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Samsung Heavy Industries Co., Ltd. and Subsidiaries Consolidated Financial Statements December 31, 2017 and 2016

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Samsung Heavy Industries Co., Ltd. and Subsidiaries Consolidated Financial Statements December 31, 2017 and 2016 Samsung Heavy Industries Co., Ltd. and Subsidiaries Consolidated Financial Statements December 31, 2017 and 2016 Samsung Heavy Industries Co., Ltd. and Subsidiaries Index December 31, 2017 and 2016 Page(s) Independent Auditor’s Report ....................................................................................................................... 1-6 Consolidated Financial Statements Consolidated Statements of Financial Position ................................................................................................ 7-8 Consolidated Statements of Profit or Loss ........................................................................................................... 9 Consolidated Statements of Comprehensive Income ........................................................................................ 10 Consolidated Statements of Changes in Equity ................................................................................................. 11 Consolidated Statements of Cash Flows ............................................................................................................ 12 Notes to the Consolidated Financial Statements ................................................................................... 13-72 Independent Auditor’s Report (English Translation of a Report Originally Issued in Korean) To the Board of Directors and Shareholders of Samsung Heavy Industries Co., Ltd. We have audited the accompanying consolidated financial statements of Samsung Heavy Industries Co., Ltd. and its subsidiaries (collectively referred to as the "Group"), which comprise the consolidated statements of financial position as at December 31, 2017 and 2016, and the consolidated statements of profit or loss, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies and other explanatory information. Management’s Responsibilities for the Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the Republic of Korea (Korean IFRS), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibilities Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with Korean Standards on Auditing. Those standards require that we comply with ethical requirements, and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of Samsung Heavy Industries Co., Ltd. and its subsidiaries as at December 31, 2017 and 2016, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with Korean IFRS. Emphasis of Matter1 Without qualifying our opinion, we draw attention to the following area of focus. 1) The auditor’s emphasis on area of focus on construction contracts Area of focus on construction contracts in accordance with the Practical Guidance of Auditing Standard 2016-1 are those matters that, in the auditor's professional judgment and communication with those charged with governance, were of most significance in the audit of the consolidated financial statements of the current period. These matters were addressed in the context of the audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We have addressed the output of the audit process for the area of focus as below in forming an audit opinion on the consolidated financial statements of Samsung Heavy Industries Co., Ltd. and its subsidiaries as a whole. A. General Information Common information applied to the area of focus on construction contract described in this audit report are as follows: As explained in the Note 2 to the consolidated financial statements (Critical Accounting Policies), the Group recognizes contract revenue and contract costs associated with the construction contract as revenue and expense respectively based on the percentage of completion of the contract activity at the end of the reporting period when the outcome of a construction contract can be estimated reliably. The percentage of completion of the contract activity is the proportion that costs incurred to date, excluding any contract cost that does not reflect the work performed, bear to the estimated total costs of the contract. The Group presents the gross amount due from customer for contract work as an asset for all contracts in progress for which costs incurred plus recognized profits (less recognized losses) exceed progress billings, and presents the gross amount due to customers for contract work as a liability for all contracts in progress for which progress billings exceed costs incurred plus recognized profits (less recognized losses). B. Revenue recognition based on the input method As explained in the Note 3 to the consolidated financial statements (Critical Accounting Estimates and Assumptions), total contract revenue is measured based on the initial amount of revenue agreed in the contract. However, the measurement of contract revenue is affected by a variety of uncertainties that depend on the outcome of future event; for example, the amount of contract revenue may increase as a result of variations in contract work, claims and inventive payments, on the other hand, the amount of contract revenue may decrease 1 This paragraph is being included in accordance with the Practical Guidance of Auditing Standard 2017-1, Practical Guidance for Special Consideration in Auditing Construction Contracts, prescribed by Korean Institute of Certified Public Accountants, and should not be considered as a communication of key audit matter described in the International Standards on Auditing 700 (Revised). 2 as a result of penalties arising from delays caused by the Group in the completion of the contract. The measurement of contract revenue is also affected by the percentage of completion measured based on the aggregated amount costs incurred. Total contract costs are estimated based on future estimates of material costs, labor costs, construction period and others. Also, as explained in the Note 6 to the consolidated financial statements (Construction Contracts), estimated total contract revenue and cost were changed due to variations in contract work and costs increases. Estimating total contract revenue with respect to contract changes due to long-term duration of the contract, changes in designs, the down trend in international oil prices and others of the Group’s major construction contracts; such as, offshore plant and drilling rig etc., are uncertain. The changes in estimated total contract revenue and costs may have negative impacts on the profit or loss for the period (or for the succeeding year); therefore, we identified revenue recognition based on the input method as a significant risk. In respect of the Group’s revenue recognition based on the input method, we have performed the following audit procedures. - We obtained understanding of the accounting policy of revenue recognition, determined if there were any changes in the accounting policy, and assessed the accounting policy. - We reviewed significant contents of contracts. - We inquired about current progress of major contacts and identified any significant changes at the end of the reporting period, and performed analytical audit procedures on the significant changes. - We performed analytical review procedures on major financial ratios such as rate of profit. - We reviewed internal control in relation to reviewing and approval process of a contract by an appropriate approver when a new contract is engaged. C. Uncertainty of estimated construction costs As explained in the Note 3 to the financial statements (Critical Accounting Estimates and Assumptions), estimated construction costs are estimated based
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