AMOREPACIFIC Group, Inc. and Subsidiaries Consolidated Financial Statements December 31, 2018 and 2017
AMOREPACIFIC Group, Inc. and Subsidiaries Index December 31, 2018 and 2017
Page(s)
Independent Auditor’s Report…...... 1 – 3
Consolidated Financial Statements
Consolidated Statements of Financial Position...... 4
Consolidated Statements of Comprehensive Income…...... 5
Consolidated Statements of Changes in Equity…...... 6
Consolidated Statements of Cash Flows…...... 7
Notes to the Consolidated Financial Statements…...... 8 – 88
Independent Auditor’s Report
(English Translation of a Report Originally Issued in Korean)
To the Board of Directors and Shareholders of AMOREPACIFIC Group, Inc.
Opinion
We have audited the accompanying consolidated financial statements of AMOREPACIFIC Group, Inc. and its subsidiaries (collectively referred to as the "Group"), which comprise the consolidated statements of financial position as at December 31, 2018 and 2017, and the consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at December 31, 2018 and 2017, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards as adopted by the Republic of Korea (Korean IFRS).
Basis for Opinion We conducted our audits in accordance with Korean Standards on Auditing. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the ethical requirements of the Republic of Korea that are relevant to our audit of the consolidated financial statements and we have fulfilled our other ethical responsibilities in accordance with the ethical requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Other Matter Auditing standards and their application in practice vary among countries. The procedures and practices used in the Republic of Korea to audit such consolidated financial statements may differ from those generally accepted and applied in other countries.
Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with Korean IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations. Those charged with governance are responsible for overseeing the Group’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Korean Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Korean Standards on Auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: · Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. · Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. · Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
· Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.
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· Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. · Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Seung-Kwon Ryoo, Certified Public Accountant.
Seoul, Korea March 7, 2019
This report is effective as of March 7, 2019, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any.
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AMOREPACIFIC Group, Inc. and Subsidiaries Consolidated Statements of Financial Position December 31, 2018 and 2017
(in thousands of Korean won) Notes 2018 2017 Assets Current assets Cash and cash equivalents 5,6,7,36,37 ￦ 1,297,453,211 ￦ 1,207,667,820 Financial deposits 5,32,37 225,100,000 168,000,000 Financial assets at fair value through profit or loss 5,7,36,37 20,174,153 - Available-for-sale financial assets 5,36,37 - 30,000,000 Financial assets at amortized cost 5,36,37 30,000,000 - Trade receivables 5,7,33,37 308,917,133 364,619,604 Other receivables 5,7,33,37 29,150,069 25,121,942 Current tax assets 4,466,891 4,918,156 Other current assets 5,14,37 76,078,859 66,936,216 Inventories 8 498,285,953 457,580,670 Non-current assets held-for-sale 13 - 201,155,041 2,489,626,269 2,525,999,449 Non-current assets Financial deposits 5,32,37 17,656,558 16,300,188 Other receivables 5,7,33,37 223,090,550 225,234,750 Financial assets at fair value through profit or loss 5,7,36,37 9,466,477 - Available-for-sale financial assets 5,7,36,37 - 31,737,546 Financial assets at amortized cost 5,7,36,37 4,246,910 - Financial assets at fair value through other comprehensive income 5,7,36,37 10,676,421 - Property, plant and equipment 10 3,321,645,433 3,247,003,432 Investment properties 12,36 367,138,100 417,853,054 Intangible assets 11 773,736,725 760,524,044 Investments in associates 9 4,771,092 4,981,796 Deferred tax assets 24 69,815,993 58,686,995 Net defined benefit assets 19 68,935,285 29,607,444 Other non-current assets 14 26,568,631 17,307,308 4,897,748,175 4,809,236,557 Total assets ￦ 7,387,374,444 ￦ 7,335,236,006
Liabilities Current liabilities Trade payables 5,33,35,37 ￦ 88,803,032 ￦ 100,565,594 Borrowings 5,15,33,35 169,421,823 178,051,737 Other payables 5,33,35 276,585,288 230,603,421 Current tax liabilities 75,914,360 86,831,393 Deferred revenue 37 - 66,907,142 Contract liabilities 17,37 66,837,686 - Provisions 16 12,130,997 19,440,651 Other current liabilities 5,18,35,37 207,944,970 488,444,791 897,638,156 1,170,844,729 Non-current liabilities Borrowings 5,15,35 44,687,010 42,902,910 Net defined benefit liabilities 19 3,251,666 3,477,036 Deferred tax liabilities 24 167,998,040 167,706,532 Provisions 16 15,381,741 5,005,977 Other non-current liabilities 5,18,35,37 15,947,755 13,325,225 247,266,212 232,417,680 Total liabilities 1,144,904,368 1,403,262,409 Equity Share capital 1 44,450,975 44,450,975 Share premium 672,986,708 672,986,708 Capital surplus 22,623,589 22,623,589 Other components of equity 20 (145,997,365) (145,978,602) Accumulated other comprehensive income 5,21,37 (21,029,899) (19,392,447) Retained earnings 22,37 2,545,799,306 2,422,584,498 Equity attributable to owners of the Parent Company 3,118,833,314 2,997,274,721 Non-controlling interest 34,37 3,123,636,762 2,934,698,876 Total equity 6,242,470,076 5,931,973,597 Total liabilities and equity ￦ 7,387,374,444 ￦ 7,335,236,006
The above consolidated statements of financial position should be read in conjunction with the accompanying notes. The U.S. dollar amounts are provided for information purposes only and do not form a part of the audited consolidated financial statements. Refer to Note
4 AMOREPACIFIC Group, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income Years Ended December 31, 2018 and 2017
(in thousands of Korean won, except per share amounts) Notes 2018 2017
Revenue 4,25,33,37 ￦ 6,078,179,209 ￦ 6,029,063,927
Cost of sales 26 1,618,694,573 1,614,142,108
Gross profit 4,459,484,636 4,414,921,819
Selling and administrative expenses 26,27 3,910,011,120 3,683,429,626
Operating profit 549,473,516 731,492,193
Finance income 5,28 33,079,074 25,656,131 Finance costs 5,28 7,332,161 4,709,470 Other non-operating losses, net 29 (41,319,356) (55,226,132) Share of net profit of associates 9 935,225 1,109,757 (14,637,218) (33,169,714)
Profit before income tax 534,836,298 698,322,479 Income tax expense 24 158,565,086 208,774,521
Profit for the period ￦ 376,271,212 ￦ 489,547,958
Profit is attributable to:
Owners of the Parent Company ￦ 142,286,121 ￦ 202,614,258 Non-controlling interests 34 233,985,091 286,933,700
Other comprehensive income (loss) Items that will not be reclassified to profit or loss Remeasurements of net defined benefit liabilities 19,24 25,810,724 16,135,574 Loss on valuation of financial assets at fair value through other comprehensive income 21,24 (923,387) - Items that may be subsequently reclassified to profit or loss Changes in the fair value of available-for-sale financial assets 21,24 - (217,534) Share of other comprehensive income (loss) of associates 9,21,24 (55,194) 82,265 Exchange differences on transaction of foreign operations 21,24 469,148 (24,266,993)
Other comprehensive income (loss) for the period, net of tax 25,301,291 (8,266,688)
Total comprehensive income for the period 401,572,503 481,281,270
Total comprehensive income for the period is attributable to:
Owners of the Parent Company 151,117,723 202,392,574 Non-controlling interests 250,454,780 278,888,696
￦ 401,572,503 ￦ 481,281,270
Earnings per share attributable to 30 owners of the Parent Company
Basic earnings per ordinary share ￦ 1,708 ￦ 2,432
Basic earnings per preferred share 1,713 2,437
The above consolidated statements of comprehensive income should be read in conjunction with the accompanying notes. The U.S. dollar amounts are provided for information purposes only and do not form a part of the audited consolidated financial statements. Refer to Note 4.
5 AMOREPACIFIC Group, Inc. and Subsidiaries Consolidated Statements of Changes in Equity Years Ended December 31, 2018 and 2017
(in thousands of Korean won) Attributable to owners of the Parent Company
Accumulated Other other components comprehensive Retained Non-controlling Total Share capital Share premium Capital surplus of equity income earnings Total interest equity
Balance at January 1, 2017 ￦ 44,450,975 ￦ 672,986,708 ￦ 22,623,589 ￦ (145,963,500) ￦ (11,876,549) ￦ 2,251,021,224 ￦ 2,833,242,447 ￦ 2,733,635,870 ￦ 5,566,878,317 Comprehensive income Profit for the period - - - - - 202,614,258 202,614,258 286,933,700 489,547,958 Remeasurements of net defined benefit liabilities - - - - - 7,294,214 7,294,214 8,841,360 16,135,574 Changes in the fair value of available-for-sale financial assets - - - - (215,591) - (215,591) (1,943) (217,534) Share of other comprehensive income of associates - - - - 22,636 - 22,636 59,629 82,265 Exchange differences on transaction of foreign operations - - - - (7,322,943) - (7,322,943) (16,944,050) (24,266,993) Total comprehensive income for the period - - - - (7,515,898) 209,908,472 202,392,574 278,888,696 481,281,270
Transactions with owners Dividends paid - - - - - (38,345,198) (38,345,198) (79,124,400) (117,469,598) Change in non-controlling interests due to capital increase - - - (15,102) - - (15,102) 1,298,710 1,283,608 Total transactions with owners - - - (15,102) - (38,345,198) (38,360,300) (77,825,690) (116,185,990)
Balance at December 31, 2017 ￦ 44,450,975 ￦ 672,986,708 ￦ 22,623,589 ￦ (145,978,602) ￦ (19,392,447) ￦ 2,422,584,498 ￦ 2,997,274,721 ￦ 2,934,698,876 ￦ 5,931,973,597
Balance at January 1, 2018 ￦ 44,450,975 ￦ 672,986,708 ￦ 22,623,589 ￦ (145,978,602) ￦ (19,392,447) ￦ 2,422,584,498 ￦ 2,997,274,721 ￦ 2,934,698,876 ￦ 5,931,973,597 Changes in accounting policy - - - - - 475,853 475,853 705,534 1,181,387 44,450,975 672,986,708 22,623,589 (145,978,602) (19,392,447) 2,423,060,351 2,997,750,574 2,935,404,410 5,933,154,984 Comprehensive income Profit for the period - - - - - 142,286,121 142,286,121 233,985,091 376,271,212 Remeasurements of net defined benefit liabilities - - - - - 10,732,340 10,732,340 15,078,384 25,810,724 Gain (loss) on valuation of financial assets at fair value through other comprehensive income - - - - (1,997,490) - (1,997,490) 1,074,103 (923,387) Gain (loss) on disposal of financial assets at fair value through other comprehensive income - - - - 263,286 (263,286) - - - Share of other comprehensive income of associates - - - - (15,983) - (15,983) (39,211) (55,194) Exchange differences on transaction of foreign operations - - - - 112,735 - 112,735 356,413 469,148 Total comprehensive income for the period - - - - (1,637,452) 152,755,175 151,117,723 250,454,780 401,572,503
Transactions with owners Dividends paid - - - - - (30,016,220) (30,016,220) (62,222,428) (92,238,648) Change in non-controlling interests due to acquisition - - - (18,763) - - (18,763) - (18,763) Total transactions with owners - - - (18,763) - (30,016,220) (30,034,983) (62,222,428) (92,257,411)
Balance at December 31, 2018 ￦ 44,450,975 ￦ 672,986,708 ￦ 22,623,589 ￦ (145,997,365) ￦ (21,029,899) ￦ 2,545,799,306 ￦ 3,118,833,314 ￦ 3,123,636,762 ￦ 6,242,470,076
The above consolidated statements of changes in equity should be read in conjunction with the accompanying notes. The U.S. dollar amounts are provided for information purposes only and do not form a part of the audited consolidated financial statements. Refer to Note 4.
