| Financial Risk Management | 26. Financial Risk Management The Group is exposed to credit risk, liquidity risk and market risks. The Group identifies and analyzes such risks, and controls are implemented under a risk management system to monitor and manage these risks at below an acceptable level. (a) Market Risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices, will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return. (i) Currency Risk The Group is exposed to currency risk on sales, purchases and borrowings that are denominated in a currency other than the functional currency of the Controlling Company, Korean won (KRW). The currencies in which these transactions primarily are denominated are USD, CNY, JPY, etc. Interest on borrowings is denominated in the currency of the borrowing. Generally, borrowings are denominated in currencies that match the cash flows generated by the underlying operations of the Group, primarily KRW, USD and CNY. In respect of other monetary assets and liabilities denominated in foreign currencies, the Group adopts policies to ensure that its net exposure is kept to an acceptable level by buying or selling foreign currencies at spot rates when necessary to address short-term imbalances. Meanwhile, the Group entered into currency interest rate swap contracts to hedge currency risk with respect to foreign currency borrowings and bonds. i) Exposure to currency risk The Group’s exposure to foreign currency risk based on notional amounts at the reporting date is as follows: (In millions) December 31, 2018 USD JPY CNY TWD EUR PLN VND Cash and cash equivalents 790 83 5,515 121 8 206 2,070,889 Trade accounts and notes receivable 2,175 7 1,098 — — — — Non-trade 21 852 201 3 4 — 23,182 Other assets denominated in foreign currencies 33 220 11,157 108 12 23 2,782 Trade accounts and notes payable (863 ) (12,501 ) (2,862 ) — — — (355,390 ) Other accounts payable (928 ) (20,326 ) (4,762 ) (6 ) (3 ) (4 ) (1,585,130 ) Financial liabilities (2,571 ) — (5,198 ) — — — — Aggregate notional amounts in the consolidated statements of financial position (1,343 ) (31,665 ) 5,149 226 21 225 156,333 Currency swap contracts 780 — — — — — — Net exposure (563 ) (31,665 ) 5,149 226 21 225 156,333 (In millions) December 31, 2019 USD JPY CNY TWD EUR PLN VND Cash and cash equivalents 1,594 68 8,360 33 5 25 28,663 Trade accounts and notes receivable 2,485 19 550 — — — — Non-trade 276 455 230 3 2 — 13,131 Other assets denominated in foreign currencies 29 526 5,668 369 5 503 4,032 Trade accounts and notes payable (628 ) (9,043 ) (2,289 ) — — — (291,891 ) Other accounts payable (488 ) (12,396 ) (3,239 ) (4 ) (10 ) — (786,356 ) Financial liabilities (4,255 ) — (20,436 ) — — — — Aggregate notional amounts in the consolidated statements of financial position (987 ) (20,371 ) (11,156 ) 401 2 528 (1,032,421 ) Currency swap contracts 2,085 — — — — — — Net exposure 1,098 (20,371 ) (11,156 ) 401 2 528 (1,032,421 ) Average exchange rates applied for the years ended December 31, 2017, 2018 and 2019 and the exchange rates at December 31, 2018 and 2019 are as follows: (In won) Average rate Reporting date spot rate 2017 2018 2019 December 31, December 31, USD W 1,131.08 1,100.21 1,165.46 1,118.10 1,157.80 JPY 10.09 9.96 10.70 10.13 10.63 CNY 167.52 166.41 168.56 162.76 165.74 TWD 37.16 36.51 37.74 36.58 38.48 EUR 1,277.01 1,298.53 1,304.52 1,279.16 1,297.43 PLN 299.98 304.87 303.62 297.33 304.87 VND 0.0498 0.0478 0.0502 0.0482 0.0500 ii) Sensitivity analysis A weaker won, as indicated below, against the following currencies which comprise the Group’s assets or liabilities denominated in a foreign currency as of December 31, 2018 and 2019, would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis is based on foreign currency exchange rate variances that the Group considers to be reasonably possible as of the end of the reporting period. The analysis assumes that all other variables, in particular interest rates, would remain constant. The changes in equity and profit or loss would have been as follows: (In millions of won) December 