,228     26,394  
  Information Technology Solution Honam Corporation   2,845     35,666  
  Information Technology Solution Daegu Corporation   1,872     12,696  
  KT Wibro Infra Co., Ltd.   6     2,083  
  Smart Channel Co., Ltd.   5,039     1,670  
  K-REALTY CR REIT1   2,038     35,290  
  MOS GS Co., Ltd.   1,033     17,620  
  MOS Daegu Co., Ltd.   429     12,318  
  MOS Chungcheong Co., Ltd   462     12,760  
  MOS Gangnam Co., Ltd.   372     14,474  
  MOS GB Co., Ltd.   1,401     22,113  
  MOS BS Co., Ltd.   575     15,716  
  MOS Honam Co., Ltd.   542     13,799  
  Others   3,002     19,895  
    

 

 

   

 

 

 
    121,401    887,694  
    

 

 

   

 

 

 

   2013 

(in millions of Korean won)

  Sales   Purchases 

Associates and jointly controlled entities

  KTCS Corporation  45,172    258,203  
  KTIS Corporation   59,537     281,219  
  Information Technology Solution Bukbu Corporation   4,784     29,626  
  Information Technology Solution Nambu Corporation   4,871     33,232  
  Information Technology Solution Seobu Corporation   5,397     34,526  
  Information Technology Solution Busan Corporation   2,920     18,967  
  Information Technology Solution Jungbu Corporation   5,318     27,483  
  Information Technology Solution Honam Corporation   3,122     36,096  
  Information Technology Solution Daegu Corporation   2,048     13,462  
  KT Wibro Infra Co., Ltd.   9     1,660  
  Smart Channel Co., Ltd.   8,188       
  K-REALTY CR REIT1   2,039     36,349  
  MOS GS Co., Ltd.   1,465     17,337  
  MOS Daegu Co., Ltd.   806     12,061  
  MOS Chungcheong Co., Ltd   819     12,111  
  MOS Gangnam Co., Ltd.   749     15,078  
  MOS GB Co., Ltd.   1,981     22,858  
  MOS BS Co., Ltd.   914     15,117  
  MOS Honam Co., Ltd.   948     13,803  
  Others   2,739     15,766  
    

 

 

   

 

 

 
    153,826    894,954  
    

 

 

   

 

 

 

Key management compensation for the years ended December 31, 2011, 2012 and 2013, consists of:

(in millions of Korean won)

  2011   2012   2013 

Salaries and other short-term benefits

  3,153    3,166    3,203  

Provision for severance benefits

   270     274     335  

Stock-based compensation

   1,990     1,078     842  
  

 

 

   

 

 

   

 

 

 

Total

  5,413    4,518    4,380  
  

 

 

   

 

 

   

 

 

 

Fund transactions with related parties for the years ended December 31, 2011, 2012, 2013, are as follows:

  2011 
    Loan transactions  Borrowing transactions  Equity
contributions
in cash
 

(in millions of Korean won)

 Loans  Repayments  Borrowings  Repayments  

Associates and jointly controlled entities

 KTIS Corporation 338              
 Kan Communications Co., Ltd.                  3,000  
 K-REALTY CR REIT1                  30,000  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  338            33,000  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  2012 
    Loan transactions  Borrowing transactions  Equity
contributions
in cash
 

(in millions of Korean won)

 Loans  Repayments  Borrowings  Repayments  

Associates and jointly controlled entities

 KTIS Corporation 654   338           
 Smart Channel Co., Ltd. 1  9,638                  
 ChungHo EZ-Cash Co., Ltd.                  3,440  
 QTT Global (Group) Company Limited                  12,746  
 HooH Healthcare Inc.                  490  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  10,292   338         16,676  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

1Provisions are made for loans to Smart Channel Co., Ltd. as of December 31, 2013.

   2013 
     Loan transactions   Borrowing transactions   Equity
contributions
in cash
 

(in millions of Korean won)

  Loans   Repayments   Borrowings   Repayments   

Associates and jointly controlled entities

 KTIS Corporation      654              
 KT-SB Venture Investment Fund                       6,000  
 JNK Retech Co., Ltd                       1,176  
 KT-CKP New Media Investment Fund                       2,250  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
       654            9,426  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Payment guarantees and collateral provided by the Group

As of December 31, 2013, based on the investors’ agreement, the Company has an obligation to provide funding to Smart Channel Co., Ltd. if Smart Channel Co, Ltd. is unable to fulfill its obligation. The Company pledged investment securities in Smart Channel Co., Ltd. as collateral (Note 14).

There are no collateral and payment guarantees provided by the related parties.

35.    Financial risk management

(1) Financial risk factors

The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to hedge certain risk exposures.

The Group’s financial policy is set up in the long-term perspective and annually reported to the Board of Directors. The financial risk management is carried out by the Value Management Office, which identifies, evaluates and hedges financial risks. The treasury department in the Value Management Office considers various finance market conditions to estimate the effect from the market changes.

1) Market risk

The Group’s market risk management focuses on controlling the extent of exposure to the risk in order to minimize revenue volatility. Market risk is a risk that decreases value or profit of the Group’s portfolio due to changes in market interest rate, foreign exchange rate and other factors.

(i) Sensitivity analysis

Sensitivity analysis is performed for each type of market risk to which the Group is exposed. Reasonably possible changes in the relevant risk variable such as prevailing market interest rates, currency rates, equity prices or commodity prices are estimated and if the rate of change in the underlying risk variable is stable, the Group does not alter the chosen reasonably possible change in the risk variable. The reasonably possible change does not include remote or ‘worst case’ scenarios or ‘stress tests’.

(ii) Foreign exchange risk

The Group is exposed to foreign exchange risk arising from operating, investing and financing activities. Foreign exchange risk is managed within the range of the possible effect on the Group’s cash flows. Foreign exchange risk unaffecting the Group’s cash flows is not hedged but can be hedged at a particular situation.

