| Financial Risk Management | 25. 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 accrued 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 cross 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 as of December 31, 2019 and 2020 are as follows: (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 ) — — — — (987 ) (20,371 ) (11,156 ) 401 2 528 (1,032,421 ) Cross currency interest rate swap contracts 2,085 — — — — — — Net exposure 1,098 (20,371 ) (11,156 ) 401 2 528 (1,032,421 ) (In millions) December 31, 2020 USD JPY CNY TWD EUR PLN VND GBP Cash and cash equivalents 1,795 164 13,382 34 7 4 33,843 — Trade accounts and notes receivable 3,093 13 585 — — — — — Non-trade 52 93 222 3 6 — 9,773 — Other assets denominated in foreign currencies — 208 51 6 1 — 4,586 — Trade accounts and notes payable (1,948 ) (9,831 ) (2,037 ) — — — (357,149 ) — Other accounts payable (268 ) (6,239 ) (2,018 ) (4 ) (8 ) — (997,204 ) (2 ) Financial liabilities (4,294 ) — (27,825 ) — — — — — (1,570 ) (15,592 ) (17,640 ) 39 6 4 (1,306,151 ) (2 ) Cross currency interest rate swap contracts 2,225 — — — — — — — Net exposure 655 (15,592 ) (17,640 ) 39 6 4 (1,306,151 ) (2 ) Average exchange rates applied for the years ended December 31, 2018, 2019 and 2020 and the exchange rates at December 31, 2019 and 2020 are as follows: (In won) Average rate Reporting date spot rate 2018 2019 2020 December 31, December 31, USD W 1,100.21 1,165.46 1,180.46 1,157.80 1,088.00 JPY 9.96 10.70 11.05 10.63 10.54 CNY 166.41 168.56 170.90 165.74 166.96 TWD 36.51 37.74 40.07 38.48 38.67 EUR 1,298.53 1,304.52 1,345.71 1,297.43 1,338.24 PLN 304.87 303.62 302.95 304.87 292.02 VND 0.0478 0.0502 0.0508 0.0500 0.0471 GBP 1,100.30 1,487.46 1,513.48 1,420.32 1,482.40 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, 2019 and 2020, 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 at 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, 2019 December 31, 2020 Equity Profit or loss Equity Profit or loss USD (5 percent weakening) W 23,570 105,398 12,438 73,186 JPY (5 percent weakening) (8,397 ) (6,418 ) (6,250 ) (5,194 ) CNY (5 percent weakening) (92,454 ) 11 (147,294 ) 93 TWD (5 percent weakening) 772 — 75 — EUR (5 percent weakening) 221 (278 ) 250 377 PLN (5 percent weakening) 8,036 28 43 43 VND (5 percent weakening) (1,871 ) (1,871 ) (2,230 ) (2,230 ) GBP (5 percent weakening) — — (107 ) (107 ) A stronger won against the above currencies as of December 31, 2019 and 2020 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 variable interest-bearing bonds and borrowings. The Group establishes and applies its policy to reduce uncertainty arising from fluctuations in interest rate 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 cross currency interest rate swap contracts amounting to USD 1,925 million ( W W i) Profile The interest rate profile of the Group’s interest-bearing financial instruments as of December 31, 2019 and 2020 is as follows: (In millions of won) December 31, 2019 December 31, 2020 Fixed rate instruments Financial assets W 3,414,838 4,296,823 Financial liabilities (6,066,554 ) (5,875,729 ) W (2,651,716 ) (1,578,906 ) Variable rate instruments Financial liabilities W (7,414,336 ) (8,193,085 ) ii) Equity and profit or loss sensitivity analysis for variable rate instruments For the years ended December 31, 2019 and 2020 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, 2019 Variable rate instruments(*) W (38,774 ) 38,774 (38,774 ) 38,774 December 31, 2020 Variable rate instruments(*) W (45,352 ) 45,352 (45,352 ) 45,352 (*) Financial instruments related to non-hedging (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”) in profit or loss at each reporting date. The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk as of December 31, 2019 and 2020 are as follows: (In millions of won) December 31, 2019 December 31, 2020 Financial assets carried at amortized cost Cash and cash equivalents W 3,336,003 4,217,943 Deposits in banks 78,768 78,663 Trade accounts and notes receivable, net 3,154,080 3,517,512 Non-trade 463,614 140,616 Accrued income 10,434 3,864 Deposits 31,036 30,947 Short-term loans 21,623 28,491 Long-term 40,827 13,899 Long-term non-trade 9,072 — Lease receivables 27,794 22,262 W 7,173,251 8,054,197 Financial assets at fair value through profit or loss Convertible securities W 1,544 2,377 Derivatives 49,676 9,363 W 51,220 11,740 Financial assets at fair value through other comprehensive income Debt instruments W 76 72 W 7,224,547 8,066,009 Trade accounts and notes receivable are insured in order for the Group to manage credit risk if they do not meet the Group’s internal credit ratings. Uninsured trade accounts and notes receivables are managed by continuous monitoring of internal credit rating standards established by the Group 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 other financial assets. 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 instruments, equity-linked and other debt instruments. 