31, 2018 December 31, 2019 Equity Profit or loss Equity Profit or loss USD (5 percent weakening) W (46,136 ) 38,725 23,570 105,398 JPY (5 percent weakening) (12,060 ) (10,497 ) (8,397 ) (6,418 ) CNY (5 percent weakening) 41,779 318 (92,454 ) 11 TWD (5 percent weakening) 413 1 772 — EUR (5 percent weakening) 1,197 390 221 (278 ) PLN (5 percent weakening) 3,451 (236 ) 8,036 28 VND (5 percent weakening) 273 273 (1,871 ) (1,871 ) A stronger won against the above currencies as of December 31, 2018 and 2019 would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant. (ii) Interest Rate Risk Interest rate risk arises principally from the Group’s bonds and borrowings. The Group establishes and applies its policy to reduce uncertainty arising from fluctuations of interest rates and to minimize finance cost and manages interest rate risk by monitoring of trends of fluctuations in interest rates and establishing plan for countermeasures. Meanwhile, the Group entered into currency interest rate swap contracts amount of USD 1,785 million ( W i) Profile The interest rate profile of the Group’s interest-bearing financial instruments at the reporting date is as follows: (In millions of won) December 31, 2018 December 31, 2019 Fixed rate instruments Financial assets W 2,443,583 3,414,838 Financial liabilities (5,033,515 ) (6,066,554 ) W (2,589,932 ) (2,651,716 ) Variable rate instruments Financial liabilities W (3,525,262 ) (7,414,336 ) ii) Equity and profit or loss sensitivity analysis for variable rate instruments For the years ended December 31, 2018 and 2019 a change of 100 basis points in interest rates at the reporting date would have increased (decreased) equity and profit or loss by the amounts shown below for the respective following years. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. (In millions of won) Equity Profit or loss 1%p increase 1%p decrease 1%p increase 1%p decrease December 31, 2018 Variable rate instruments(*) W (25,558 ) 25,558 (25,558 ) 25,558 December 31, 2019 Variable rate instruments(*) W (38,774 ) 38,774 (38,774 ) 38,774 (*) Financial instruments related to interest rate swap not qualified for hedging are excluded. (b) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers. The Group’s exposure to credit risk of trade and other receivables is influenced mainly by the individual characteristics of each customer. However, management believes that the default risk of the country in which each customer operates, do not have a significant influence on credit risk since the majority of the customers are global electronic appliance manufacturers operating in global markets The Group establishes credit limits for each customer and each new customer is analyzed quantitatively and qualitatively before determining whether to utilize third party guarantees, insurance or factoring as appropriate. In relation to the impairment of financial assets subsequent to initial recognition, the Group recognizes the changes in expected credit loss (“ECL”) at each reporting date in order to reflect changes in the credit risks based on ECL model. The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk as of December 31, 2018 and 2019 are as follows: (In millions of won) December 31, 2018 December 31, 2019 Financial assets carried at amortized cost Cash and cash equivalents W 2,365,022 3,336,003 Deposits in banks 78,411 78,768 Trade accounts and notes receivable, net 2,829,163 3,154,080 Non-trade 159,238 463,614 Accrued income 10,075 10,434 Deposits 91,123 31,036 Short-term loans 16,116 21,623 Long-term 55,048 40,827 Long-term non-trade 11,448 9,072 Lease receivables — 27,794 W 5,615,644 7,173,251 Financial assets at fair value through profit or loss Convertible bonds W 1,327 1,544 Derivatives 13,059 49,676 W 14,386 51,220 Financial assets at fair value through other comprehensive income Debt instruments W 161 76 W 5,630,191 7,224,547 Trade accounts and notes receivables are insured in order to manage credit risk if it does not meet the Group’s internal credit ratings. Uninsured trade accounts and notes receivables are managed