As of December 31, 2011, 2012 and 2013, if the foreign exchange rate had strengthened/weakened by 10% with all other variables held constant, the effects on profit before income tax and shareholders’ equity would have been as follows:

(in millions of Korean won)

  Fluctuation of
foreign exchange  rate
  Income before tax  Shareholders’ equity 

2011

   +10 (56,994 (50,291
   -10  56,994    50,291  

2012

   +10  (64,746  (52,203
   -10  64,746    52,203  

2013

   +10  (46,173  (47,888
   -10  46,173    47,888  

The above analysis is a simple sensitivity analysis which assumes that all the variables other than foreign exchange rates are held constant. Therefore, the analysis does not reflect any correlation between foreign exchange rates and other variables, nor the management’s decision to decrease the risk.

Details of foreign assets and liabilities of the Group as of December 31, 2011, 2012 and 2013, are as follows:

   2011   2012   2013 

(in thousands of
Foreign currencies)

  Financial
assets
   Financial
liabilities
   Financial
assets
   Financial
liabilities
   Financial
assets
   Financial
liabilities
 

USD

   235,435     2,323,677     217,488     2,377,137     254,917     2,225,700  

SDR

   1,160     744     494     1,130     1,105     1,211  

JPY

   1,080,822     35,451,398     657,947     35,102,877     190,520     30,054,316  

GBP

   7     131     1     9          134  

EUR

   1,239     3,357     5,395     2,614     1,342     4,943  

DZD

   18,714          3,770          2,798       

CNY

   14,495     700     10,236     197            

UZS

   13,534,203     44,788,561     7,920,825     38,727,985     1,805,565       

RWF

                       11,962       

IDR

   411,687     10,000     347,447                 

(iii) Price risk

As of December 31, 2011, 2012 and 2013, the Group is exposed to equity securities price risk because the securities held by the Group are traded in active markets. If the market prices had increased/decreased by 10% with all other variables held constant, the effects on profit before income tax and shareholders’ equity would have been as follows:

(in millions of Korean won)

  Fluctuation of price  Income before tax   Shareholders’ equity 

2011

   +10     —    10,118  
   -10       (10,118

2012

   +10       4,916  
   -10       (4,916

2013

   +10       5,535  
   -10       (5,535

The above analysis is based on the assumption that the equity index had increased/decreased by 10% with all other variables held constant and all the Group’s marketable equity instruments had moved according to the historical correlation with the index.

(iv) Cashflow and fair value interest rate risk

The Group’s interest rate risk arises from liabilities in foreign currency such as foreign currency bonds payable. Bonds payable in foreign currency issued at variable rates expose the Group to cash flow interest rate risk which is partially offset by swap transactions. Bonds payable and borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group sets the policy and operates to minimize the uncertainty of the changes in interest rates and financial costs.

As of December 31, 2011, 2012 and 2013, if the market interest rate had increased/decreased by 100bp with other variables held constant, the effects on profit before income tax and shareholders’ equity would be as follows:

(In millions of Korean won)

  Fluctuation of
interest rate
   Income before tax  Shareholders’ equity 

2011

   + 100 bp    (1,724 (581
   - 100 bp     (12,872  (14,209

2012

   + 100 bp     (562  (368
   - 100 bp     (5,100  (5,361

2013

   + 100 bp     10,345    12,846  
   - 100 bp     (17,201  (19,017

The above analysis is a simple sensitivity analysis which assumes that all the variables other than market interest rates are held constant. Therefore, the analysis does not reflect any correlation between market interest rates and other variables, nor the management’s decision to decrease the risk.

2) Credit risk

Credit risk is managed aton the company level to minimizeGroup basis with the purpose of minimizing financial loss. Credit risk arises infrom the ordinary course ofnormal transactions and investing activities, where clients or other party fails to discharge an obligation. The Companyobligation on contract conditions. To manage credit risk, the Group considers the counterparty’s credit on a periodic basis based on the counterparty’s financial conditions, default history and other important factors.

Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as outstanding receivables. To minimize such risk, only the financial institutions with strong credit ratings are accepted.

As of December 31, 2012 and 2013, maximum exposure to credit risk is as follows:

(In millions of Korean won)

  2012   2013 

Cash equivalents(except cash on hand)

  2,051,670    2,065,157  

Trade and other receivables1

   6,980,474     6,053,040  

Loans receivable

   1,180,700     1,348,597  

Finance lease receivables

   861,655     709,937  

Other financial assets

    

Financial assets at fair value through the profit or loss

   6,407     15,643  

Derivative used for hedging

   21,348     3,496  

Time deposits and others

   460,394     582,693  

Available-for-sale financial assets

   10,953     25,978  

Held-to-maturity financial assets

   436     3,248  

Financial guarantee contracts2

   213,947     389,814  

Performance guarantee contracts2

   14,490       
  

 

 

   

 

 

 

Total

  11,802,474    11,197,603  
  

 

 

   

 

 

 

1As of December 31, 2013, the Company is provided with a payment guarantee of667,817 million from Seoul Guarantee Insurance related to the sale of certain accounts receivable arising from handset sales.

2Total amounts guaranteed by the Group according to the guarantee contracts.

3) Liquidity risk

The Group manages its liquidity risk by liquidity strategy and plans. The Group considers the maturity of financial assets and financial liabilities and the estimated cash flows from operations.

The table below analyzes the Group’s liabilities into relevant maturity groups based on the remaining period at the date of the end of each reporting period to the contractual maturity date as of December 31, 2012 and 2013. These amounts are contractual undiscounted cash flows.

   2012 

(in millions of Korean won)

  Less than 1 year   1-5 years   More than 5 years   Total 

Trade and other payables

  7,253,043    686,700    104,857    8,044,600  

Finance lease payables

   15,826     29,474          45,300  

Borrowings(including bonds payable)

   3,631,441     7,578,276     1,878,606     13,088,323  

Other non-derivative financial liabilities

        80,752          80,752  

Financial guarantee contracts 1

   213,947               213,947  

Performance guarantee contracts 1

   14,490               14,490  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  11,128,747    8,375,202    1,983,463    21,487,412  
  

 

 

   

 

 

   

 

 

   

 

 

 

1

Total amount guaranteed by the Group according to guarantee contracts. Cash flow from financial guarantee contracts is classified as the maturity group in the earliest period when the financial guarantee contracts can be executed.