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, 2020. (In millions of won) Contractual cash flows in Carrying amount Total 6 months or less 6-12 months 1-2 years 2-5 years More than 5 years Non-derivative Borrowings W 11,296,898 12,201,452 1,672,931 942,835 2,753,807 6,375,984 455,895 Bonds 2,771,916 2,786,822 327,489 551,540 1,379,750 435,757 92,286 Trade accounts and notes payable 3,779,290 3,779,290 3,660,788 118,502 — — — Other accounts payable 1,703,791 1,703,791 1,703,791 — — — — Other accounts payable (enterprise procurement cards)(*) 1,078,150 1,078,150 473,511 604,639 — — — Long-term other accounts payable 30 30 — — 30 — — Security deposits received 12,539 12,539 — 1,430 10,920 189 — Lease liabilities 83,431 90,132 25,150 14,284 19,779 22,181 8,738 Derivative financial liabilities Derivatives W 167,625 153,487 26,332 22,861 39,277 65,017 — W 20,893,670 21,805,693 7,889,992 2,256,091 4,203,563 6,899,128 556,919 (*) Represents liabilities payable to credit card companies for utility expenses and others paid using enterprise procurement cards. The Group presented the payable to credit card companies as other accounts payable and disclosed related cash flows as operating activities since the Group is using the enterprise procurement cards through agreements with suppliers for transactions arising from purchasing of goods and services, the payment term is within a year from the purchase, as part of the normal operating cycle, and no security is provided. Change in liabilities related to procurement cards for the year ended December 31, 2020 is as follows: (In millions of won) January 1, 2020 Change (Cash flows from operation activities) December 31, 2020 Other accounts payable (enterprise procurement cards) W 2,353,355 (1,275,205 ) 1,078,150 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, 2019 December 31, 2020 Total liabilities W 23,086,282 22,334,584 Total equity 12,488,281 12,736,939 Cash and deposits in banks (*1) 3,414,760 4,296,751 Borrowings (including bonds) 13,480,889 14,068,814 Total liabilities to equity ratio 185 % 175 % Net borrowings to equity ratio (*2) 81 % 77 % (*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 and others) 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 instruments 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, 2019 and 2020 are as follows: (In millions of won) December 31, 2019 December 31, 2020 Carrying amounts Fair values Carrying amounts Fair values Financial assets carried at amortized cost Cash and cash equivalents W 3,336,003 (*) 4,218,099 (*) Deposits in banks 78,768 (*) 78,663 (*) Trade accounts and notes receivable 3,154,080 (*) 3,517,512 (*) Non-trade 463,614 (*) 140,616 (*) Accrued income 10,434 (*) 3,864 (*) Deposits 31,036 (*) 30,947 (*) Short-term loans 21,623 (*) 28,491 (*) Long-term 40,827 (*) 13,899 (*) Long-term non-trade 9,072 (*) — (*) Lease receivables 27,794 (*) 22,262 (*) Financial assets at fair value through profit or loss Equity instruments W 9,879 9,879 13,223 13,223 Convertible securities 1,544 1,544 2,377 2,377 Derivatives 49,676 49,676 9,363 9,363 Financial assets at fair value through other comprehensive income Debt instruments W 76 76 72 72 Financial liabilities at fair value through profit or loss Derivatives W 20,592 20,592 167,625 167,625 Convertible bonds 858,385 858,385 861,675 861,675 Financial liabilities carried at amortized cost Borrowings W 10,329,671 10,394,498 11,296,898 11,328,418 Bonds 2,292,833 2,345,867 1,910,241 1,923,517 Trade accounts and notes payable 2,618,261 (*) 3,779,290 (*) Other accounts payable 4,397,121 (*) 2,781,941 (*) Long-term other accounts payable 1,069 (*) 30 (*) Security deposits received 11,000 (*) 12,539 (*) Lease liabilities 88,512 (*) 83,431 (*) (*) Excluded from disclosures as the carrying amount approximates fair value. . (iii) Fair values of financial assets and liabilities i) Fair value hierarchy Financial instruments carried at fair value are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques. 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, 2019 and 2020 are as follows: (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 securities — — 1,544 1,544 Derivatives — — 49,676 49,676 Financial assets 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 (In millions of won) December 31, 2020 Level 1 Level 2 Level 3 Total Financial assets at fair value through profit or loss Equity instruments W — — 13,223 13,223 Convertible securities — — 2,377 2,377 Derivatives — — 9,363 9,363 Financial asset at fair value through other comprehensive income Debt instruments W 72 — — 72 Financial liabilities at fair value through profit or loss Derivatives W — — 167,625 167,625 Convertible bonds 861,675 — — 861,675 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, 2019 and December 31, 2020 are as follows: (In millions of won) December 31, 2019 Valuation technique Input Classification Level 1 Level 2 Level 3 Liabilities Borrowings W — — 10,394,498 Discounted cash Discount Bonds — — 2,345,867 Discounted cash Discount (In millions of won) December 31, 2020 Valuation technique Input Classification Level 1 Level 2 Level 3 Liabilities Borrowings W — — 11,328,418 Discounted cash Discount Bonds — — 1,923,517 Discounted cash Discount iv) The interest rates applied for determination of the above fair value as of December 31, 2019 and 2020 are as follows: December 31, 2019 December 31, 2020 Borrowings, bonds and others 1.87~3.56 % 2.15~4.46 % |