by continuous monitoring of internal credit ratings and seeking insurance coverage, if necessary. (c) Liquidity Risk Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group has historically been able to satisfy its cash requirements from cash flows from operations and debt and equity financing. To the extent that the Group does not generate sufficient cash flows from operations to meet its capital requirements, the Group may rely on other financing activities, such as external long-term borrowings and offerings of debt securities, equity-linked and other debt securities. In addition, the Group maintains a line of credit with various banks. The following are the contractual maturities of financial liabilities, including estimated interest payments, as of December 31, 2019. (In millions of won) Contractual cash flows in Carrying Total 6 months 6-12 1-2 2-5 More than Non-derivative Borrowings W 10,329,671 11,514,568 1,174,941 723,363 2,173,444 6,471,876 970,944 Bonds 3,151,218 3,306,729 297,649 184,878 908,281 1,780,014 135,907 Trade accounts and notes payable 2,618,261 2,618,261 2,618,261 — — — — Other accounts payable 2,069,105 2,069,105 2,068,039 1,066 — — — Other accounts payable (enterprise procurement cards)(*) 2,328,016 2,353,355 1,287,023 1,066,332 — — — Long-term other accounts payable 1,069 1,069 — — 1,069 — — Security deposits received 11,000 11,000 3,980 5,330 1,690 — — Lease liabilities 88,512 97,562 26,702 14,543 22,931 23,096 10,290 Derivative financial liabilities Derivatives W 20,592 (13,101 ) — — (4,870 ) (8,231 ) — W 20,617,444 21,958,548 7,476,595 1,995,512 3,102,545 8,266,755 1,117,141 (*) Represents the amount of utility expenses and others paid by the enterprise procurement cards and the outstanding payables are settled at the end of the billing cycle. The payments to the card company arises from operating activities of purchasing of goods and services thus the related cash flow is disclosed as operating activities. It is not expected that the cash flows included in the maturity analysis could occur significantly earlier, or at significantly different amounts. (d) Capital Management Management’s policy is to maintain a capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. Liabilities to equity ratio, net borrowings to equity ratio and other financial ratios are used by management to achieve an optimal capital structure. Management also monitors the return on capital as well as the level of dividends to ordinary shareholders. (In millions of won) December 31, 2018 December 31, 2019 Total liabilities W 18,289,464 23,086,282 Total equity 14,886,246 12,488,281 Cash and deposits in banks(*1) 2,443,422 3,414,760 Borrowings (including bonds) 8,558,777 13,480,889 Total liabilities to equity ratio 123 % 185 % Net borrowings to equity ratio(*2) 41 % 81 % (*1) Cash and deposits in banks consist of cash and cash equivalents and current deposits in banks. (*2) Net borrowings to equity ratio is calculated by dividing total borrowings (including bonds and excluding lease liabilities) less cash and current deposits in banks by total equity. (e) Determination of fair value (i) Measurement of fair value A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial i) Current assets and liabilities The carrying amounts approximate their fair value because of the short maturity of these instruments. ii) Trade receivables and other receivables The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. This fair value is determined for disclosure purposes. The carrying amounts of current receivables approximate their fair value. iii) Investments in equity and debt securities The fair value of marketable financial assets at FVTPL and at FVOCI is determined by reference to their quoted closing bid price at the reporting date. The fair value of non-marketable iv) Non-derivative Fair value, which is determined for disclosure purposes, except for the liabilities at FVTPL, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. (ii) Fair values versus carrying amounts The fair values of financial assets and liabilities, together with