   2013 

(in millions of Korean won)

  Less than 1 year   1-5 years   More than 5 years   Total 

Trade and other payables

  7,429,289    789,999    352,928    8,572,216  

Finance lease payables

   22,498     52,877          75,375  

Borrowings(including bond payables)

   3,147,761     5,408,176     3,468,282     12,024,219  

Other non-derivative financial liabilities

        3,166     53,704     56,870  

Financial guarantee contracts 1

   389,814               389,814  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  10,989,362    6,254,218    3,874,914    21,118,494  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash outflow and inflow of derivatives settled gross or net are undiscounted contractual cash flow and can differ from the amount in the financial statements.

   2011 

(in millions of Korean won)

  Less than 1 year   1-5 years   More than 5 years   Total 

Outflow

  414,646    1,949,253    42,541    2,406,440  

Inflow

   436,469     2,038,288     50,053     2,524,810  

   2012 

(in millions of Korean won)

  Less than 1 year   1-5 years   More than 5 years   Total 

Outflow

  1,020,494    1,507,287    41,292    2,569,073  

Inflow

   949,921     1,550,822     45,093     2,545,836  

   2013 

(in millions of Korean won)

  Less than 1 year   1-5 years   More than 5 years   Total 

Outflow

  971,454    1,377,071    38,795    2,387,320  

Inflow

   910,488     1,256,407     41,648     2,208,543  

(2) Disclosure of capital management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other shareholders and to maintain an optimal capital structure to reduce the cost of capital.

The Group’s capital structure consists of liabilities including borrowings, cash and cash equivalents, and shareholders’ equity. The treasury department monitors the Group’s capital structure and considers cost of capital and risks related each capital component.

The debt-to-equity ratios as of December 31, 2012 and 2013, are as follows:

(in millions of Korean won)

  2012  2013 

Total liabilities

  21,339,933   22,012,701  

Total equity

   13,217,975    12,837,416  

Debt-to-equity ratio

   161  171

The Group manages capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings less cash and cash equivalents. Total capital is calculated as ‘equity’ in the statement of financial position plus net debt.

The gearing ratios as of December 31, 2012 and 2013, are as follows:

(in millions of Korean won, %)

  2012  2013 

Total borrowings

  11,477,765    11,552,103  

Less: cash and cash equivalents

   (2,057,613  (2,070,869
  

 

 

  

 

 

 

Net debt

   9,420,152    9,481,234  

Total equity

   13,217,975    12,837,416  

Total capital

   22,638,127    22,318,650  

Gearing ratio

   42  42

(3) Offsetting Financial Assets and Financial Liabilities

Details of the Group’s recognized financial assets subject to enforceable master netting arrangements or similar agreements are as follows:

  2012 

(in millions of Korean won)

 Gross
assets
  Gross
liabilities
offset
  Net amounts
presented in
the statement
of financial

position
  Amounts not offset  Net
amount
 
    Financial
instruments
  Cash
collateral
  

Derivative assets for hedging purpose 1

 11,120      11,120   (11,120      

Trade receivables 2

  103,733    (32  103,701    (87,276      16,425  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 114,853   (32 114,821   (98,396    16,425  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  2013 

(in millions of Korean won)

 Gross
assets
  Gross
liabilities
offset
  Net amounts
presented in
the statement
of financial

position
  Amounts not offset  Net
amount
 
    Financial
instruments
  Cash
collateral
  

Derivative assets for hedging purpose 1

 5,393      5,393   (5,393      

Trade receivables 2

  100,989    (60  100,929    (92,979      7,950  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 106,382   (60 106,322   (98,372    7,950  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

1The amount applied with master netting arrangements under the standard contract of ISDA(International Swap and Derivatives Association).

2The amount applied with netting arrangements under the reference offer of the telecommunication facility interconnection and sharing data among telecommunications companies.

The Group’s recognized financial liabilities subject to enforceable master netting arrangements or similar agreements are as follows:

   2012 

(in millions of Korean won)

  Gross
liabilities
   Gross
assets
offset
  Net amounts
presented in
the statement
of  financial
position
   Amounts not offset   Net
amount
 
       Financial
instruments
  Cash
collateral
   

Derivative liabilities for hedging purpose 1

  16,848       16,848    (11,120     5,728  

Trade payables 2

   89,665         89,665     (87,276       2,389  

Other payables 2

   4     (1  3              3  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 
  106,517    (1 106,516    (98,396     8,120  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

   2013 

(in millions of Korean won)

  Gross
liabilities
   Gross
assets
offset
  Net amounts
presented  in
the statement
of financial
position
   Amounts not offset   Net
amount
 
       Financial
instruments
  Cash
collateral
   

Derivative liabilities for hedging purpose 1

  9,889       9,889    (5,393     4,496  

Trade payables 2

   95,754         95,754     (92,979       2,775  

Other payables 2

   11     (2  9              9  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 
  105,654    (2 105,652    (98,372     7,280  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

1The amount applied with master netting arrangements under the standard contract of ISDA(International Swap and Derivatives Association).

2The amount applied with netting arrangements under the reference offer of the telecommunication facility interconnection and sharing data among telecommunications companies.

36.    Fair Value

(1) Fair Value of Financial Instruments by Category

Carrying amount and fair value of financial instruments by category as of December 31, 2012 and 2013, are as follows:

   2012   2013 

(in millions of Korean won)

  Carrying
amount
   Fair value   Carrying
amount
   Fair value 

Financial assets

        

Cash and cash equivalents 1

  2,057,613    2,057,613    2,070,869    2,070,869  

Trade and other receivables 1

   6,980,474     6,980,474     6,053,040     6,053,040  

Other financial assets

        

Financial instruments at fair value through profit or loss

   6,407     6,407     15,643     15,643  

Derivative financial instruments for hedging purpose

   21,348     21,348     3,496     3,496  

Time deposits and others 1

   460,830     460,830     585,941     585,941  

Available-for-sale financial assets 2

   301,718     301,718     405,194     405,194  
  

 

 

   

 

 

   

 

 

   

 

 

 
  9,828,390    9,828,390    9,134,183    9,134,183  
  

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities

        

Trade and other liabilities1

  7,922,662    7,922,662    8,472,707    8,472,707  

Financial lease liabilities

   41,646     41,646     68,210     68,210  

Borrowings

   11,436,119     11,566,001     11,483,893     11,499,645  

Other financial liabilities

        

Financial instruments at fair value through profit or loss

   3,216     3,216     2,956     2,956  

Derivative financial instruments for hedging purpose

   112,603     112,603     150,612     150,612  

Financial guarantee liability 1

   9,328     9,328     15,984     15,984  

Other financial liabilities 1

   16,649     16,649     73,080     73,080  
  

 

 

   

 

 

   

 

 

   

 

 

 
  19,542,223    19,672,105    20,267,442    20,283,194  
  

 

 

   

 

 

   

 

 

   

 

 

 

1The Group did not conduct fair value estimation since the book value is a reasonable approximation of the fair value.