6 AMOREPACIFIC Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 2018 and 2017
(in thousands of Korean won) Notes 2018 2017
Cash flows from operating activities Cash generated from operations 31 ￦ 898,080,777 ￦ 888,533,599 Interest received 24,554,209 25,526,835 Interest paid (4,786,086) (6,193,306) Income tax paid (187,197,596) (318,120,559) Net cash inflow from operating activities 730,651,304 589,746,569
Cash flows from investing activities Net decrease in current financial deposits - 464,047,013 Net decrease in current available-for-sale financial assets - 170,717,835 Decrease in financial assets at fair value through profit or loss 26,059,081 - Decrease in other receivables 8,168,871 31,915,349 Decrease in non-current financial deposits 579,033 1,422,570 Proceeds from disposal of non-current available-for-sale financial assets - 454,905 Proceeds from disposal of financial assets at amortized cost 1,435,365 - Proceeds from disposal of financial assets at fair value through other comprehensive income 3,198,768 - Proceeds from disposal of property, plant and equipment 2,341,057 3,922,577 Proceeds from disposal of intangible assets 1,339,604 1,150,514 Proceeds from disposal of investment properties 2,016,000 3,400,000 Proceeds from disposal of non-current assets held-for-sale 13 504,000 21,000,000 Dividend income from associates 1,186,537 2,538,000 Other cash inflows 22,740,855 - Net increase in current financial deposits (56,431,000) - Payments for financial assets at fair value through profit or loss (43,141,575) - Increase in other receivables (15,820,680) (44,306,238) Increase in non-current financial deposits (1,900,010) (1,900,010) Payments for non-current available-for-sale financial assets - (4,387,363) Payments for financial assets at amortized cost (337,180) - Payments for financial assets at fair value through other comprehensive income (401,849) - Payments for property, plant and equipment 10 (436,897,962) (846,592,469) Payments for intangible assets 11 (55,055,450) (46,905,774) Net cash outflow from investing activities (540,416,535) (243,523,091)
Cash flows from financing activities Proceeds from short-term borrowings 98,463,772 87,388,102 Proceeds from long-term borrowings - 45,425,690 Increase in non-controlling interests - 1,298,709 Repayments of short-term borrowings (108,628,289) (58,982,800) Repayments of current portion of long-term borrowings borrowings - (44,992,042) Dividends paid 23 (92,202,965) (117,422,602) Net cash outflow from financing activities (102,367,482) (87,284,943)
Effects of exchange rate changes on cash and cash equivalents 1,918,104 (20,301,029) Net increase in cash and cash equivalents 89,785,391 238,637,506 Cash and cash equivalents at the beginning of the year 1,207,667,820 969,030,314 Cash and cash equivalents at the end of the year ￦ 1,297,453,211 ￦ 1,207,667,820
The above consolidated statements of cash flows should be read in conjunction with the accompanying notes. The U.S. dollar amounts are provided for information purposes only and do not form a part of the audited consolidated financial statements. Refer to Note 4. 7 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
1. General Information
General information of AMOREPACIFIC Group, Inc. which is the Parent Company in accordance with Korean IFRS 1110 Consolidated Financial Statements (referred to as “the Company”) and its 35 subsidiaries (collectively referred to as “the Group”) is as follows.
The Company was incorporated on September 5, 1945, under the laws of the Republic of Korea to engage in manufacturing, marketing and trading of cosmetics, personal care goods and other related products. However, on January 1, 2007, the Company’s legal form of business entity was changed to a holding company to provide management, administrative and financing services to its consolidated and unconsolidated subsidiaries. The Company listed its shares on the Korea Stock Exchange on April 30, 1973, and as approved by the shareholders on March 25, 2011, the Company changed its name from PACIFIC Corporation to AMOREPACIFIC Group, Inc.
As at December 31, 2018, the Company’s share capital is ￦44,451 million, including ￦3,222 million of preferred shares. The Company is authorized to issue 360,000,000 shares at a par value per share of ￦500. On December 16, 2016, 2,667,200 convertible preferred shares were converted into ordinary shares with the expiration of its term of existence. As at December 31, 2018, the number of ordinary shares and preferred shares issued by the company are 82,458,180 and 6,443,770, respectively.
Preferred shareholders have no voting rights and are entitled to non-cumulative and non- participating preferred dividend at a rate of 1% over those provided to ordinary shareholders. This preferred dividend rate is not applicable to share dividend. Accordingly, in calculating earnings per share for preferred shares, a different dividend rate is used.
The Parent Company’s ordinary shareholders as at December 31, 2018, are as follows:
2018 Number of Percentage of Shareholders ordinary shares ownership (%)
Kyung- Bae Suh 44,443,620 53.9 Others 1 38,014,560 46.1 82,458,180 100.0
1 Including 5,549,735 treasury shares.
8 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
The Company’s consolidated subsidiaries as at December 31, 2018, are as follows:
Percentage Share capital of Shareholder Subsidiaries Primary Business (in millions of Year end Location ownership Korean won) (%) Manufacturing and AMOREPACIFIC Group, Inc. AMOREPACIFIC Corporation1 \ 34,508 35.40 Dec.31 Korea marketing of cosmetics AMOREPACIFIC Group, Inc. Innisfree Corporation Marketing of cosmetics 1,222 81.82 Dec.31 Korea Manufacturing and AMOREPACIFIC Group, Inc. Etude Corporation 3,631 80.48 Dec.31 Korea marketing of cosmetics AMOREPACIFIC Group, Inc. AMOS Professional Corporation Marketing of hair care products 3,500 100.00 Dec.31 Korea AMOREPACIFIC Group, Inc. Espoir Corporation Marketing of cosmetics 1,019 80.48 Dec.31 Korea Manufacturing and marketing of AMOREPACIFIC Group, Inc. AESTURA Corporation 11,645 100.00 Dec.31 Korea medicine Manufacturing and marketing of AMOREPACIFIC Group, Inc. PACIFICGLAS, Inc. 5,000 100.00 Dec.31 Korea glass Printing, manufacturing and AMOREPACIFIC Group, Inc. PACIFICPACKAGE Corporation 11,505 100.00 Dec.31 Korea marketing of paper containers Manufacturing and marketing of AMOREPACIFIC Group, Inc. Osulloc Farm Co.,Ltd. 5,083 98.38 Dec.31 Korea green tea Manufacturing and marketing of AMOREPACIFIC Group, Inc. COSVISION CO.,LTD. cosmetics, detergents and 13,875 100.00 Dec.31 Korea organic compounds AMOREPACIFIC Global Holding company and marketing AMOREPACIFIC Corporation 201,910 90.00 Dec.31 Hong Kong Operations Limited. of cosmetics AMORE Cosmetics (Shanghai) Manufacturing and AMOREPACIFIC Corporation 64,299 100.00 Dec.31 China Co.,Ltd. marketing of cosmetics AMOREPACIFIC (Shanghai) AMOREPACIFIC Corporation Research and development 2,195 100.00 Dec.31 China R&I Center Co.,Ltd. AMOREPACIFIC Manufacturing and R&D of AMOREPACIFIC Corporation MANUFACTURING 41,690 100.00 Dec.31 Malaysia cosmetics MALAYSIA SDN. BHD. Packaging of products and AMOREPACIFIC Corporation We-Dream Co.,Ltd. 406 100.00 Dec.31 Korea managing of facilities Packaging of products and AMOREPACIFIC Corporation Green Partners Corporation 800 100.00 Dec.31 Korea managing of facilities AESTURA (Shanghai) TRADING AESTURA Corporation Marketing of medicine 64 100.00 Dec.31 China Co.,Ltd. AMOREPACIFIC Global AMOREPACIFIC Trading Co., Marketing of cosmetics 9,456 100.00 Dec.31 China Operations Limited. Ltd. AMOREPACIFIC Global AMOREPACIFIC Hong Kong Marketing of cosmetics 12 100.00 Dec.31 Hong Kong Operations Limited. Co.,Limited AMOREPACIFIC Global AMOREPACIFIC Taiwan Marketing of cosmetics 13,414 100.00 Dec.31 Taiwan Operations Limited. Co.,Ltd. AMOREPACIFIC Global AMOREPACIFIC SINGAPORE Marketing of cosmetics 25,861 100.00 Dec.31 Singapore Operations Limited. PTE Co Ltd. AMOREPACIFIC Global AMOREPACIFIC MALAYSIA Marketing of cosmetics 9,415 100.00 Dec.31 Malaysia Operations Limited. SDN. BHD. AMOREPACIFIC Global AMOREPACIFIC (Thailand) Marketing of cosmetics 19,383 100.00 Dec.31 Thailand Operations Limited. LIMITED AMOREPACIFIC Corporation 2.29 PT. LANEIGE INDONESIA AMOREPACIFIC Global Marketing of cosmetics 8,584 Dec.31 Indonesia PACIFIC 97.71 Operations Limited. AMOREPACIFIC Global AMOREPACIFIC Vietnam LTD. Marketing of cosmetics 10,367 100.00 Dec.31 Vietnam Operations Limited. AMOREPACIFIC Global AMOREPACIFIC PHILIPPINES, Marketing of cosmetics 1,098 100.00 Dec.31 Philippines Operations Limited. INC. AMOREPACIFIC Global AMOREPACIFIC US, INC. Marketing of cosmetics 61,262 100.00 Dec.31 United States Operations Limited. AMOREPACIFIC Global AMOREPACIFIC CANADA INC. Marketing of cosmetics 2,497 100.00 Dec.31 Canada Operations Limited. AMOREPACIFIC Global AMOREPACIFIC EUROPE Manufacturing and 98,933 100.00 Dec.31 France Operations Limited. S.A.S marketing of cosmetics AMOREPACIFIC Global Annick Goutal S.A.S Marketing of cosmetics 20,673 100.00 Dec.31 France Operations Limited. AMOREPACIFIC Global AMOREPACIFIC Japan Co.,Ltd. Marketing of cosmetics 33,105 100.00 Dec.31 Japan Operations Limited. AMOREPACIFIC Global Innisfree Cosmetics India Private Marketing of cosmetics 4,807 100.00 Mar. 31 India Operations Limited. Limited AMOREPACIFIC Global United Arab AMOREPACIFIC ME FZ-LLC Marketing of cosmetics 1,953 100.00 Dec.31 Operations Limited. Emirates AMOREPACIFIC Global AMOREPACIFIC AUSTRALIA Marketing of cosmetics 2,997 100.00 Dec.31 Australia Operations Limited. PTY LTD AMOREPACIFIC Trading AMOREPACIFIC (SHANGHAI) Marketing of cosmetics 170 100.00 Dec.31 China Co.,Ltd. COSMETICS CO., LTD
1 Although the Parent Company has less than 50% of voting power, it is included as a subsidiary as the related parties, including the Ultimate parent, have 47.9% of the voting power and the rest are widely distributed among shareholders and institution investors owning less than 1%. Taking into
9 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
consideration the participatory and approval ratios of the past general meetings, the Company has de facto control to decide the financial and operating policies.
Summarized financial information for consolidated subsidiaries as at and for the periods ended December 31, 2018 and 2017, is as follows:
2018
(in millions of Korean won) Total Total Total Profit (loss) comprehensive assets liabilities Revenue for the period income(loss) AMOREPACIFIC Corporation 1 \ 4,678,941 \ 442,130 \ 3,670,705 \ 274,661 \ 297,661 Innisfree Corporation 534,203 59,959 598,915 61,974 62,987 Etude Corporation 85,980 33,519 218,282 (28,281) (27,112) AMOS Professional Corporation 75,501 8,559 84,455 14,069 14,251 Espoir Corporation 20,861 8,377 42,141 (3,918) (3,741) AESTURA Corporation 1 113,746 18,568 100,137 3,542 4,254 PACIFICGLAS, Inc. 59,244 20,992 63,300 576 608 PACIFICPACKAGE Corporation 70,310 21,323 55,141 (2,258) (1,996) Osulloc Farm Co.,Ltd 96,523 8,457 21,267 1,333 1,502 COSVISION CO.,LTD. 149,766 72,726 170,272 (5,953) (5,658) Amorepacific Global Operations 229,024 69,132 65,744 (1,926) 4,848 Limited.1 AMORE Cosmetics (Shanghai) 288,379 74,076 182,452 38,442 36,617 Co.,Ltd. AMOREPACIFIC (Shanghai) R&I 4,003 179 5,131 392 364 Center Co.,Ltd. AMOREPACIFIC MANUFACTURING MALAYSIA 40,630 76 - 121 989 SDN. BHD. We-Dream Co.,Ltd. 853 168 1,560 118 137 Green Partners Corporation 785 5 - (20) (20) AESTURA (Shanghai) TRADING 57 - - - - Co.,Ltd. AMOREPACIFIC Trading Co.,Ltd. 529,399 355,155 1,280,564 34,274 32,555 AMOREPACIFIC Hong Kong 81,702 44,987 163,602 9,028 11,043 Co.,Limited AMOREPACIFIC Taiwan Co.,Ltd. 32,570 18,368 57,454 992 1,232 AMOREPACIFIC SINGAPORE PTE 45,233 22,344 70,814 (279) 220 Co Ltd. AMOREPACIFIC MALAYSIA SDN. 29,534 17,419 49,232 (52) 210 BHD. AMOREPACIFIC (Thailand) 27,870 8,452 47,215 1,508 2,360 LIMITED PT. LANEIGE INDONESIA PACIFIC 15,217 10,291 22,813 225 88 AMOREPACIFIC Vietnam LTD. 10,207 5,079 17,075 1,534 1,620 AMOREPACIFIC PHILIPPINES, 2,285 961 750 211 226 INC. AMOREPACIFIC US, INC. 45,486 32,923 58,582 (6,819) (7,027) AMOREPACIFIC CANADA INC. 5,238 2,755 8,951 (153) (251) AMOREPACIFIC EUROPE S.A.S 27,560 35,890 14,406 (6,744) (6,984) Annick Goutal S.A.S 19,371 23,979 14,559 (2,692) (2,529) AMOREPACIFIC Japan Co.,Ltd. 34,050 25,447 79,245 4,428 4,689 Innisfree Cosmetics India Private 6,250 3,479 6,541 686 594 Limited AMOREPACIFIC ME FZ-LLC 1,146 827 4,457 (917) (898) AMOREPACIFIC AUSTRALIA PTY 3,780 2,051 2,793 (1,103) (1,268) LTD AMOREPACIFIC (SHANGHAI) 277 127 145 (13) (20) COSMETICS CO., LTD
10 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
2017
(in millions of Korean won) Total Total Total Profit (loss) comprehensive assets liabilities Revenue for the period income(loss) AMOREPACIFIC Corporation 1 \ 4,786,272 \ 759,717 \ 3,627,543 \ 317,769 \ 330,426 Innisfree Corporation 490,438 66,611 642,022 78,134 78,529 Etude Corporation 106,584 27,067 259,054 3,342 4,164 AMOS Professional Corporation 72,597 9,965 83,398 15,776 16,242 Espoir Corporation 19,985 3,760 43,232 (1,389) (1,330) AESTURA Corporation 1 116,172 25,248 114,129 2,356 3,182 PACIFICGLAS, Inc. 60,215 22,571 54,109 (1,816) (609) PACIFICPACKAGE Corporation 72,163 21,180 52,378 (2,009) (1,893) Osulloc Farm Co.,Ltd 95,312 8,748 19,000 4,548 4,674 COSVISION CO.,LTD. 160,388 97,671 185,832 (3,400) (3,175) Amorepacific Global Operation 224,059 68,669 72,906 15,351 (2,479) Limited.1 AMOREPACIFIC GLOBAL 3,605 3 - (1,208) (1,384) OPERATIONS PTE. LTD. AMORE Cosmetics (Shanghai) 250,957 88,474 151,882 35,066 26,761 Co.,Ltd. MOREPACIFIC MANUFACTURING 39,564 - - 44 (858) MALAYSIA SDN. BHD. AMORE Cosmetics (Shanghai) R&I 3,648 188 5,168 515 330 Center Co.,Ltd. We-Dream Co.,Ltd. 583 36 1,121 38 38 AESTURA (Shanghai) TRADING 57 - - - 3 Co.,Ltd. AMOREPACIFIC Trading Co.,Ltd. 497,600 334,885 1,211,902 41,390 33,246 AMOREPACIFIC Hong Kong 89,463 45,211 161,029 7,949 1,297 Co.,Limited AMOREPACIFIC Taiwan Co.,Ltd. 25,978 13,008 47,159 3,751 3,239 AMOREPACIFIC SINGAPORE PTE 55,829 33,161 66,916 3,048 2,143 Co Ltd. AMOREPACIFIC MALAYSIA SDN. 23,060 11,155 38,483 923 691 BHD. AMOREPACIFIC (Thailand) 27,055 9,911 36,732 1,903 1,390 LIMITED PT. LANEIGE INDONESIA PACIFIC 9,416 4,578 14,893 289 (322) Innisfree Cosmetics India Private 3,660 1,849 3,247 (561) (697) Limited AMOREPACIFIC Japan Co.,Ltd. 19,212 15,373 61,701 2,306 2,024 AMOREPACIFIC US, INC. 33,209 28,993 45,614 (2,616) (3,341) AMOREPACIFIC CANADA INC. 5,762 3,028 7,244 259 124 AMOREPACIFIC EUROPE S.A.S 32,930 34,616 21,895 (13,164) (13,033) Annick Goutal S.A.S. 13,422 15,378 13,849 (4,731) (4,783) AMOREPACIFIC ME FZ-LLC 1,128 345 60 (452) (564) AMOREPACIFIC Vietnam LTD. 6,935 8,337 10,140 (247) (125) AMOREPACIFIC AUSTRALIA PTY - - - - - LTD