the carrying amounts shown in the consolidated statements of financial position as of December 31, 2018 and 2019 are as follows: (In millions of won) December 31, 2018 December 31, 2019 Carrying Fair values Carrying Fair values Financial assets carried at amortized cost Cash and cash equivalents W 2,365,022 (*) 3,336,003 (*) Deposits in banks 78,411 (*) 78,768 (*) Trade accounts and notes receivable 2,829,163 (*) 3,154,080 (*) Non-trade 159,238 (*) 463,614 (*) Accrued income 10,075 (*) 10,434 (*) Deposits 91,123 (*) 31,036 (*) Short-term loans 16,116 (*) 21,623 (*) Long-term 55,048 (*) 40,827 (*) Long-term non-trade 11,448 (*) 9,072 (*) Lease receivables — — 27,794 (*) Financial assets at fair value through profit or loss Equity instruments W 13,681 13,681 9,879 9,879 Convertible bonds 1,327 1,327 1,544 1,544 Derivatives 13,059 13,059 49,676 49,676 Financial assets at fair value through other comprehensive income Debt instruments W 161 161 76 76 Financial liabilities at fair value through profit or loss Derivatives W 25,758 25,758 20,592 20,592 Convertible bonds — — 858,385 858,385 Financial liabilities carried at amortized cost Borrowings W 6,226,520 6,281,996 10,329,671 10,394,498 Bonds 2,332,257 2,384,987 2,292,833 2,345,867 Trade accounts and notes payable 3,087,461 (*) 2,618,261 (*) Other accounts payable 3,566,629 (*) 4,397,121 (*) Long-term other accounts payable 3,103 (*) 1,069 (*) Security deposits received 10,955 (*) 11,000 (*) Lease liabilities — — 88,512 (*) (*) Excluded from disclosures as the carrying amount approximates fair value. (iii) Fair values of financial assets and liabilities i) Fair value hierarchy The table below analyzes financial instruments carried at fair value based on the input variables used in the valuation method to measure fair value of assets and liabilities. The different levels have been defined as follows: • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities • Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly • Level 3: inputs for the asset or liability that are not based on observable market data ii) Financial instruments measured at fair value Fair value hierarchy classifications of the financial instruments that are measured at fair value as of December 31, 2018 and 2019 are as follows: (In millions of won) Level 1 Level 2 Level 3 Total December 31, 2018 Financial assets at fair value through profit or loss Equity instruments W — — 13,681 13,681 Convertible bonds — — 1,327 1,327 Derivatives — — 13,059 13,059 Financial asset at fair value through other comprehensive income Debt instruments W 161 — — 161 Financial liabilities at fair value through profit or loss Derivatives W — — 25,758 25,758 (In millions of won) Level 1 Level 2 Level 3 Total December 31, 2019 Financial assets at fair value through profit or loss Equity instruments W — — 9,879 9,879 Convertible bonds — — 1,544 1,544 Derivatives — — 49,676 49,676 Financial asset at fair value through other comprehensive income Debt instruments W 76 — — 76 Financial liabilities at fair value through profit or loss Derivatives W — — 20,592 20,592 Convertible bonds 858,385 — — 858,385 iii) Financial instruments not measured at fair value but for which the fair value is disclosed Fair value hierarchy classifications, valuation technique and inputs for fair value measurements of the financial instruments not measured at fair value but for which the fair value is disclosed as of December 31, 2018 and December 31, 2019 are as follows: (In millions of won) December 31, 2018 Valuation Input Classification Level 1 Level 2 Level 3 Liabilities Borrowings W — — 6,281,996 Discounted cash Discount Bonds — — 2,384,987 Discounted cash Discount (In millions of won) December 31, 2019 Valuation Input Classification Level 1 Level 2 Level 3 Liabilities Borrowings W — — 10,394,498 Discounted cash Discount Bonds — — 2,345,867 Discounted cash Discount The interest rates applied for determination of the above fair value at the reporting date are as follows: December 31, 2018 December 31, 2019 Borrowings, bonds and others 2.09~3.37 % 1.87~3.56 % |