2Equity instruments that do not have a quoted price in an active market are measured at cost because their fair value cannot be measured reliably and excluded from the fair value disclosures.

(2) Financial Instruments Measured at Cost

Available-for-sale financial assets measured at cost as of December 31, 2012 and 2013, are as follows:

(in millions of Korean won)

  2012   2013 

SBS KT SPC

  25,000    25,000  

MBC KT SPC

   11,000     11,000  

KBS KT SPC

   11,000     11,000  

IBK-AUCTUS Green Growth Private Equity Fund

   14,319     14,319  

Ustream Inc.

   11,295     11,295  

KOCREF REITs

        7,000  

Presto Private Equity Fund

        4,000  

Enterprise DB(Convertible Preferred Stock)

   3,013     3,013  

The 1st Praxis PE

        3,000  

Soulbay Indochina Private Equity Fund

        3,000  

AMOGREENTECH

   3,000     3,000  

Kokam Co., Ltd.

   2,794     2,794  

Channel A

   2,391     2,391  

Nexenta Systems(Convertible Preferred Stock)

   2,260     2,260  

KOFSGSK Corporate’s Financial Stabilization Private Equity Fund

        2,000  

Kamur Private Equity Fund No.1(Partnership enterprises)

        2,000  

JTBC

   2,000     2,000  

CSTV

   2,000     2,000  

Shinhan K2 Secondary Fund

   1,050     1,950  

JKL Private Equity Fund No.4

   1,905     1,905  

JKL-Quintessa Private Equity Fund

        1,833  

Minigate(Convertible Preferred Stock)

   1,800     1,800  

United Turnaround PEF No.3

        1,187  

Newkyunggi Resort Corp

   1,240     1,240  

Nexenta Systems

   1,029     1,029  

Goods Flow Co., Ltd.

   1,000     1,000  

Mirae Asset Good Company Secondary Investment Fund

        1,000  

Innopolis-CJ Bio Healthcare Fund

        1,000  

KaKao Co., Ltd

        1,000  

Others

   30,061     16,417  
  

 

 

   

 

 

 
  128,157    142,433  
  

 

 

   

 

 

 

The range of cashflow estimates is significant and the probabilities of the various estimates cannot be reasonably assessed and therefore these instruments are measured at cost.

The Group does not have any plans to dispose of the above-mentioned equities instruments in the near future. These instruments will be measured at fair value when the Group can develop a reliable estimate of the fair value.

(3) Fair Value Hierarchy

Assets measured at fair value or for which the fair value is disclosed are categorized within the fair value hierarchy, and the defined levels are as follows:

Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1)

Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, prices) or indirectly (that is, derived from prices) (Level 2)

Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3)

Fair value hierarchy classifications of the financial assets and financial liabilities that are measured at fair value or its fair value is disclosed as of December 31, 2013, are as follows:

   2012 

(in millions of Korean won)

  Level 1   Level 2   Level 3   Total 

Recurring fair value measurements

        

Other financial assets

        

Financial assets at fair value through profit or loss

      119    6,288    6,407  

Derivative financial assets for hedging purpose

        837     20,511     21,348  

Available-for-sale financial assets

   49,156     35,361     217,201     301,718  
  

 

 

   

 

 

   

 

 

   

 

 

 
   49,156     36,317     244,000     329,473  
  

 

 

   

 

 

   

 

 

   

 

 

 

Disclosed fair value

        

Jointly controlled entities and associates

   52,882               52,882  

Investment property 1

             2,335,642     2,335,642  
  

 

 

   

 

 

   

 

 

   

 

 

 
   52,882          2,335,642     2,388,524  
  

 

 

   

 

 

   

 

 

   

 

 

 
  102,038    36,317    2,579,642    2,717,997  
  

 

 

   

 

 

   

 

 

   

 

 

 

Recurring fair value measurements

        

Other financial liabilities

        

Financial liabilities at fair value through profit or loss

      63    3,153    3,216  

Derivative financial liabilities for hedging purpose

        89,063     23,540     112,603  
  

 

 

   

 

 

   

 

 

   

 

 

 
        89,126     26,693     115,819  
  

 

 

   

 

 

   

 

 

   

 

 

 

Disclosed fair value

        

Borrowings

             11,566,001     11,566,001  
  

 

 

   

 

 

   

 

 

   

 

 

 
             11,566,001     11,566,001  
  

 

 

   

 

 

   

 

 

   

 

 

 
      89,126    11,592,694    11,681,820  
  

 

 

   

 

 

   

 

 

   

 

 

 

1The highest and best use of a non-financial asset does not differ from its current use.

   2013 

(in millions of Korean won)

  Level 1   Level 2   Level 3   Total 

Recurring fair value measurements

        

Other financial assets

        

Financial assets at fair value through profit or loss

      499    15,144    15,643  

Derivative financial assets for hedging purpose

             3,496     3,496  

Available-for-sale financial assets

   55,347     57,533     292,314     405,194  
  

 

 

   

 

 

   

 

 

   

 

 

 
   55,347     58,032     310,954     424,333  
  

 

 

   

 

 

   

 

 

   

 

 

 

Disclosed fair value

        

Jointly controlled entities and associates

   69,840               69,840  

Investment property 1

             2,051,183     2,051,183  
  

 

 

   

 

 

   

 

 

   

 

 

 
   69,840          2,051,183     2,121,023  
  

 

 

   

 

 

   

 

 

   

 

 

 
  125,187    58,032    2,362,137    2,545,356  
  

 

 

   

 

 

   

 

 

   