1 Represents separate financial statements in which its investments in subsidiaries and associates are measured at cost.
The amounts presented above are before the elimination of intercompany transactions. Also, the amounts presented above reflect accounting adjustments which were different from the Parent Company.
11 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
Changes in Scope for Consolidation
Subsidiary newly included in the consolidation for the year ended December 31, 2018, is as follows:
Subsidiary Reason AMOREPACIFIC PHILIPPINES, Newly established by AMOREPACIFIC Global Operations INC. Limited., a subsidiary, with the contribution of 100%
AMOREPACIFIC (SHANGHAI) Newly established by AMOREPACIFIC Trading Co.,Ltd., a COSMETICS CO., LTD subsidiary, with the contribution of 100%
Newly established by AMOREPACIFIC Corporation, a Green Partners Corporation subsidiary, with the contribution of 100%
Subsidiaries excluded from the consolidation for the year ended December 31, 2018, is as follows:
Subsidiary Reason AMOREPACIFIC GLOBAL OPERATIONS PTE. LTD., a AMOREPACIFIC GLOBAL subsidiary, was excluded from the consolidation due to OPERATIONS PTE. LTD. liquidation
2. Significant Accounting Policies
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
2.1 Basis of Preparation
The Group maintains its accounting records in Korean won and prepares statutory financial statements in the Korean language (Hangul) in accordance with International Financial Reporting Standards as adopted by the Republic of Korea (Korean IFRS). The accompanying consolidated financial statements have been condensed, restructured and translated into English from the Korean language financial statements.
Certain information attached to the Korean language financial statements, but not required for a fair presentation of the Group's financial position, financial performance or cash flows, is not presented in the accompanying consolidated financial statements.
The consolidated financial statements of the Group have been prepared in accordance with Korean IFRS. These are the standards, subsequent amendments and related interpretations issued by the International Accounting Standards Board (IASB) that have been adopted by the Republic of Korea.
The preparation of financial statements requires the use of critical accounting estimates. Management also needs to exercise judgement in applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 3.
12 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
2.2 Changes in Accounting Policies and Disclosures
(a) New and amended standards adopted by the Group
The Group has applied the following standards and amendments for the first time for their annual reporting period commencing January 1, 2018.
- Amendment to Korean IFRS 1028 Investments in Associates and Joint Ventures
When an investment in an associate or a joint venture is held by, or is held indirectly through, an entity that is a venture capital organization, or a mutual fund, unit trust and similar entities including investment-linked insurance funds, the entity may elect to measure each investment separately at fair value through profit or loss in accordance with Korean IFRS 1109. The amendment does not have a significant impact on the consolidated financial statements because the Group is not a venture capital organization.
- Amendment to Korean IFRS 1040 Transfers of Investment Property
The amendment to Korean IFRS 1040 clarifies that a transfer to, or from, investment property, including property under construction, can only be made if there has been a change in use that is supported by evidence, and the list of evidence for a change of use in the standard was re- characterized as a non-exclusive list of example. The amendment does not have a significant impact on the consolidated financial statements.
- Amendment to Korean IFRS 1102 Share-based Payment
Amendments to Korean IFRS 1102 clarify accounting for a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. Amendments also clarify that the measurement approach should treat the terms and conditions of a cash-settled award in the same way as for an equity-settled award. The amendment does not have a significant impact on the consolidated financial statements.
- Enactment of Interpretation 2122 Foreign Currency Transaction and Advance Consideration
According to the enactment, the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. The enactment does not have a significant impact on the consolidated financial statements.
- Korean IFRS 1109 Financial Instruments
The Group has applied Korean IFRS 1109 Financial Instruments on January 1, 2018, the date of initial application. In accordance with the transitional provisions in Korean IFRS 1109, comparative figures have not been restated, and the differences between previous book amounts and book amounts at the date of initial application are recognized to retained earnings. See Note 37 for further details on the impact of the application of the standard.
13 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
- Korean IFRS 1115 Revenue from Contracts with Customers
The Group has applied to apply Korean IFRS 1115 Revenue from Contracts with Customers. In accordance with the transition provisions in Korean IFRS 1115, comparative figures have not been restated. The Group elected the modified retrospective approach, and recognized the cumulative impact of initially applying the revenue standard as an adjustment to retained earnings as at January 1, 2018, the period of initial application. See Note 37 for further details on the impact of the application of the standard.
(b) New standards and interpretations not yet adopted by the Group
Certain new accounting standards and interpretations that have been published that are not mandatory for annual reporting period commencing January 1, 2018 and have not been early adopted by the Group are set out below.
- Enactment to Korean IFRS 1116 Leases
Korean IFRS 1116 Leases issued on May 22, 2017 is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted. This standard will replace Korean IFRS 1017 Leases. The Group will apply the standards for annual periods beginning on or after January 1, 2019.
Under the new standard, with implementation of a single lease model, lessee is required to recognize assets and liabilities for all lease which lease term is over 12 months and underlying assets are not low value assets. A lessee is required to recognize a right-of-use asset and a lease liability representing its obligation to make lease payments.
The Group performed an impact assessment to identify potential financial effects of applying Korean IFRS 1116. The Group is analyzing the effects on the financial statements based on available information as at December 31, 2018 to identify effects on 2019 financial statements; however, it is difficult to provide reasonable estimates of financial effects until the analysis is complete.
- Amendments to Korean IFRS 1109 Financial Instruments
The narrow-scope amendments made to Korean IFRS 1109 Financial Instruments enable entities to measure certain prepayable financial assets with negative compensation at amortized cost. When a modification of a financial liability measured at amortized cost that does not result in the derecognition, a modification gain or loss shall be recognized in profit or loss. These amendments will be applied for annual periods beginning on or after January 1, 2019, with early adoption permitted.
- Amendments to Korean IFRS 1019 Employee Benefits
The amendments require that an entity shall calculate current service cost and net interest for the remainder of the reporting period after a plan amendment, curtailment or settlement based on
14 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
updated actuarial assumptions from the date of the change. The amendments also require that a reduction in a surplus must be recognized in profit or loss even if that surplus was not previously recognized because of the impact of the asset ceiling. The amendments are effective for plan amendments, curtailments and settlements occurring in reporting periods that begin on or after 1 January 2019.
- Amendments to Korean IFRS 1028 Investments in Associates and Joint Ventures
The amendments clarify that an entity shall apply Korean IFRS 1109 to financial instruments in an associate or joint venture to which the equity method is not applied. These include long-term interests that, in substance, form part of the entity’s net investment in an associate or joint venture. These amendments will be applied for annual periods beginning on or after January 1, 2019, with early adoption permitted. In accordance with the transitional provisions in Korean IFRS 1109, the restatement of the comparative information is not required and the cumulative effects of initially applying the amendments retrospectively should be recognized in the beginning balance of retained earnings at the date of initial application.
- Enactment to Interpretation of Korean IFRS 2123 Uncertainty over Income Tax Treatments
The Interpretation explains how to recognize and measure deferred and current income tax assets and liabilities where there is uncertainty over a tax treatment, and includes guidance on how to determine whether each uncertain tax treatment is considered separately or together. It also presents examples of circumstances where a judgement or estimate is required to be reassessed. This Interpretation will be applied for annual periods beginning on or after January 1, 2019, and an entity can either restate the comparative financial statements retrospectively or recognize the cumulative effect of initially applying the Interpretation as an adjustment in the beginning balance at the date of initial application.
- Annual Improvements to Korean IFRS 2015 – 2017 Cycle:
Korean IFRS 1103 Business Combination
The amendments clarify that when a party to a joint arrangement obtains control of a business that is a joint operation, and had rights to the assets and obligations for the liabilities relating to that joint operation immediately before the acquisition date, the transaction is a business combination achieved in stages. In such cases, the acquirer shall remeasure its entire previously held interest in the joint operation. These amendments will be applied to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2019, with early adoption permitted.
Korean IFRS 1111 Joint Agreements
The amendments clarify that when a party that participates in, but does not have joint control of, a joint operation might obtain joint control of the joint operation in which the activity of the joint operation constitutes a business. In such cases, previously held interests in the joint operation are not remeasured. These amendments will be applied to transactions in which an entity obtains
15 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
joint control on or after the beginning of the first annual reporting period beginning on or after 1 January 2019, with early adoption permitted.
Paragraph 57A of Korean IFRS 1012 Income Tax
The amendment is applied to all the income tax consequences of dividends and requires an entity to recognize the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally recognized those past transactions or events. These amendments will be applied for annual reporting periods beginning on or after January 1, 2019, with early adoption permitted.
Korean IFRS 1023 Borrowing Costs
The amendments clarify that if a specific borrowing remains outstanding after the related qualifying asset is ready for its intended use (or sale), it becomes part of general borrowings. These amendments will be applied to borrowing costs incurred on or after the beginning of the first annual reporting period beginning on or after January 1, 2019, with early adoption permitted.
2.3 Consolidation
The Group has prepared the consolidated financial statements in accordance with Korean IFRS 1110 Consolidated Financial Statements.
(a) Subsidiaries
Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.
The acquisition method of accounting is used to account for business combinations by the Group. 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 measured initially at their fair values at the acquisition date. The Group recognizes any non-controlling interest in the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest’s proportionate share of the acquired entity’s net identifiable assets. All other non-controlling interests are measured at fair values, unless otherwise required by other standards. Acquisition-related costs are expensed as incurred.
The excess of consideration transferred, amount of any non-controlling interest in the acquired entity and acquisition-date fair value of any previous equity interest in the acquired entity over the fair value of the net identifiable assets acquired is recoded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the business acquired, the difference is recognized directly in the profit or loss as a bargain purchase.
16 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
Intercompany transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.
The Group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Group. A changed in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interest to reflect their relative interest in the subsidiary. Any difference between the amount of the adjustment to non-controlling interest and any consideration paid or received is recognized in a separate reserve within equity attributable to owners of the Parent Company.
When the Group ceases to consolidate for a subsidiary because of a loss of control, any retained interest in the subsidiary is remeasured to its fair value with the changed in carrying amount recognized in profit or loss.
(b) Associates
Associates are entities over which the Group has significant influence but not control or joint control. Investments in associates are accounted for using the equity method of accounting, after initially being recognized at cost. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. If there is an objective evidence of impairment for the investment in the associate, the Group recognizes the difference between the recoverable amount of the associate and its book amount as impairment loss.
2.4 Foreign Currency Translation
(a) Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which each entity operates (the “functional currency"). The consolidated financial statements are presented in Korean won, which is the Parent Company’s functional and presentation currency.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year end exchange rates are generally recognized in profit or loss.
Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, translation differences on non-monetary assets and liabilities such as equities held at fair value through profit or loss are recognized in profit or loss as part of the fair value gain or loss and
17 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
translation differences on non-monetary assets such as equities held at fair value through other comprehensive income are recognized in other comprehensive income.
(c) Translation to the presentation currency
The results and financial position of all Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
assets and liabilities for each statement of financial position presented are translated at the closing rate at the end of the reporting period, income and expenses for each statement of profit or loss are translated at average exchange rates, all resulting exchange differences are recognized in other comprehensive income.
When the Company ceases to control the subsidiary, exchange differences that were recorded in equity are recognized in the statement of profit or loss as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.
2.5 Financial Assets
(a) Classification
From January 1, 2018, the Group classifies its financial assets in the following measurement categories:
those to be measured at fair value through profit or loss
those to be measured at fair value through other comprehensive income, and
those to be measured at amortized cost.
The classification depends on the Group’s business model for managing the financial assets and the contractual terms of the cash flows.
For financial assets measured at fair value, gains and losses will either be recorded in profit or loss or other comprehensive income. For investments in debt instruments, this will depend on the business model in which the investment is held. The Group reclassifies debt investments when, and only when its business model for managing those assets changes.
For investments in equity instruments that are not held for trading, this will depend on whether the Group has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income.
(b) Measurement
At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable
18 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss.
Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.
A. Debt instruments
Subsequent measurement of debt instruments depends on the Group’s business model for managing the asset and the cash flow characteristics of the asset. The Group classifies its debt instruments into one of the following three measurement categories:
Amortized cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortized cost. A gain or loss on a debt investment that is subsequently measured at amortized cost and is not part of a hedging relationship is recognized in profit or loss when the asset is derecognized or impaired. Interest income from these financial assets is included in ‘finance income’ using the effective interest rate method.
Fair value through profit or loss: Assets that do not meet the criteria for amortized cost or fair value through other comprehensive income are measured at fair value through profit or loss. A gain or loss on a debt investment that is subsequently measured at fair value through profit or loss and is not part of a hedging relationship is recognized in profit or loss and presented net in the statement of profit or loss within ‘finance income or finance costs’ in the year in which it arises.
Fair value through other comprehensive income: Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at fair value through other comprehensive income. Movements in the carrying amount are taken through other comprehensive income, except for the recognition of impairment loss (reversal of impairment loss), interest income and foreign exchange gains and losses which are recognized in profit or loss. When the financial asset is derecognized, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss. Interest income from these financial assets is included in ‘finance income’ using the effective interest rate method. Foreign exchange gains and losses are presented in ‘other income or expenses’ and impairment losses are presented in ‘other expenses’.
B. Equity instruments
The Group subsequently measures all equity investments at fair value. Where the Group’s management has elected to present fair value gains and losses on equity investments in other comprehensive income, there is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment. Dividend income from such investments continue to be recognized in profit or loss as ‘other income’ when the right to receive payments is established.
19 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
Changes in the fair value of financial assets at fair value through profit or loss are recognized in ‘finance income or finance costs’ in the statement of profit or loss as applicable. Impairment loss (reversal of impairment loss) on equity investments measured at fair value through other comprehensive income are not reported separately from other changes in fair value.
(c) Impairment
The Group assesses on a forward looking basis the expected credit losses associated with its debt instruments carried at amortized cost and fair value through other comprehensive income. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For trade receivables, the Group applies the simplified approach, which requires expected lifetime credit losses to be recognized from initial recognition of the receivables.
(d) Recognition and Derecognition
Regular way purchases and sales of financial assets are recognized or derecognized on trade-date, the date on which the Group commits to purchase or sell the asset. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership.
If a transfer does not result in derecognition because the Group has retained substantially all the risks and rewards of ownership of the transferred asset, the Group continues to recognize the transferred asset in its entirety and recognizes a financial liability for the consideration received. The Group classified the financial liability as “borrowings” in the statement of financial position.
(e) Offsetting of financial instruments
Financial assets and liabilities are offset and the net amount reported in the statements of financial position where there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the assets and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the Group or the counterparty.
2.6 Trade Receivables
Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less loss allowance. See Note 7.3 for further information about the Group’s accounting for trade receivables.
2.7 Inventories
Inventories are stated at the lower of cost and net realizable value. The cost of merchandise, raw materials, subsidiary materials and supplies are determined using the moving-weighted average method, while the cost of finished goods, semi-finished goods and work-in-progress are determined using gross average method. Also, the cost of materials in transit is assigned by using specific identification method.
20 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
2.8 Non-current Assets (or Disposal Group) Held-for-sale
Non-current assets (or disposal group) are classified as held for sale when their carrying amount will be recovered principally through a sale transaction rather than through continuing use 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.
2.9 Property, Plant and Equipment
Property, plant and equipment are stated at historical cost less accumulated depreciation and accumulated impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items.
Depreciation of all property, plant and equipment, except for land, is calculated using the straight- line method to allocate their cost or revalued amounts, net of their residual values, over their estimated useful lives as follows:
Useful life
Buildings 10 - 60 years Structures 10 - 40 years Machinery 3 - 30 years Vehicles 6 - 10 years Tools 1 - 5 years Fixtures and furniture 2 - 15 years Others 10 years
The assets’ depreciation method, residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.
2.10 Borrowing Costs
General and specific borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized during the period of time that is required to complete and prepare the asset for its intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. Other borrowing costs are expensed in the period in which they are incurred.
2.11 Government Grants
Grants from the government are recognized at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants related to assets are presented in the statement of financial position by
21 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
deducting the grant in arriving at the carrying amount of the asset, and government grants related to income are deferred and later deducted from the related expense.
2.12 Intangible Assets
Goodwill is measured as described in Note 2.3 (a), and carried at cost less accumulated impairment losses.
Intangible assets, except for goodwill, are initially recognized at its historical cost, and carried at cost less accumulated amortization and accumulated impairment losses.
Software development costs that are directly attributable to internally generated by the Group are recognized when the criteria; such as, technically feasible, generate probable future economic benefits and other, are met. Membership rights that have an indefinite useful life are not subject to amortization because there is no foreseeable limit to the period over which the assets are expected to be utilized. The Group amortizes intangible assets with a limited useful life using the straight-line method over the following periods:
Useful life
Industrial property rights 5 - 20 years Software 5 - 10 years Others 2 - 45 years
2.13 Investment Property
Investment property is property held to earn rentals or for capital appreciation or both. An investment property is measured initially at its cost. An investment property is measured after initial measurement at depreciated cost (less any accumulated impairment losses). After recognition as an asset, investment property is carried at cost less accumulated depreciation and impairment losses. The Group depreciates investment property, except for land, using the straight-line method over their useful lives of 10 ~ 60 years.
2.14 Impairment of Non-financial Assets
Goodwill and intangible assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period.
22 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
2.15 Trade and Other Payables
These amounts represent liabilities for goods and services provided to the Group prior to the end of reporting period which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. Trade and other payables are presented as current liabilities, unless payment is not due within 12 months after the reporting period. They are recognized initially at their fair value and subsequently measured at amortized cost using the effective interest method.
2.16 Financial Liabilities
(a) Classification and measurement
The Group’s financial liabilities at fair value through profit or loss are financial instruments held for trading. A financial liability is held for trading if it is incurred principally for the purpose of repurchasing in the near term. A derivative that is not a designated as hedging instruments and an embedded derivative that is separated are also classified 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 present as ‘trade payables’, ‘borrowings’, and ‘other payables’ in the statement of financial position.
Preferred shares that require mandatory redemption at a particular date are classified as liabilities. Interest expenses on these preferred shares using the effective interest method are recognized in the statement of profit or loss as ‘finance costs’, together with interest expenses recognized from other financial liabilities.
(b) Derecognition
Financial liabilities are removed from the statement of financial position when it is extinguished; for example, when the obligation specified in the contract is discharged or cancelled or expired or when the terms of an existing financial liability are substantially modified. The difference between the carrying amount of a financial liability extinguished or transferred to another party and the consideration paid (including any non-cash assets transferred or liabilities assumed) is recognized in profit or loss.
2.17 Provisions
Provisions for service warranties, make good obligation, and legal claims are recognized when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period, and the increase in the provision due to the passage of time is recognized as interest expense.
23 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
2.18 Current and Deferred Tax
The tax expense for the period consists of current and deferred tax. Current and deferred tax is recognized in profit or loss, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively.
The tax expense is measured at the amount expected to be paid to the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.
Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. The Group recognizes current income tax on the basis of amounts expected to be paid to the tax authorities.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss.
Deferred tax assets are recognized only if it is probable that future taxable amounts will be available to utilize those temporary differences and losses.
The Group recognizes a deferred tax liability all taxable temporary differences associated with investments in subsidiaries, associates, and interests in joint arrangements, except to the extent that the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. In addition, The Group recognizes a deferred tax asset for all deductible temporary differences arising from such investments to the extent that it is probable the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis.
2.19 Employee Benefits
(a) Post-employment benefits
The Group operates both defined contribution and defined benefit pension plans.
For defined contribution plans, the Group pays contribution to publicly or privately administered pension insurance plans on mandatory, contractual or voluntary basis. The Group has no further payment obligation once the contribution have been paid. The contribution are recognized as employee benefit expense when they are due.
24 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
A defined benefit plan is a pension plan that is not a defined contribution plan. Generally, post- employment benefits are payable after the completion of employment, and the benefit amount depended on the employee’s age, periods of service or salary levels. The liability recognized in the statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms approximating to the terms of the related obligation. Remeasurement gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized in the period in which they occur, directly in other comprehensive income.
Changes in the present value of the defined benefit obligation resulting from plan amendments or curtailments are recognized immediately in profit or loss as past service costs.
(b) Other long-term employee benefits
Certain entities within the Group provide long-term employee benefits that are entitled to employees with service period for ten years and above. The expected costs of these benefits are accrued over the period of employment using the same accounting methodology as used for defined benefit pension plans. The Group recognizes service cost, net interest on other long-term employee benefits and remeasurements as profit or loss for the year. These liabilities are valued annually by an independent qualified actuaries.
2.20 Revenue Recognition
From January 1, 2018, the Group has applied Korean IFRS 1115 Revenue from Contracts with Customers.
The Group recognizes revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the Group 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 type of customer, the type of transaction and the specifics of each arrangement.
(a) Identifying performance obligations
The Group manufactures and sells cosmetics and personal care of goods. The Group expects that identifying performance obligation will not have a material impact on the financial statements because the Group generally separates contracts to recognize revenue from service rendered, apart from sales of goods or products.
(b) Variable consideration
25 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
The Group may provide promotional incentive to enhance customer’s revenue or allow sales returns, which may cause variable consideration.
The Group estimates an amount of variable consideration by using the expected value which the Group expects to better predict the amount of consideration. The Group recognize revenue with transaction price including variable consideration only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the refund period has lapsed. The refund liability is measured at the amount of consideration received for which the Group does not expect to be entitled.
(c) Allocating consideration received
The Group operates a customer loyalty program granting loyalty points and where members can redeem the points on future purchases. The customers’ option is identified as a separate performance obligation.
The Group allocates the fair value of the consideration received or receivable in respect of revenues between the award credits and the sales of goods, and consideration for award credits is allocated preferentially based on their fair value and remaining amounts are allocated to sales of goods.
2.21 Lease
A lease is an agreement, whereby the lessor conveys to the lessee, in return for a payment or series of payments, the right to use an asset for an agreed period of time. Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group are classified as operating leases. Payments made under operating leases are charge to profit or loss on a straight-line basis over the period of lease.
Leases where the Group, as lessee, has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the lease’s inception at the fair value of the leased property or, if lower, the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in other short-term and long- term payables. Each lease payment is allocated between the liability and finance cost.
If the Group is a lessor, a lease is classified as a finance lease if it transfers substantially all the risks 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 carrying amount of the leased asset and recognized as an expense over the lease term on the same basis as the lease income.
2.22 Segment Reporting
Information of each operating segment is reported in a manner consistent with the internal business segment reporting provided to the chief operating decision-maker (Note 4). The chief operating
26 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the representative director that makes strategic decisions.
2.23 Approval of Issuance of the Financial Statements
The consolidated financial statements 2018 were approved for issue by the Board of Directors on January 31, 2019 and are subject to change with the approval of shareholders at their Annual General Meeting.
3. Critical Accounting Estimates and Assumptions
The preparation of financial statements requires the Group to make estimates and assumptions concerning the future. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. 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 discussed below. Additional information of significant judgement and assumptions of certain items are included in relevant notes.
(a) Estimated goodwill impairment
The Group tests whether goodwill has suffered any impairment on an annual basis. The recoverable amount of a cash generating unit (CGU) is determined based on value-in-use calculations (Note 11).
(b) Income taxes
The Group’s taxable income generated from these operations are subject to income taxes based on tax laws and interpretations of tax authorities in numerous jurisdictions. There are many transactions and calculations for which the ultimate tax determination is uncertain (Note 24).
If certain portion of the taxable income is not used for investments or increase in wages or dividends in accordance with the Tax System For Recirculation of Corporate Income, the Group is liable to pay additional income tax calculated based on the tax laws. Accordingly, the measurement of current and deferred income tax is affected by the tax effects from the new tax system. As the Group’s income tax is dependent on the investments, increase in wages and dividends, there is an uncertainty measuring the final tax effects.