 

 

 

Recurring fair value measurements

        

Other financial liabilities

        

Financial liabilities at fair value through profit or loss

      6    2,950    2,956  

Derivative financial liabilities for hedging purpose

        113,980     36,632     150,612  
  

 

 

   

 

 

   

 

 

   

 

 

 
        113,986     39,582     153,568  
  

 

 

   

 

 

   

 

 

   

 

 

 

Disclosed fair value

        

Borrowings

             11,499,645     11,499,645  
  

 

 

   

 

 

   

 

 

   

 

 

 
             11,499,645     11,499,645  
  

 

 

   

 

 

   

 

 

   

 

 

 
      113,986    11,539,227    11,653,213  
  

 

 

   

 

 

   

 

 

   

 

 

 

(4) Transfers Between Fair Value Hierarchy Levels of Recurring Fair Value Measurements

(a) Details of transfers between Level 1 and Level 2 of the fair value hierarchy for the recurring fair value measurements are as follows:

There are no transfers between Level 1 and Level 2 of the fair value hierarchy for the recurring fair value measurements.

(b) Details of changes in Level 3 of the fair value hierarchy for the recurring fair value measurements are as follows:

  2012 
  Interest rate
swap
  Other
derivative
assets
  Derivative
financial
assets for
hedging
purpose
  Available-
for-sale
  Financial
liabilities
designated
as at  fair
value
through
profit or
loss
  Derivative
financial
liabilities
for

hedging
purpose
 

Beginning balance

     —   4,151   63,689   134,346        

Reclassification

          (12,886          12,886  

Amount recognized in profit or loss1

  1        (29,350  (1,122  (334  28,708  

Amount recognized in other comprehensive income 2

          (942  38,679        (18,054

Purchases

      2,136        13,209    3,487      

Sales

              (6,164        

Transfer into Level 3 (From Cost method)

              38,253          
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

 1   6,287   20,511   217,201   3,153   23,540  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  2013 
  Interest rate
swap
  Other
derivative
assets
  Derivative
financial
assets for
hedging
purpose
  Available-
for-sale
  Other
derivative
liabilities
  Financial
liabilities
designated
as at  fair
value
through
profit or
loss
  Derivative
financial
liabilities
for
hedging
purpose
 

Beginning balance

 1   6,287   20,511   217,201       —   3,153   23,540  

Reclassification

  15,633        (15,633                

Amount recognized in profit or loss1

  (8,395  2,469    127    (3,844  148    (351  9,268  

Amount recognized in other comprehensive income2

          (1,509  95,434            3,824  

Purchases

              3,009              

Sales

      (851      (29,851            

Transfer into Level 3 (From Cost method)

              10,365              
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

 7,239   7,905   3,496   292,314   148   2,802   36,632  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(5) Valuation Technique and the Inputs

Valuation techniques and inputs used in the recurring, non-recurring fair value measurements and disclosed fair values categorized within Level 2 and Level 3 of the fair value hierarchy as of December 31, 2012 and 2013, are as follows:

   2012

(in millions of Korean won)

  Fair value   Level   

Valuation

techniques

Recurring fair value measurements

      

Other financial assets

      

Financial assets at fair value through profit or loss

      

Held for trading financial assets

      

Interest rate swap

  1     3    Hull-White model

Currency forward

   119     2    Discounted cash flow model

Other derivative assets

   6,287     3    Option model (binomial trees)

Derivative financial assets for hedging purpose

   837     2    Discounted cash flow model
   20,511     3    Hull-White model

Available-for-sale financial assets

   252,562     2,3    Discounted cash flow model

Disclosed fair value

      

Investment property

   2,335,642     3    Discounted cash flow model

Recurring fair value measurements

      

Other financial liabilities

      

Financial liabilities at fair value through profit or loss

      

Held for trading financial assets

      

Interest rate swap

   63     2    Discounted cash flow model

Financial liabilities designated as at fair value through profit or loss

   3,153     3    Option model (binomial trees)

Derivative financial liabilities for hedging purpose

   89,063     2    Discounted cash flow model
   23,540     3    Hull-White model

Disclosed fair value
Borrowings

   11,566,001     3    Discounted cash flow model

   2013

(in millions of Korean won)

  Fair value   Level   

Valuation

techniques

Recurring fair value measurements

      

Other financial assets

      

Financial assets at fair value through profit or loss

      

Held for trading financial assets

      

Interest rate and currency swap

  7,239     3    Hull-White model

Currency forward

   499     2    Discounted cash flow model

Other derivative assets

   7,905     3    

Monte-Carlo Simulation

Option model (binomial trees)

Derivative financial assets for hedging purpose

   3,496     3    Discounted cash flow model

Available-for-sale financial assets

   349,847     2,3    Discounted cash flow model

Disclosed fair value

      

Investment property

   2,051,183     3    Discounted cash flow model

Recurring fair value measurements

      

Other financial liabilities

      

Financial liabilities at fair value through profit or loss

      

Held for trading financial assets

      

Currency forward

   6     2    Discounted cash flow model

Other derivatives

   148     3    Option model (binomial trees)

Financial liabilities designated as at fair value through profit or loss

   2,802     3    Option model (binomial trees)

Derivative financial liabilities for hedging purpose

   113,980     2    Discounted cash flow model
   36,632     3    Hull-White model

Disclosed fair value
Borrowings

   11,499,645     3    Discounted cash flow model

(6) Gains and losses on valuation at the transaction date

In the case that the Group estimates the fair value of derivative financial instruments using inputs not based on observable market data, and the fair value calculated by the said valuation technique differs from the transaction price, then the fair value of the financial instruments is recognized as the transaction price. The difference between the fair value at initial recognition and the transaction price is deferred and amortized using a straight-line method by maturity of the financial instrument. However, in the case that inputs of the valuation techniques become observable in the markets, the remaining deferred difference is immediately recognized in full in profit for the year.

In relation to this, details and changes of the total deferred difference for the years ended December 31, 2012 and 2013, are as follows:

(in millions of Korean won)

  2012   2013 

Beginning balance

      54,152  

New transactions

   54,152       

Amortization

        (10,830
  

 

 

   

 

 

 

Ending balance

  54,152    43,322  
  

 

 

   

 

 

 

37.    Business Combination

(1) KT Rental Co., Ltd.