(c) Customer loyalty programs
By customer loyalty programs, the Group allocates the consideration receivable to the award
27 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
credits by reference to the fair value of goods providing, taking into account redemption rates and timing of redemption based on historical data.
(d) Fair value of financial instruments
The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Group uses its judgment to select a variety of methods and make assumptions that are mainly based on market conditions existing at the end of each reporting period (Note 36).
(e) Impairment of financial assets
The provision for impairment for financial assets are based on assumptions about risk of default and expected loss rates. The Group uses judgement in making these assumptions and selecting the inputs to the impairment calculation based on the Group’s past history, existing market conditions as well as forward looking estimates at the end of each reporting period.
(f) Net defined benefit liability (asset)
The present value of net defined benefit liability (asset) depends on a number of factors that are determined on an actuarial basis using a number of assumptions including the discount rate (Note 19).
4. Segment Information
Management has determined the operating segments based on the information reviewed by the chief operating decision-maker who formulates the strategic. Chief operating decision-maker considers the business from perspective of products of each segment.
The main products of each business division are as follows:
Divisions Products Cosmetics Cosmetics and household products Others Cosmetics containers and hair products
The segment information for revenue and operating profit for the years ended December 31, 2018 and 2017, is as follows:
2018 2017 Operating Operating (in millions of Korean won) Revenue profit Revenue profit
Cosmetics \ 5,966,193 \ 533,138 \ 5,892,964 \ 742,850 Others 345,695 16,561 349,819 19,273 \ 6,311,888 \ 549,699 \ 6,242,783 \ 762,123
28 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
Adjustments from total segment revenue to the Group’s revenue for the years ended December 31, 2018 and 2017, are as follows:
2018 2017 (in millions of Korean won)
Total segment revenue \ 6,311,888 \ 6,242,783 Elimination of intercompany transactions and others (233,709) (213,719) Group revenue \ 6,078,179 \ 6,029,064
Adjustments from total segment operating profit to the Group’s operating profit for the years ended December 31, 2018 and 2017, are as follows:
2018 2017 (in millions of Korean won)
Total segment operating profit \ 549,699 \ 733,390 Intersegment revenue (expense) (225) (1,898) Operating profit \ 549,474 \ 731,492
External revenues by geographic areas for the years ended December 31, 2018 and 2017, are as follows:
Revenue (in millions of Korean won) 2018 2017
Korea \ 3,967,645 \ 4,104,811 Asia 2,003,680 1,832,704 North America 71,930 57,063 Others 34,924 34,486 \ 6,078,179 \ 6,029,064
There is no external customer attributing to more than 10% of total revenue for the years ended December 31, 2018 and 2017.
29 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
5. Financial Instruments by Category
Categorizations of financial assets as at December 31, 2018 and 2017, are as follows:
2018 2017 (in millions of Korean won)
Financial assets at Cash and cash equivalents \ 879,994 \ - amortized cost Current financial deposits 225,100 - Non-current financial deposits 17,657 - Current debt securities 30,000 - Non-current debt securities 4,247 - Trade receivables 308,917 - Current other receivables 29,150 - Non-current other receivables 223,091 - Other current assets1 3,705 - Financial assets at Cash and cash equivalents 417,459 - fair value through Non-current equity securities 1,019 - profit or loss Current debt securities 20,174 - Non-current debt securities 8,447 - Financial assets at fair value through other Equity securities 10,676 - comprehensive income Loans and receivables Cash and cash equivalents - 1,207,668
Current financial deposits - 168,000
Non-current financial deposits - 16,300
Trade receivables - 364,620
Current other receivables - 25,122
Non-current other receivables - 225,235
Other current assets1 - 3,310
Available-for-sale Equity securities - 18,052
financial assets Current debt securities - 30,000
Non-current debt securities - 13,686 \ 2,179,637 \ 2,071,993
1 Other current assets represent accrued revenues (Note 14).
30 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
Categorizations of financial liabilities as at December 31, 2018 and 2017, are as follows:
2018 2017 (in millions of Korean won)
Financial liabilities Trade payables \ 88,803 \ 100,566 at amortized cost Short-term borrowings 169,422 178,052
Long-term borrowings 44,687 42,903
Other payables 276,585 230,603
Other current liabilities 2 143,106 211,803
Other non-current liabilities 3 12,693 9,124
\ 735,296 \ 773,051
2 Other current liabilities consist of dividend payables, accrued expenses, refund liability and financial lease liabilities (Note 18). 3 Other non-current liabilities consist of deposits received, accrued expenses and financial lease liabilities (Note 18).
Net gains or losses on each category of financial instruments for the years ended December 31, 2018 and 2017, are as follows:
2018 2017 (in millions of Korean won)
Financial assets at fair value through profit or loss Gain on disposal (profit or loss) \ 101 \ - Gain on valuation (profit or loss) 2,289 - Interest income 20,979 - Financial assets at fair value through other comprehensive income Loss on valuation (other comprehensive income) (784) - Reclassified loss on valuation to equity (139) - (other comprehensive income) Dividend income 292 - Financial assets at amortized cost Interest income 6,935 - Gain on disposal (profit or loss) - - Loss on disposal (profit or loss) - - Gain on foreign currency translation 10,474 - Impairment loss (7,459) - Available-for-sale financial assets Loss on valuation (other comprehensive income) - (218) Gain on disposal (profit or loss) - 1,123 Loss on disposal (profit or loss) - (331) Interest income - 2,394 Dividend income - 409 Loans and receivables Interest income - 23,263
31 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
Loss on foreign currency translation - (39,331) Impairment loss - (1,069) Financial liabilities at amortized cost Interest expense (4,558) (4,709) Gain (loss) on foreign currency translation (4,125) 10,168
6. Cash and Cash Equivalents
Cash and cash equivalents as at December 31, 2018 and 2017, are as follows:
2018 2017 (in millions of Korean won)
Cash on hand \ 315 \ 242 Ordinary deposits 195,921 142,681 Checking accounts 58,613 60,153 Other accounts 1,042,604 1,004,592 \ 1,297,453 \ 1,207,668
Cash and cash equivalents include bank deposits that have a maturity of three months or less from the date of acquisition.
32 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
7. Financial assets
As explained in Note 2, the Group has applied Korean IFRS 1109 Financial Instruments on January 1, 2018. See Note 37 for further details on the impact and financial instruments classification of the application of the standard.
7.1 Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss as at December 31, 2018, are as follows:
(in millions of Korean won) 2018 Current Non-current1
Cash and cash equivalents : Beneficiary certificates \ 417,459 \ - Debt securities : Beneficiary certificates 20,174 3,956 Non-marketable debt securities - 4,491 Equity instruments : Non-marketable equity securities - 1,019 \ 437,633 \ 9,466
1 In the prior financial year, the Group had designated financial assets as available-for-sale financial assets when the management intended to hold them for the medium to long-term.
Amounts recognized in profit or loss for the year ended December 31, 2018, are as follows:
(in millions of Korean won) 2018
Gain from financial assets at fair value through profit or loss \ 2,390
33 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
7.2 Financial Assets at Fair Value through Other Comprehensive Income
Financial assets at fair Value through other comprehensive income as at December 31, 2018, are as follows:
(in millions of Korean won) 2018
Equity instruments: Marketable equity securities Humedix Co., Ltd. \ 559 Meritz Securities Co., Ltd. 6,005 Evofem Biosciences, Inc. 183 Obalon Therapeutics Inc 1,141 GL Pharm Tech Corporation 1,275 Non-marketable equity securities 1,513 \ 10,676
1 In the prior financial year, the Group had designated equity instruments as available-for-sale financial assets when the management intended to hold them for the medium to long-term.
Upon disposal of these equity investments, any balance within the accumulated other comprehensive income for these equity investments is reclassified to retained earnings and is not reclassified to profit or loss.
Changes in financial assets at fair value through other comprehensive income for the year ended December 31, 2018, are as follows:
(in millions of Korean won) 2018
Beginning balance1 \ 15,760 Acquisitions 402 Disposals2 (3,199) Loss on valuation (2,287) Net gains (losses) reclassified from equity - Ending balance \ 10,676
1 In the prior financial year, the Group had designated equity instruments as available-for-sale financial assets when the management intended to hold them for the medium to long-term.
2 Upon disposal transaction, gain (loss) on valuation recognized in other comprehensive income of \ 1,886 million were reclassified into retained earnings.
34 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
7.3 Trade and other receivables
Trade receivables and its provisions for impairment as at December 31, 2018 and 2017, are as follows:
2018 2017 (in millions of Korean won)
Trade receivables \ 312,571 \ 368,836 Less: provision for impairment (3,654) (4,216) Trade receivables, net \ 308,917 \ 364,620
Other receivables and its provisions for impairment as at December 31, 2018 and 2017, are as follows:
2018 2017 (in millions of Korean won) Current Non-current Current Non-current
Non-trade receivables \ 29,722 \ - \ 10,468 \ - Loans 3 30,393 17 35,502 Deposits provided 113 192,698 15,325 189,733 Less: provision for impairment (688) - (688) - \ 29,150 \ 223,091 \ 25,122 \ 225,235
Movements in the provision for impairment of trade receivables for the years ended December 31, 2018 and 2017, are as follows:
(in millions of Korean won) 2018 2017
Beginning balance \ 4,216 \ 3,710 Impairment loss 3,659 1,069 Receivables written off during the year as uncollectible (3,940) (572) Exchange differences (281) 9 Ending balance \ 3,654 \ 4,216
Provision for impaired receivables and unused amounts reversed have been included in the statement of profit or loss within ‘selling and administrative expenses’ in (Note 27). Receivables for which an impairment provision was recognized are written off against the provision when there is no expectation of recovering additional cash.
The Group’s trade and other receivables are spread to a great number of customers, so there is no important credit risk concentrated. The maximum exposure of trade and other receivables to credit risk at the end of reporting period is the carrying amount of each class of receivables mentioned above.
35 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
8. Inventories
Inventories as at December 31, 2018 and 2017, are as follows:
2018 2017 (in millions of Korean won)
Merchandise and Finished goods \ 336,178 \ 307,515 Raw materials 47,918 38,851 Subsidiary materials 27,710 23,810 Others 86,480 87,405 \ 498,286 \ 457,581
Inventories recognized as an expense during the year ended December 31, 2018 amounted to \ 1,252,256 million (2017: \ 1,237,839 million). They were included in ‘cost of sales’.
Loss on valuation of inventories and loss on disposal of inventories for the periods ended December 31, 2018 and 2017, are as follows:
2018 2017 (in millions of Korean won)
Loss on valuation of inventories (reversal) \ 5,859 \ (3,155) Loss on disposal of inventories 53,534 43,077 \ 59,393 \ 39,922
36 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
9. Associates
Associates as at December 31, 2018 and 2017, are as follows:
2018 Percentage Acquisition Book Net asset (in millions of Korean won) of ownership cost amount amount (%)
Taiwan AMORE Co.,Ltd. 50.00 \ 131 \ 2,346 \ 2,346 BBDO Korea lnc. 30.00 949 2,425 2,425
Anhui Pacific Tea Co., Ltd.1 80.00 786 - -
\ 1,866 \ 4,771 \ 4,771
2017 Percentage Acquisition Book Net asset (in millions of Korean won) of ownership cost amount amount (%)
Taiwan AMORE Co.,Ltd. 50.00 \ 131 \ 2,381 \ 2,381 BBDO Korea lnc. 30.00 949 2,601 2,601
Anhui Pacific Tea Co., Ltd.1 80.00 786 - -
\ 1,866 \ 4,982 \ 4,982
1 A subsidiary for consolidation but not included in the scope of consolidation due to its immateriality.
Changes in investments in associates for the years ended December 31, 2018 and 2017, are as follows:
2018 Taiwan AMORE BBDO (in millions of Korean won) Co., Ltd. Korea Inc. Total
Beginning balance \ 2,381 \ 2,601 \ 4,982 Share of profit or loss 31 904 935 of associates Share of other comprehensive income (55) - (55) of associates Dividends (107) (1,080) (1,187) Exchange differences 96 - 96 Ending balance \ 2,346 \ 2,425 \ 4,771
37 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
2017 (in millions of Taiwan AMORE BBDO Anhui Pacific Tea Korean won) Co., Ltd. Korea Inc. Co., Ltd. Total
Beginning balance \ 2,656 \ 3,943 \ 57 \ 6,656 Share of profit or loss 79 1,088 (57) 1,110 of associates Share of other comprehensive income 82 - - 82 of associates Dividends (108) (2,430) - (2,538) Exchange differences (328) - - (328) Ending balance \ 2,381 \ 2,601 \ - \ 4,982
Summarized financial information of associates as at and for the years ended December 31, 2018 and 2017, is as follows:
2018 (in millions of Total Total Profit Comprehensive Korean won) assets liabilities Revenue for the period income
Taiwan AMORE \ 5,592 \ 900 \ 5,149 \ 62 \ (48) Co., Ltd. BBDO Korea Inc. 29,932 21,849 37,676 3,015 3,015
2017 (in millions of Total Total Profit Comprehensive Korean won) assets liabilities Revenue for the period income
Taiwan AMORE \ 5,248 \ 486 \ 5,768 \ 159 \ 322 Co., Ltd. BBDO Korea Inc. 29,347 20,677 33,016 3,627 3,627
38 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
10. Property, Plant and Equipment
Property, plant and equipment as at December 31, 2018 and 2017, are as follows:
2018 2017 Acquisition Accumulated Book Acquisition Accumulated Book (in millions of Korean won) cost depreciation amount cost depreciation amount
Land \ 1,014,618 \ - \ 1,014,618 \ 956,092 \ - \ 956,092 Buildings 1,602,471 (212,363) 1,390,108 1,547,853 (180,235) 1,367,618
Structures 73,156 (28,449) 44,707 66,302 (24,572) 41,730
Machinery 725,789 (309,853) 415,935 628,302 (274,227) 354,075
Vehicles 3,677 (2,759) 918 3,929 (2,553) 1,376
Tools 183,693 (152,706) 30,987 172,594 (141,751) 30,843
Fixtures and furniture 1,006,278 (685,117) 321,161 893,971 (560,806) 333,165
Others 7,312 (3,345) 3,967 6,545 (2,646) 3,899
Construction in progress 99,244 - 99,244 158,205 - 158,205
\ 4,716,238 \ (1,394,593) \ 3,321,645 \ 4,433,793 \ (1,186,790) \ 3,247,003
Changes in property, plant and equipment for the years ended December 31, 2018 and 2017, are as follows:
2018
(in millions of Korean won) Land Buildings Structures Machinery Vehicles
Opening net book amount ￦ 956,092 ￦ 1,367,618 ￦ 41,730 ￦ 354,075 ￦ 1,376 Acquisition - 9,715 2,208 34,912 11 Reclassification 68,263 71,294 5,219 80,117 16 Disposal (1,584) (11,317) (131) (3,882) (85) Depreciation - (42,860) (4,413) (48,965) (400) Impairment loss - - - - - Others (8,737) (3,195) - - - Exchange differences 584 (1,147) 94 (322) - Closing net book amount ￦ 1,014,618 ￦ 1,390,108 ￦ 44,707 ￦ 415,935 ￦ 918
2018
(in millions of Korean won) Fixtures and Construction in Tools furniture Others progress Total
Opening net book amount ￦ 30,843 ￦ 333,165 ￦ 3,899 ￦ 158,205 ￦ 3,247,003 Acquisition 16,981 128,313 643 150,579 343,362 Reclassification 2,193 17,136 - (206,250) 37,988 Disposal - (4,552) - (3,391) (24,942) Depreciation (18,991) (154,067) (570) - (270,266) Impairment loss - (211) - - (211) Others - - - - (11,932)
39 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
Exchange differences (39) 1,376 (4) 101 643 Closing net book amount ￦ 30,987 ￦ 321,160 ￦ 3,968 ￦ 99,244 ￦ 3,321,645
1 In relation to the construction of new building, some of the acquisition tax paid on land of \8,737 million and building of \3,195 million, were refunded for the year ended December 31, 2018.
2017
(in millions of Korean won) Land Buildings Structures Machinery Vehicles
Opening net book amount ￦ 952,167 ￦ 633,620 ￦ 36,830 ￦ 261,111 ￦ 1,435 Acquisition - 6,099 3,170 19,997 63 Reclassification 3,859 759,708 5,782 117,110 355 Disposal - - (284) (608) (23) Depreciation - (26,445) (3,545) (42,567) (453) Exchange differences 66 (5,364) (223) (968) (1) Closing net book amount ￦ 956,092 ￦ 1,367,618 ￦ 41,730 ￦ 354,075 ￦ 1,376
2017
(in millions of Korean won) Fixtures and Construction in Tools furniture Others progress Total
Opening net book amount ￦ 29,296 ￦ 294,583 ￦ 4,142 ￦ 560,685 ￦ 2,773,869 Acquisition 18,772 141,046 3 678,784 867,934 Reclassification 276 53,669 - (1,073,987) (133,228) Disposal (16) (3,820) - (6,530) (11,281) Depreciation (17,264) (145,757) (239) - (236,270) Exchange differences (221) (6,556) (7) (747) (14,021) Closing net book amount ￦ 30,843 ￦ 333,165 ￦ 3,899 ￦ 158,205 ￦ 3,247,003
1 During 2017, in relation to the construction of new building in Yongsan-gu, Seoul, the book amount of \ 131,830 million based on lease ratio was reclassified into investment property (Note 12).
40 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
Depreciation of property, plant and equipment is charged to the following accounts:
2018 2017 (in millions of Korean won)
Selling and administrative expenses1 \ 177,934 \ 148,422 Cost of sales 92,332 87,848 \ 270,266 \ 236,270
1 Depreciation expense is included in research and development expenses.
Details of property, plant and equipment provided as collaterals as at December 31, 2018 and 2017, are as follows:
2018
(in millions Carrying Secured Related of Korean won) amount amount Related line item amount Secured party
Land and buildings \ 1,249 Deposits received \ 961 National Pension Service
Land and buildings 303 Deposits received 253 Lotte Card Co., Ltd. \ 20,233 Land and buildings 74 Deposits received 57 Samsung Life Insurance Co., Ltd. National Human Rights Land and buildings 151 Deposits received 116 Commission of Korea Korea Workers' Compensation Buildings 3,594 Deposits received 3,594 & Welfare Service 16,814 Korea Workers' Compensation Buildings 718 Deposits received 718 & Welfare Service
2017
(in millions Carrying Secured Related of Korean won) amount amount Related line item amount Secured party
Land and buildings \ 1,249 Deposits received \ 961 National Pension Service
Land and buildings 303 Deposits received 253 Lotte Card Co., Ltd. \ 20,596 Land and buildings 74 Deposits received 57 Samsung Life Insurance Co., Ltd. National Human Rights Land and buildings 151 Deposits received 116 Commission of Korea Korea Workers' Compensation Buildings 17,366 3,594 Deposits received 3,594 & Welfare Service Buildings 358 100 Deposits received 100 Social Welfare Organization Chungkwang
41 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
Details of finance lease as at December 31, 2018 and 2017, are as follows:
One of the subsidiaries, AMOREPACIFIC EUROPE S.A.S leases land and buildings under non- cancellable finance lease agreements. The lease term is up to 2018 and after termination of the lease term, the ownership has been transferred to AMOREPACIFIC EUROPE S.A.S and has been disposed in 2018.
The Group leases offices, warehouses, and computer facilities under non-cancellable operating lease agreements. The lease terms are between 1 and 5 years. The lease payment recognized as expense for the year ended December 31, 2018, is \ 360,497 million (2017: \ 371,405 million).
Total minimum lease payments in relation to non-cancellable operating leases that are payable at the end of the reporting period are as follows:
2018 (in millions of Korean won)
Within one year \ 215,466 Later than one year but not later than five years 302,106 Later than five years 15,738 \ 533,310
42 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
11. Intangible Assets
Changes in intangible assets for the years ended December 31, 2018 and 2017, are as follows:
2018
(in millions of Korean won) Industrial Goodwill property Software Others Total
Beginning balance ￦ 525,873 ￦ 23,809 ￦ 130,016 ￦ 80,826 ￦ 760,524 Acquisition - 61 11,936 43,734 55,731 Reclassification - 7,437 18,416 (26,711) (858) Disposal - (85) (530) (1,957) (2,572) Amortization - (3,109) (30,719) (693) (34,521) Impairment loss (3,113) - - (1,927) (5,040) Exchange differences 503 (7) 35 (58) 473 Ending balance ￦ 523,263 ￦ 28,106 ￦ 129,154 ￦ 93,214 ￦ 773,737
2017
(in millions of Korean won) Industrial Goodwill property Software Others Total
Beginning balance ￦ 527,721 ￦ 17,299 ￦ 124,703 ￦ 79,369 ￦ 749,092 Acquisition - 10 10,037 36,828 46,875 Reclassification - 8,928 24,066 (31,596) 1,398 Disposal - (16) (268) (2,391) (2,675) Amortization - (2,433) (28,080) (599) (31,112) Impairment loss - - - (40) (40) Exchange differences (1,848) 21 (442) (745) (3,014) Ending balance ￦ 525,873 ￦ 23,809 ￦ 130,016 ￦ 80,826 ￦ 760,524
Amortization of intangible assets is charged to the following accounts:
2018 2017 (in millions of Korean won)
Selling and administrative expenses1 \ 32,592 \ 29,378 Cost of sales 1,929 1,734 \ 34,521 \ 31,112
1 Amortization expense is included in research and development expenses.
43 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
Goodwill is monitored by the management at the cash-generating units. The following is a summary of goodwill allocation for each operating segment:
2018 2017 (in millions of Korean won)
Cosmetics CGU \ 500,279 \ 500,279 Annick Goutal CGU 2,723 5,790 AMOREPACIFIC Hong Kong CGU 7,935 7,619 China CGU 3,957 3,979 Vietnam CGU 3,502 3,429 Singapore Etude House CGU 3,346 3,274 Thailand CGU 549 524 Indonesia CGU 298 306 Others 674 673 \ 523,263 \ 525,873
The recoverable amounts of all CGUs have been determined based on value-in-use calculations, and the key assumptions used for value-in-use calculations in 2018 are as follows:
AMOREPAC Annick IFIC Singapore (in percentage, %) Cosmetics Goutal Hong Kong China Vietnam Etude CGU CGU CGU CGU CGU House CGU
Gross margin rate 70.78 74.26 71.13 69.01 65.17 80.78 Growth rate1 7.47 15.93 10.22 15.67 27.52 5.40 Pre-tax discount rate 13.75 9.28 8.25 16.81 9.29 7.11
1 Weighted average revenue growth rate used to extrapolate cash flows for a five-year period is measured based on the past performance and expectation of market development.
As at December 31, 2018, as a result of impairment test for goodwill, impairment loss of \ 3,113 million was recognized because the carrying amount of Annick Goutal exceeded the recoverable amount.
44 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
12. Investment Property
Details of investment property as at December 31, 2018 and 2017, are as follows:
2018 2017 (in millions of Accumulated Book Accumulated Book Korean won) Cost depreciation amount Cost depreciation amount
Land \ 200,564 \ - \ 200,564 \ 206,150 \ - \ 206,150
Buildings 177,416 (10,842) 166,574 220,154 (8,486) 211,668
Structures - - - 115 (80) 35
Construction ------in progress \ 377,980 \ (10,842) \ 367,138 \ 426,419 \ (8,566) \ 417,853
Changes in investment property for the years ended December 31, 2018 and 2017, are as follows:
2018
(in millions of Korean won) Construction Land Buildings Structures in progress Total
Beginning balance ￦ 206,150 ￦ 211,668 ￦ 35 ￦ - ￦ 417,853 Acquisition - - - - - Reclassification 1 (1) (37,129) - - (37,130) Depreciation - (6,190) (2) - (6,192) Disposal (2,617) (689) (33) - (3,339) Others 2 (2,968) (1,086) - - (4,054) Ending balance ￦ 200,564 ￦ 166,574 ￦ - ￦ - ￦ 367,138
2017
(in millions of Korean won) Construction Land Buildings Structures in progress Total
Beginning balance ￦ 205,016 ￦ 10,330 ￦ 38 ￦ 72,743 ￦ 288,127 Acquisition - - - - - Reclassification 1 4,623 202,249 - (72,743) 134,129 Depreciation - (911) (3) - (914) Disposal (3,489) - - - (3,489) Others 2 - - - - - Ending balance ￦ 206,150 ￦ 211,668 ￦ 35 ￦ - ￦ 417,853
1 During 2017, land located in Yongsan-gu, Seoul, and construction in progress with respect to the construction of a new building, which will be leased in the future, were reclassified from property, plant and equipment, as the planned future rent ratio changed.
2 In relation to the construction of new building, some of the acquisition tax paid on land of \ 2,968
45 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
million and building of \ 1,086 million, were refunded for the year ended December 31, 2018.
Fair value of investment property as of December 31, 2018, is \ 422,185 million (2017: \ 431,368 million).
Details of investment property provided as collaterals as at December 31, 2018, are as follows:
2018
(in millions Carrying Secured Related of Korean won) amount amount Related line item amount Secured party
Land \ 72,337 \ 2,842 Deposits received \ 1,968 Woori Bank Buildings 28,786
Rental income related to investment property for the year ended December 31, 2018, is \ 12,305 million (2017: \ 404 million) and operating expenses during the period are \ 7,299 million (2017: \ 289 million).
46 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
13. Non-current Assets Held-for-sale
Details of non-current assets held-for-sale as at December 31, 2018 and 2017, are as follows:
2018 2017 (in millions of Accumulated Book Accumulated Book Korean won) Cost depreciation amount Cost depreciation amount
Land \ \ \ \ \ \ - - - 190,286 - 190,286
Buildings - - - 31,294 (21,728) 9,566 Structures - - - 5,255 (3,952) 1,303 \ \ \ \ \ \ - - - 226,835 (25,680) 201,155
During the year ended December 31, 2018, the disposal procedure of the land and buildings of the plant located in Yongin-si, Gyeonggi Province, which was recognized as non-current assets held for-sale was completed.