On July 2012, the restriction on controlling power of the Company transacts onlyunder the shareholders’ agreement between the Company and the second major shareholder was lifted, and therefore KT rental became a subsidiary. These transactions were accounted for in accordance with IFRS 3, Business Combinations. As a result of applying acquisition method, the Company recognized goodwill of131,426 million.

Details of the consideration transferred, fair value of the acquired identifiable assets and liabilities and goodwill at the acquisition date are as follows:

(in millions of Korean won)

Fair value of existing shares before business combination

305,730

Consideration transferred (a)

305,730

Recognized amounts of assets acquired and liabilities assumed 1

Cash and cash equivalents

23,160

Trade and other receivables

120,964

Loans receivable

49,805

Financial lease receivables

254,264

Other financial assets

1,983

Inventories

779

Tangible assets (rental vehicle, others)

992,516

Intangible assets (orders on hand, customer relationship, others)

69,866

Other assets

34,031

Trade and other payables

(195,933

Borrowings

(985,790

Current income tax liabilities

(5,138

Retirement benefit obligation

(4,065

Deferred income tax liabilities

(9,151

Other liabilities

(46,759

The net of total amounts of identifiable assets and liabilities measured at fair value (b)

300,532

Non-controlling interests 2 (c)

126,228

Goodwill (a-b+c)

131,426

1The assets acquired and liabilities assumed are measured at fair value in accordance with IFRS 3,Business Combination.

2At the date of acquisition, the Company measures any non-controlling interest in KT Rental Co., Ltd. at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets.

As described in Note 14, the previously held interest in KT Rental Co., Ltd. was measured at fair value, and the Company recognized other income of126,011 million arising from the value measurement on acquisition.

After the acquisition date, the operating revenue and net income for consolidation of KT Rental Co., Ltd. before the elimination of related party transactions with its subsidiaries are368,228 million and11,072 million, respectively. If KT Rental Co., Ltd. was consolidated on January 1, 2012, the operating revenue and net income included in consolidated income statement would have been715,604 million and25,995 million, respectively.

The fair value of trade accounts receivable and others acquired from KT Rental Co., Ltd. is120,964 million, but the full contract value is132,915 million. The uncollectible amounts from these receivables are expected to be11,951 million.

38.    Interests in Unconsolidated Structured Entities

Details of information about its interests in unconsolidated structured entities, which the Group does not have control over, including the nature, purpose and activities of the structured entities and how the structured entities are financed, are as follows:

Remarks

Nature, Purpose, Activities and Others

Real estate finance

A structured entity incorporated for the purpose of real estate development is provided with funds by investors’ investments in equity and borrowings from financial institutions (including long-term and short-term loans and issuance of Asset Based Commercial Paper due in three months), and based on these, the structured entity implements activities such as real estate acquisition, development and mortgage loans. The structured entity repays loan principals with funds from installment house sales after the completion of real estate development or with collection of the principal of mortgage loan. The remaining shares are distributed to investors. As of December 31, 2013, the Group is engaged in real estate finance structured entity, and generates revenues by receiving dividends from direct investments in or receiving interests on loans to the structured entity. Financial institutions including the Group are provided with guarantees including joint guarantees or real estate collateral from investors and others. Consequently, the Group has priority order than other parties in collecting loans to and investments in structured entity. However, when the credit rating of investors and others decreases or when the value of real estate decreases, the Group may incur losses.

PEF and investment funds

Minority investors including managing members contribute to Private Equity Fund (PEF) and investment funds incorporated for the purpose of providing funds to the small, medium, or venture entities, and the managing member implements activities such as investments in equity or loans based on the contributions. As of December 31, 2013, the Group is engaged in PEF and investment funds structured entity, and after contributing to PEF and investment funds, the Group receives dividends for operating revenues from these contributions. The Group is provided with underlying assets of PEF and investment funds as collateral. However, when the value of the underlying assets decreases, the Group may incur losses.

Remarks

Nature, Purpose, Activities and Others

M&A finance

A structured entity incorporated for the purpose of supporting a certain company’s financial structure improvement or acquiring equity or convertible bonds is provided with funds by investors’ investments in equity and long-term or short-term borrowings from financial institutions, and based on these, the structured entity acquires shares held by the entity, which has plans to improve its financial structure, or to dispose convertible bonds and others. The structured entity repays loan principals with funds from disposals of holding shares after a certain period. The remaining shares are distributed to investors. As of December 31, 2013, the Group is engaged in M&A finance structured entity, and receives interests. Financial institutions are provided with guarantees including joint guarantees or shares subject to M&A from investors and others. Consequently, the Group has priority order than other parties in collecting loans and investments. However, when the credit rating of investors and others decreases or when the value of shares provided as collateral decreases, the Group may incur losses.

Asset securitization

A transferor other than the Group transfers the assets, which are subject to securitization, to a structured entity incorporated by the transferor or other financial institutions other than the Group, and based on this as underlying assets, the structured entity is provided with funds by asset-backed borrowings and pays acquisition costs of the acquired underlying assets. As of December 31, 2013, the Group is engaged in the structured entity, and generates revenues by receiving interest income as the Group provides asset-backed loans directly to the structured entity. When the structured entity has difficulty repaying loan principal, the transferor has obligation to cover the lack of funds. Consequently, the Group has priority order than other parties in collecting loans to structured entity. However, when the credit rating of transferor decreases, the Group may incur losses.

Other

There are other structured entity types, which the Group is engaged in, such as Special Purpose Acquisition Company (SPAC) and others. Interest income is realized from the Group’s loans to the relevant structured entity. When SPAC is listed or merged after the Group invests in shares or convertible bonds issued by the relevant structured entity, revenues are realized from disposal of the shares of the convertible bonds. However, the Group may incur losses when SPAC is liquidated if the SPAC is not listed or merged.