Changes in non-current assets held-for-sale for the years ended December 31, 2018 and 2017, are as follows:
2018 (in millions of Korean won) Land Buildings Structures Total
Beginning balance \ 190,286 \ 9,566 \ 1,303 \ 201,155 Acquisition - - - - Reclassification - - - - Depreciation - - - - Disposal 1 (190,286) (9,566) (1,303) (201,155) Ending balance \ - \ - \ - \ -
2017 (in millions of Korean won) Land Buildings Structures Total
Beginning balance \ 190,286 \ 9,566 \ 1,303 \ 201,155 Acquisition - - - - Reclassification - - - - Depreciation - - - - Disposal 1 - - - - Ending balance \ 190,286 \ 9,566 \ 1,303 \ 201,155
1 During the year ended December 31, 2017, the Group received \ 21,000 million of outstanding balance from a buyer and transferred its ownership, in relation to the contract for the land and buildings of the plant located in Yongin-si, Gyeonggi Province, which was recognized as non- current assets held-for-sale. In connection with the contract, the Group has entered into an additional contract, in which the right to resell the land and buildings to the Group is granted to the buyer. During the year ended December 31, 2018, the Group removed the land and buildings from its books because the buyer did not request the right to resell within the exercise period of the right.
47 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
There is no cumulative profit or loss directly recognized in other comprehensive income in relation to the above non-current assets held-for-sale for the periods ended December 31, 2018 and 2017.
14. Other Assets
Other assets as at December 31, 2018 and 2017, are as follows:
2018 2017 (in millions of Korean won) Current Non-current Current Non-current
Accrued revenues \ 3,705 \ - \ 3,310 \ - Advance payments 21,611 - 22,528 - Prepaid expenses 41,810 26,569 36,081 17,307 Prepaid value added tax 8,326 - 4,617 - Others 627 - 400 - \ 76,079 \ 26,569 \ 66,936 \ 17,307
48 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
15. Borrowings
Details of carrying amount of borrowings as at December 31, 2018 and 2017, are as follows:
Interest rate(%), (in millions of Korean won, December 31, in EUR, USD, JPY, HKD) Creditor 2018 2018 2017
Short-term borrowings Bank overdrafts of EUR 485,629 KEB Hana Bank Paris EURIBOR \ 621 \ 613 (2017: EUR 479,352) Branch 1M + 1.50% Bank overdrafts of EUR 5,742,476 KEB Hana Bank Paris EURIBOR 7,346 4,240 (2017: EUR 3,314,343) Branch 1M + 1.50% Bank overdrafts of JPY 1,000,000,000 Bank of Tokyo-Mitsubishi 10,131 - Tibor + 0.45% UFJ, Ltd. Azabu Branch Loans for working capital SBJ BANK Yokohama - 4,745 - (2017: JPY 500,000,000) Branch Loans for working capital of EUR 7,000,000 EURIBOR 8,954 8,955 Citibank N.A France (2017: EUR 7,000,000) 1M + 1.05% Loans for working capital of HKD 110,000,000 15,705 15,078 CITI N.A HONG KONG HIBOR + 0.85% (2017: HKD 110,000,000) Loans for working capital - 31,592 Citibank (China) Co. Ltd. - (2017: USD 30,000,000) Loans for working capital of EUR 12,500,000 0.95%+ MAX 15,990 15,991 KEB Hana Bank Paris (EURIBOR Branch (2017: EUR 12,500,000) 3M,0) Bank overdrafts of EUR 6,000,000 KEB Hana Bank Paris EURIBOR + 7,675 3,838 (2017: EUR 3,000,000) Branch 0.65% Facility loans Kookmin Bank 2.63 7,000 7,000 Loans for working capital Korea Development Bank 2.72 9,000 9,000 Facility loans Kookmin Bank 2.61 9,000 9,000 Loans for working capital Kookmin Bank 3.18 2,000 5,000 Loans for working capital Korea Development Bank 2.92 3,000 3,000 Facility loans Korea Development Bank 2.26 60,000 60,000 Loans for working capital Korea Development Bank 2.60 8,000 - Loans for working capital Woori Bank 2.95 5,000 - 169,422 178,052 Long-term borrowings Loans for working capital of HKD 313,000,000 CITI N.A HONG KONG 44,687 42,903 1.65 (2017: HKD 313,000,000) and others 44,687 42,903 \ 214,109 \ 220,955
A Redemption schedule of long-term borrowings as at December 31, 2018, is as follows:
(in millions of Korean won) Maturity date Amount
2020.7.20 \ 44,687
49 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
16. Provisions
Details and changes of provisions for liabilities and charges for the periods ended December 31, 2018 and 2017, are as follows:
2018 (in millions of Korean won) Current Non-current Accrual for Long-term Provision Refund Profit-sharing accumulated Provision for employee for liability1 and bonuses paid leave restoration Levies Others Total benefits restoration Total
Beginning \ 6,541 \ 2,879 \ 5,093 \ 3,264 \ - \ 1,664 \ 19,441 \ 4,105 \ 901 \ 5,006 balance Increase - 9,877 1,740 - 213 194 12,024 3,517 6,842 10,359
Decrease - (9,091) - (3,264) (213) (320) (12,888) - - - Reclassification (6,541) - - - - - (6,541) - - - Exchange - 107 (2) - - (10) 95 - 17 17 differences Ending balance \ - \ 3,772 \ 6,831 \ - \ - \ 1,528 \ 12,131 \ 7,622 \ 7,760 \ 15,382
1 As the Group has applied Korean IFRS 1115 Revenue from Contracts with Customers from January 1, 2018, the Group reclassified from provision for sales return of \ 6,541 million to other liabilities (Notes 18 and 37).
(in millions of 2017 Korean won) Current Non-current Long-term Provision Provision for Compensation Profit-sharing Accrual for Provision for employee for accumulated sales return for sale1 and bonuses paid leave restoration Others Total benefits restoration Total
Beginning \ 6,698 \ 4,000 \ 4,695 \ 5,635 \ - \ 1,548 \ 22,576 \ 3,549 \ 738 \ 4,287 balance
Increase 653 - 1,484 2,053 5,797 746 10,733 557 192 749
Decrease (658) (4,000) (3,091) (2,604) (2,533) (651) (13,537) - - - Exchange (152) - (209) 9 - 21 (331) - (30) (30) differences
Ending \ 6,541 \ - \ 2,879 \ 5,093 \ 3,264 \ 1,664 \ 19,441 \ 4,106 \ 900 \ 5,006 balance
1 The Group decided to recall certain products that had been sold during 2017 and reimburse customers. In this regard, the Group recognized expected expenses as provisions.
50 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
17. Contract liabilities
As explained in Note 2, the Group has applied Korean IFRS 1115 Revenue from Contracts with Customers on January 1, 2018. See Note 37 for further details on the impact of the application of the standard.
Changes in Contract liabilities for the year ended December 31, 2018, are as follows:
(in millions of Korean won) 2018 Customer loyalty Advances from
program customers Total
Beginning balance \ 65,726 \ 16,577 \ 82,303 Increase (decrease) (18,023) 2,558 (15,465) Ending balance \ 47,703 \ 19,135 \ 66,838
18. Other Liabilities
Other liabilities as at December 31, 2018 and 2017, are as follows:
2018 2017 (in millions of Korean won) Current Non-current Current Non-current
Withholdings \ 13,752 \ - \ 13,454 \ - Value added tax withheld 42,451 - 33,468 - Advances from customers 3,176 3,002 225,454 3,002 Deposits received - 10,948 - 7,628 Accrued expenses 134,501 1,745 209,830 1,496 Finance lease liabilities - - 1,561 - Dividends payable 448 - 412 - Refund liability1 8,157 - - - Others 5,460 253 4,266 1,199 \ \ \ \ 207,945 15,948 488,445 13,325
1 The refund liability was reclassified from other liabilities.
51 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
19. Post-employment Benefits
19.1 Defined Benefit Plan
Details of net defined benefit liabilities recognized in the statements of financial position as at December 31, 2018 and 2017, are as follows:
2018 2017 (in millions of Korean won)
Present value of funded defined benefit obligations \ 360,598 \ 351,505 Present value of unfunded defined benefit obligations 3,211 3,116 Total 363,809 354,621 Fair value of plan assets1 (429,493) (380,751) Net defined benefit liabilities \ (65,684) \ (26,130)
1 The contributions to the National Pension Fund of \ 176 million (2017: \ 201 million) are included in the fair value of plan assets as at December 31, 2018.
Movements in the defined benefit obligations for the years ended December 31, 2018 and 2017, are as follows:
2018 2017 (in millions of Korean won)
Beginning balance \ 354,621 \ 339,082 Past service cost 1 23,963 - Current service cost 40,552 46,317 Interest expense 12,834 11,763 Remeasurements: Actuarial gain from change in demographic assumptions (3,161) - Actuarial gain from change in financial assumptions (59,849) (29,500) Actuarial loss from experience adjustments 20,319 2,285 Exchange differences 2 17 Payments from plans: Benefit payments (25,472) (15,343) Ending balance \ 363,809 \ 354,621
1 During the year ended December 31, 2018, the Group changed the plan and recognized the past service cost of \ 24,342 million and gain (loss) on the settlement of \ (379) million as an expense.
52 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
Movements in the fair value of plan assets for the years ended December 31, 2018 and 2017, are as follows:
2018 2017 (in millions of Korean won)
Beginning balance \ 380,751 \ 333,736 Interest income 14,789 11,965 Remeasurements: Return on plan assets (8,507) (6,616) Contributions: Employers 67,920 57,241 Payments from plans: Benefit payments (25,460) (15,317) Others - (258) Ending balance \ 429,493 \ 380,751
The significant actuarial assumptions as at December 31, 2018 and 2017, are as follows:
2018 2017
Discount rate 2.60~3.50% 3.60~4.00% Salary growth rate 3.00% 5.61~6.19%
The sensitivity of the defined benefit obligations to changes in the principal assumptions is
Impact on defined benefit obligation Changes in Increase Decrease in assumption in assumption assumption
Discount rate 1.00%P 7.25% decrease 8.33% increase Salary growth rate 1.00%P 8.26% increase 7.33% decrease
The defined benefit liabilities are exposed to a significant risk on changes in the corporate bond yields rate.
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 methods and types of assumptions used in preparing the sensitivity analysis did not change compared to the prior period.
53 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
Plan assets as at December 31, 2018 and 2017, consist of as:
(in millions of Korean won) 2018 2017 Composition Composition Unquoted price (%) Unquoted price (%)
Deposits \ 429,317 99.9 \ 380,550 99.9 National Pension Fund 176 0.1 201 0.1 \ 429,493 100.0 \ 380,751 100.0
The weighted average maturity of the defined benefit obligation is 7.85 years and expected maturity analysis of undiscounted pension benefits for the next 10 years as at December 31, 2018, is as follows:
Less than 1 Between 1 Between 2 Between 5 (in millions of Korean won) year and 2 years and 5 years and 10 years Total
Pension benefits \ 30,729 \ 33,177 \ 105,822 \ 212,371 \ 382,099
The Group reviews the funding level on an annual basis and has a policy to contribute in the fund. Expected contributions to post-employment benefit plans for the year ending December 31, 2019 are \ 44,707 million (2018: \ 55,924 million).
19. 2 Defined Contribution Plan
The expense recognized in the current period in relation to defined contribution plan was \ 474 million (2017: \ 563 million).
54 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
20. Other Components of Equity
Other components of equity as at December 31, 2018 and 2017, consist of:
2018 2017 (in millions of Korean won)
Treasury shares1 \ (139,664) \ (139,664) Capital adjustments (6,333) (6,315) \ (145,997) \ (145,979)
1 Represents 5,549,735 ordinary shares and 62,452 preferred shares of treasury shares. The Group intends to dispose of the remaining treasury shares depending on the market conditions within the range of not incurring or minimizing loss on disposal of treasury shares as possible.
21. Accumulated Other Comprehensive Income
Accumulated other comprehensive income as at December 31, 2018 and 2017, consists of the following:
2018 2017 (in millions of Korean won)
Loss on valuation of financial assets at fair value through other comprehensive income \ (6,368) \ - Changes in the value of available-for-sale financial assets - (4,633) Exchange differences on transaction of foreign operations (13,913) (14,026) Share of other comprehensive income of associates (749) (733) \ (21,030) \ (19,392)
Changes in accumulated other comprehensive income for the periods ended December 31, 2018 and 2017, are as follows:
2018 Reclassification Transfer to (in millions of Korean won) Beginning Increase to retained non-controlling Ending balance (decrease) earnings interest balance
Loss on valuation of financial assets at fair value through other ￦ (4,633) ￦ 1,225 ￦ (1,886) ￦ (1,074) ￦ (6,368) comprehensive income Exchange differences on transaction (14,026) 469 - (356) (13,913) of foreign operations Share of other comprehensive (733) (55) - 39 (749) income of associates ￦ (19,392) ￦ 1,639 ￦ (1,886) ￦ (1,391) ￦ (21,030)
55 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
2017 Transfer to (in millions of Korean won) Beginning Increase Reclassification non-controlling Ending balance (decrease) to profit or loss interest balance
Changes in the value of available-for- ￦ (4,418) ￦ (217) ￦ - ￦ 2 ￦ (4,633) sale financial assets Exchange differences on transaction (6,704) (24,266) - 16,944 (14,026) of foreign operations Share of other comprehensive (755) 82 - (60) (733) income of associates ￦ (11,877) ￦ (24,401) ￦ - ￦ 16,886 ￦ (19,392)
22. Retained Earnings
Retained earnings as at December 31, 2018 and 2017, consist of:
2018 2017 (in millions of Korean won)
Legal reserves1 \ 28,615 \ 28,615 Discretionary reserves 739,337 739,337 Retained earnings before appropriation 1,777,847 1,654,632 \ 2,545,799 \ 2,422,584
1 The Commercial Code of the Republic of Korea requires the Patent Company to appropriate for each financial period, as a legal reserve, an amount equal to a minimum of 10% of cash dividends paid until such reserve equals 50% of its issued share capital. The reserve is not available for cash dividends payment, but may be transferred to share capital or used to reduce accumulated deficit. When the accumulated legal reserves (the sum of capital reserves and earned profit reserves) are greater than 1.5 times the paid-in capital amount, the excess legal reserves may be distributed (in accordance with a resolution of the shareholders’ meeting).