(in millions of Korean won)

  Real Estate
Finance
   PEF &
Investment
Fund
   Acquisition
Finance
   Asset-
backed
   Others   Total 

Total amount of Unconsolidated Structured Entities

  4,970,665    7,915,355    2,175,476    5,981,382    163,702    21,206,580  

Assets recognized in statement of financial position

            

Loans

  277,663    360    101,969    228,413    12,043    620,448  

Other financial assets

   32,244     134,523     981          8,690     176,438  

Jointly investment entities and associates

        183,200               28,406     211,606  
  309,907    318,083    102,950    228,413    49,139    1,008,492  

Maximum loss exposure 1

            

Investment Assets

  309,907    318,083    102,950    228,413    49,139    1,008,492  

Credit grants

   103,500                         103,500  
  413,407    318,083    102,950    228,413    49,139    1,111,992  

1Maximum exposure to loss includes the investments recognized in the Group’s financial statements and the amounts which are probable to be determined when certain conditions are met by agreements including purchase agreements, credit granting and others.

39.    Information About Non-controlling Interests

Summarized Financial Information on Subsidiaries

The summarized financial institutions which have strong credit rating.information for each subsidiary with non-controlling interests that are material to the Group before inter-company eliminations as of December 31, 2011, 2012 and 2013, are as follows:

   2011 

(in millions of Korean won)

  KT Skylife
Co., Ltd.
  BC Card Co.,
Ltd.
  KT Powertel Co.,
Ltd.
  KT Hitel Co.,
Ltd.
 

Non-controlling Interests

   49.73  63.57  55.15  34.06

Current assets

  251,268   1,316,363   87,053   130,307  

Non-current assets

   299,175    557,973    80,022    119,423  

Current liabilities

   235,849    1,180,578    41,709    65,428  

Non-current liabilities

   22,382    186,109    17,352    3,948  

Equity

   292,212    507,649    108,014    180,353  

Accumulated non-controlling interests

   145,315    322,728    59,575    61,425  

Sales

   480,468    782,262    126,354    463,032  

Profit or loss for the year

   26,649    (945  14,566    (2,016

Total comprehensive income

   28,022    8,505    14,189    (3,913

The profit or loss allocated to non-controlling interests

   13,252    (601  8,034    (687

Cash flows from operating activities

   92,889    (300,423  26,984    1,654  

Cash flows from investing activities

   (116,410  (24,453  (20,903  1,197  

Cash flows from financing activities before dividends paid to non-controlling interests

   (13,346  2,000    (5,000  (25

Dividends paid to non-controlling interests

                 

Effect of exchange rate change on cash and cash equivalents

       (13  5    1  

Net (decrease)/increase in cash and cash equivalents

   (36,867  (322,889  1,086    2,827  

   2012 

(in millions of Korean won)

  KT Skylife
Co., Ltd.
  BC Card Co.,
Ltd.
  KT Rental  KT Powertel Co.,
Ltd.
  KT Hitel Co.,
Ltd.
 

Non-controlling Interests

   49.85  34.35  42.00  55.15  34.06

Current assets

  303,069   1,792,439   305,651   93,877   132,892  

Non-current assets

   338,495    735,663    1,388,370    81,985    116,339  

Current liabilities

   197,972    1,696,058    537,424    39,029    75,727  

Non-current liabilities

   94,677    211,820    889,060    16,584    3,784  

Equity

   348,915    620,224    267,537    120,249    169,719  

Accumulated non-controlling interests

   173,932    213,049    112,369    66,323    57,803  

Sales

   574,829    3,128,882    368,228    124,936    443,431  

Profit or loss for the year

   55,546    103,797    11,072    12,527    (8,902

Total comprehensive income

   52,152    127,976    10,107    12,229    (10,659

The profit or loss allocated to non-controlling interests

   27,689    35,655    4,650    6,909    (3,032

Cash flows from operating activities

   170,815    18,310    105,771    8,734    (14,954

Cash flows from investing activities

   (76,320  (35,116  (265,429  (6,997  5,263  

Cash flows from financing activities before dividends paid to non-controlling interests

   (18,642  8,070    169,963          

Dividends paid to non-controlling interests

       (5,290            

Effect of exchange rate change on cash and cash equivalents

                   (10

Net (decrease)/increase in cash and cash equivalents

   75,853    (14,026  10,305    1,737    (9,701

   2013 

(in millions of Korean won)

  KT Skylife
Co., Ltd.
  BC Card Co.,
Ltd.
  KT Rental  KT Powertel Co.,
Ltd.
  KT Hitel Co.,
Ltd.
 

Non-controlling Interests

   49.89  34.61  42.00  55.15  36.30

Current assets

  287,142   2,292,323   362,040   87,932   178,659  

Non-current assets

   397,509    672,427    1,826,231    79,199    115,006  

Current liabilities

   191,181    1,958,506    532,634    30,433    99,348  

Non-current liabilities

   91,887    216,505    1,363,625    13,579    3,296  

Equity

   401,583    789,738    292,013    123,119    191,021  

Accumulated non-controlling interests

   200,360    273,328    122,650    67,906    69,343  

Sales

   627,415    3,090,434    885,294    112,742    579,987  

Profit or loss for the year

   72,724    128,475    32,400    5,453    3,551  

Total comprehensive income

   73,943    198,778    31,041    5,661    8,109  

The profit or loss allocated to non-controlling interests

   36,284    44,465    13,608    3,008    1,289  

Cash flows from operating activities

   141,282    273,904    (346,309  16,010    11,108  

Cash flows from investing activities

   (218,797  (17,335  (39,246  (15,794  (18,199

Cash flows from financing activities before dividends paid to non-controlling interests

   (14,346  10,216    392,098    (6,252  13,192  

Dividends paid to non-controlling interests

   (8,344  (10,051  (2,075  (1,538    

Effect of exchange rate change on cash and cash equivalents

           (287      (49

Net (decrease)/increase in cash and cash equivalents

   (100,205  256,734    4,181    (7,574  6,052  

Transactions with Non-controlling Interests

The effects of changes in the ownership interest on the equity attributable to owners of the Company during the year are summarized as follows:

(in millions of Korean won)

  2011  2012  2013 

Carrying amount of non-controlling interests acquired1

  2,846   178,763   14,353  

Consideration paid to non-controlling interests2

   (39,302  (15,359  (16,202
  

 

 

  

 

 

  

 

 

 

Excess of consideration paid recognized in parent’s equity

  (36,456 163,404   (1,849
  

 

 

  

 

 

  

 

 

 

1In 2013, the Company acquired the remaining 40% of the issued shares of KT Dutch B.V., a subsidiary, for a purchase consideration of3,980 million. The Company now holds 100% equity interest in KT Dutch B.V. The carrying amount of the non-controlling interests in KT Dutch B.V.at the date of acquisition was14,353 million. As a result, the Company derecognized non-controlling interests of14,353 million and recorded an increase in equity attributable to owners of the parent of10,373 million.

In 2012, the Company acquired 30.68% of the issued shares of BC Card Co., Ltd, a subsidiary of Vogo-BCC Investment Holdings Co., Ltd. and KGF-BCC LIMITED, for a purchase consideration of288,828 million. The Company now holds 69.54% equity interest in BC Card Co., Ltd. The carrying amount of the non-controlling interests in BC Card Co., Ltd. at the date of acquisition was272,273 million. As a result, the Company derecognized non-controlling interests of172,376 million and recorded an increase in equity attributable to owners of the parent of116,452 million.

In 2011, the Company’s non-controlling interest decreased by 2.68% through inequality capital increase of KT Capital Co., Ltd. on September 30, 2011. This resulted in a decrease in the carrying amount of non-controlling interest of1,615 million. Also, the Company acquired the remaining 20% of the issued shares of KT Innotz Inc., a subsidiary. As a result, the Company holds 100% of the issued shares of KT Innotz Inc and the carrying amount of non-controlling interest decreased by1,049 million.

2In 2013, the Company’s non-controlling interest increased by 2.24% through inequality capital increase of KT Hitel Co., Ltd. This resulted in an increase in the carrying amount of non-controlling interest of8,439 million. Also, on July 11, 2013, the Company’s non-controlling interest increased by 6.04% through inequality capital increase of Nasmedia, Inc. As a result, the carrying amount of non-controlling interest increased by7,239 million.

In 2012, the Company’s non-controlling interest increased by 13.85% through inequality capital increase of KT Cloudware Corporation on March 26, June 13 and November 30, 2012. This resulted in an increase in the carrying amount of non-controlling interest of4,060 million. Also, on November 21, 2012, the Company’s non-controlling interest increased by 9.09% through inequality capital increase of KT music Corporation. As a result, the carrying amount of non-controlling interest increased by5,360 million.

In 2011, the Company’s non-controlling interest increased by 2.78% through inequality capital increase of KT Skylife Co., Ltd. on June 1, 2011. This resulted in an increase in the carrying amount of non-controlling interest of32,294 million. Also, on December 29 and 30, 2011, the Company’s non-controlling interest increased by 17.24% through inequality capital increase of Centios Co., Ltd. As a result, the carrying amount of non-controlling interest increased by4,399 million.

40. Discontinued Operations

As approved by the Company’s Board of Directors on August 9, 2012, the Company decided to sell KT Tech, Inc., its subsidiary, and discontinued the operations related to handset development. KT-Tech’s liquidation procedure has been completed and KT Tech’s electrical operating performance was reflected in profit or loss from discontinued operations.

Income and loss from discontinued operations for the year ended December 31, 2012, are as follows:

(in millions of Korean won)

2012

Revenue

431

Expense

(35,756

Income from discontinued operations before income taxes

(35,325

Income tax expense for discontinued operations

3,791

Income (loss) from discontinued operations

(31,534

Cash flows from discontinued operations for the year ended December 31, 2012, are as follows:

(in millions of Korean won)

2012

Cash flows from operating activities

40,017

Cash flows from investing activities

(3,609

Cash flows from financing activities

(28,243

Changes in foreign exchange rates

(6

Total cash flows

8,159

41.    Subsequent Events

The investment business division of KT Capital Co., Ltd., a consolidated subsidiary, was spun off and merged with the Company on March 13, 2014.

Subsequent to December 31, 2013, the Company has issued commercial paper securities, as follows:

(in millions of Korean won)

  Issue date   Face value of
bond
   Total issued
amount
   Maturity date 

Commercial paper securities

   2014.02.17    300,000    252,398     2019.02.18  

Subsequent to December 31, 2013, the Company has decided to acquire these debts, as follows:

(in millions of Korean won)
Original debtor

 

Creditor

 Acquisition
price
  Acquisition
date
  

Remarks

Malou (1st)

 Green power(17th) 11,584    2014.2.20   Debt related to Romania solar PF

Korean alpha solar (2nd)

 Grand(1st)  15,416    2014.2.20   Debt related to Romania solar PF

Korean alpha solar (2nd)

 Grand(1st)  18,372    2014.2.20   Debt related to Romania solar PF

On March 12, 2014, KT ENS has filed for court receivership after failing to pay49,106 million of commercial paper. There may be lawsuits against KT ENS on this matter in the future, and the effect of this matter cannot be reasonably predicted.

KT Skylife and NDS Limited have had a dispute on the right to use of conditional access system provided by NDS Limited and business interruption of KT Skylife. On February 24, 2014, KT Skylife and NDS Limited sent the first written form of compensation for the damages to the other party. KT Skylife and NDS Limited have requested33,457 million and28,163 million, respectively, with 6% of annual interest rate to the other party.

As of March 7, 2014, the Ministry of Science, ICT, and Future Planning banned the mobile carriers including the Company from subscribing new customers and selling handsets to the existing customers. These mobile carriers are those who violated the prohibition released by the Korea Communications Commission and provided discriminative subsidy on handsets. This ban on the Company lasts for 45 days, from March 13, 2014 to April 26, 2014.

In April 2014, the Company announced that it will discontinue operations related to fixed-line sales activities such as on-site sales, activation, after service and customer centers. These operations will be outsourced to certain of subsidiaries and associates of the Company. On April 23, 2014, the Company determined that 8,304 employees will retire through its special early retirement program. It is expected to record approximately1.2 trillion as severance indemnity in connection with the special early retirement program, all of which is expected to be recorded during 2014.

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

KT CORPORATION
(Registrant)

/s/ Suk-Chae LeeCHANG-GYU HWANG

Name: Suk-Chae LeeChang-Gyu Hwang
Title: Chief Executive Officer

Date: June 29, 2011April 28, 2014