56 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
23. Dividends
The dividends paid in 2018 and 2017, are as follows:
2018 2017 Ordinary Preferred Ordinary Preferred shares shares shares shares
Dividends paid \ 27,687 million \ 2,329 million \ 35,378 million \ 2,967 million
Dividends per share (in Korea won) 360 365 460 465
Dividends in respect of the year ended December 31, 2018, of \ 310 per ordinary share and \ 315 per preferred share, amounting to a total dividend of \ 23,842 million on ordinary shares and \ 2,010 million on preferred shares are to be proposed at the annual general shareholders’ meeting on March 15, 2019. These financial statements do not reflect these dividend payables.
24. Tax Expense and Deferred Tax
Income tax expense for the years ended December 31, 2018 and 2017, consists of:
2018 2017 (in millions of Korean won)
Current tax \ 176,867 \ 225,162 Deferred tax (18,302) (16,387) Income tax expense \ 158,565 \ 208,775
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:
2018 2017 (in millions of Korean won)
Profit before income tax expense \ 534,836 \ 698,322 Tax at domestic tax rates applicable to profits in the respective countries \ 139,670 \ 172,791 Tax effects of: Income not subject to tax (1,208) (33) Expenses not deductible for tax purposes 9,946 7,353 Tax losses for which no deferred income tax asset was recognized 15,421 7,737 Utilization of previously unrecognized tax losses (2,030) (5,075) Tax credits (2,138) (3,977) Impact on deferred income tax due to changes in tax rate - 5,628
57 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
Adjustment in respect of prior years (1,188) 17,438 Effects of the tax refund 1,184 1,000 Others (1,092) 5,913 Income tax expense \ 158,565 \ 208,775
The weighted average applicable tax rate of the Group was 29.65% (2017: 29.90%).
The tax effect relating to components of other comprehensive income (expenses) for the periods ended December 31, 2018 and 2017, is as follows:
(in millions of Korean won) 2018 2017 Before tax Tax effect After tax Before tax Tax effect After tax
Loss on valuation of \ (2,163) \ 1,240 \ (923) \ (229) \ 11 \ (218) available-for-sale assets Remeasurements 34,184 (8,373) 25,811 20,599 (4,463) 16,136 Share of other comprehensive income of (55) - (55) 82 - 82 associates Exchange differences on transaction of foreign 469 - 469 (24,267) - (24,267) operations \ 32,435 \ (7,133) \ 25,302 \ (3,815) \ (4,452) \ (8,267)
The analysis of deferred tax assets and liabilities as at December 31, 2018 and 2017, is as follows:
2018 2017 (in millions of Korean won)
Deferred tax assets Deferred tax asset to be recovered after more than 12 months \ 129,838 \ 101,632 Deferred tax asset to be recovered within 12 months 74,409 68,015 Deferred tax liabilities Deferred tax liability to be recovered after more than 12 months (298,025) (272,417) Deferred tax liability to be recovered within 12 months (4,404) (6,250) Deferred tax liabilities, net \ (98,182) \ (109,020)
58 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
The movement in deferred tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows:
(in millions of Korean won) 2018 Other Statement of comprehensive Exchange Ending Beginning balance profit or loss income differences balance
Deferred tax assets Trade receivables \ 13,191 \ 4,405 \ - \ - \ 17,596 Provision for impairment 1,203 281 - (1) 1,483 Other receivables 895 (366) - - 529 Non-current assets held-for-sale 1,276 (1,276) - - - Inventories 4,930 (3,758) - 9 1,181 Property, plant and equipment 15,531 27,320 - (27) 42,824 Intangible assets 371 84 - - 455 Government grants 136 78 - - 214 Financial assets at fair value through other comprehensive income 1,734 (321) 1,180 - 2,593 Financial assets at fair value through profit or loss - 495 - - 495 Investments in subsidiaries 2,102 - - - 2,102 Contract liabilities 16,570 (5,160) - - 11,410 Refund liability 1,316 561 - (1) 1,876 Accrual for accumulated paid leave 1,148 346 - - 1,494 Other provisions 744 735 - - 1,479 Post-employment benefit obligations 75,411 10,925 (10,448) - 75,888 Long-term employee benefits 1,068 914 - - 1,982 Accrued expenses 23,972 9,896 - (341) 33,527 Other current liabilities 3,680 285 - - 3,965 Tax loss carryforwards 3,842 (1,094) - 12 2,760 Others 527 (133) - - 394 169,647 44,217 (9,268) (349) 204,247 Deferred tax liabilities Accrued revenue (690) (228) - - (918) Other receivables (942) (1,023) - - (1,965) Inventories (2,600) (826) - - (3,426) Property, plant and equipment (105,176) (20,189) - - (125,365) Intangible assets (4,794) 28 - 18 (4,748) Financial assets at fair value through other comprehensive income (173) 23 60 - (90) Investments in subsidiaries (33,068) 3,497 - - (29,571) Plan assets (94,554) (13,387) 2,075 - (105,866) Reserve for technology development (3,548) 3,548 - - - Advanced depreciation provision (8,249) - - - (8,249) Treasury shares (22,927) - - - (22,927) Other current liabilities (1,946) 2,642 - - 696 (278,667) (25,915) 2,135 18 (302,429) \ (109,020) \ 18,302 \ (7,133) \ (331) \ (98,182)
59 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
(in millions of Korean won) 2017 Other Beginning Statement of comprehensive Changes in Exchange Ending balance profit or loss income tax rates differences balance
Deferred tax assets Trade receivables \ 16,063 \ (3,649) \ - \ 777 \ - \ 13,191 Provision for impairment 803 457 - - (57) 1,203 Other receivables 3,597 (2,702) - - - 895 Non-current assets held-for-sale - 1,188 - 88 - 1,276 Inventories 6,503 (1,572) - - (1) 4,930 Property, plant and equipment 13,920 1,628 - 329 (346) 15,531 Intangible assets 91 280 - - - 371 Government grants 456 (328) - 8 - 136 Available-for-sale financial assets 1,687 - 47 - - 1,734 Investments in subsidiaries 2,089 13 - - - 2,102 Deferred revenue 17,189 (1,364) - 835 (90) 16,570 Provision for sales return 2,213 (942) - 48 (3) 1,316 Accrual for accumulated paid leave 1,098 (17) - 67 - 1,148 Other provisions - 697 - 47 - 744 Post-employment benefit obligations 65,407 11,500 (5,957) 4,455 6 75,411 Long-term employee benefits 859 135 - 74 - 1,068 Accrued expenses 26,016 1,892 - - (3,936) 23,972 Other current liabilities 2,952 476 - 252 - 3,680 Tax loss carryforwards 1,746 2,147 - - (51) 3,842 Others 490 1 - 36 - 527 163,179 9,840 (5,910) 7,016 (4,478) 169,647 Deferred tax liabilities Accrued revenue (1,311) 643 - (22) - (690) Other receivables (955) 19 - (6) - (942) Inventories (3,000) 542 - (142) - (2,600) Property, plant and equipment (113,655) 14,936 - (6,457) - (105,176) Intangible assets (4,844) (43) - (53) 146 (4,794) Available-for-sale financial assets (180) - (36) 43 - (173) Investments in subsidiaries (26,919) (6,079) - (70) - (33,068) Plan assets (76,851) (13,612) 1,494 (5,585) - (94,554) Reserve for technology development (12,789) 9,481 - (240) - (3,548) Advanced depreciation provision (8,259) 10 - - - (8,249) Treasury shares (22,927) - - - - (22,927) Other current liabilities (8,112) 6,278 - (112) - (1,946) (279,802) 12,175 1,458 (12,644) 146 (278,667) \ (116,623) \ 22,015 \ (4,452) \ (5,628) \ (4,332) \ (109,020)
60 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
Deferred income tax assets are recognized for tax loss carryforwards to the extent that the realization of the related tax benefit through future taxable profits is probable. The Group did not recognize deferred tax assets of \ 239,086 million in respect of losses amounting to \ 74,947 million that can be carried forward against future taxable income.
The maturity of unused tax losses and tax credits are as follows:
Tax losses Tax credits (in millions of Korean won)
2018 ~ 2020 \ 2,505 \ 892 2021 ~ 2035 118,922 - No limit 117,659 - \ 239,086 \ 892
The temporary differences from the subsidiaries whose disposal is not in the foreseeable future were not recognized because of the uncertainty in realizability of the deferred tax assets (liabilities), and the amount as at December 31, 2018 and 2017, are as follows:
2018 2017 (in millions of Korean won)
Taxable temporary differences \ (304,056) \ (293,039) Deductible temporary differences 35,756 21,193 \ (268,300) \ (271,846)
61 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
25. Revenue
Revenue for the years ended December 31, 2018 and 2017, consist of the following:
2018 2017 (in millions of Korean won)
Sales of goods \ 6,032,508 \ 6,008,310 Rendering of services 29,453 15,986 Others Rental income 12,306 404 Royalty income 216 408 Others 3,696 3,956 16,218 4,768 \ 6,078,179 \ 6,029,064
26. Breakdown of Expenses by Nature
Breakdown of expenses by nature for the years ended December 31, 2018 and 2017, are as follows:
2018 2017 (in millions of Korean won)
Changes in inventories \ (40,705) \ (20,646) Purchase of raw materials and merchandise 1,294,791 1,258,485 Employee benefit expense 872,892 801,424 Depreciation and amortization 310,564 268,057 Advertising expense 692,427 633,725 Service fees 687,307 678,335 Distribution commission 991,097 948,224 Other expenses 720,333 729,968 Total1 \ 5,528,706 \ 5,297,572
1 Sum of cost of sales, and selling and administrative expenses in the statements of comprehensive income.
62 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
27. Selling and Administrative Expenses
Selling and administrative expenses for the years ended December 31, 2018 and 2017, are as follows:
2018 2017 (in millions of Korean won)
Salaries and post-employment benefits \ 574,437 \ 539,982 Employee benefits 109,293 96,849 Advertising expense 692,427 633,725 Depreciation 207,906 169,655 Service fees 584,128 538,123 Distribution commission 991,097 948,224 Freight expense 132,817 127,732 Taxes and dues 43,669 43,938 Research and development 97,514 93,437 Other 476,723 491,765 \ 3,910,011 \ 3,683,430
28. Finance Income and Costs
Finance income and costs for the years ended December 31, 2018 and 2017, are as follows:
2018 2017 (in millions of Korean won)
Finance income Interest income \ 27,915 \ 25,656 Gain on disposal of financial assets at fair value
through profit or loss 101 - Gain on valuation of financial assets at fair value
through profit or loss 5,063 - \ 33,079 \ 25,656 Finance costs Interest expense \ (4,558) \ (4,709) Loss on valuation of financial assets at fair value through profit or loss (2,774) - \ (7,332) \ (4,709)
63 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
29. Other Non-operating Gains / (Losses)
Other non-operating gains / (losses) for the years ended December 31, 2018 and 2017, consist of:
2018 2017 (in millions of Korean won)
Other non-operating income Gain on foreign currency transactions \ 22,400 \ 15,202 Gain on foreign currency translation 3,836 5,831 Gain on disposal of property, plant and equipment 1,401 1,019 Gain on disposal of intangible assets 4,225 - Gain on disposal of investment property 58 - Gain on disposal of non-current assets held-for-sale 4,912 - Dividend income 292 409 Others 11,224 22,026 48,348 44,487 Other non-operating expenses Loss on foreign currency transactions (15,818) (34,480) Loss on foreign currency translation (4,069) (15,716) Loss on disposal of property, plant and equipment (10,069) (9,999) Loss on disposal of intangible assets (1,400) (301) Impairment loss on property, plant and equipment (211) - Impairment loss on intangible assets (5,040) (40) Loss on disposal of investment property (877) (89) Donations (13,698) (13,424) Others (38,485) (25,664) (89,667) (99,713) \ (41,319) \ (55,226)
64 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
30. Earnings per Share
Basic earnings per share is calculated by dividing the profit attributable to owners of the Group by the weighted average number of ordinary shares outstanding during the financial year excluding treasury shares (Note 20).
Basic earnings per ordinary share for the years ended December 31, 2018 and 2017, is as follows:
2018 2017 (in millions of Korean won)
Profit attributable to owners of the Parent Company \ 142,286 \ 202,614 Profit attributable to ordinary shares 131,355 187,061 Weighted average number of ordinary shares outstanding 76,908,445 76,908,445 (unit: shares) Basic earnings per ordinary share (in Korean won) 1,708 2,432
Basic earnings per preferred share1 for the years ended December 31, 2018 and 2017, is as follows:
2018 2017 (in millions of Korean won)
Profit attributable to owners of the Parent Company \ 142,286 \ 202,614 Profit attributable to preferred shares 10,931 15,553 Weighted average number of preferred shares outstanding 6,381,315 6,381,315 (unit: shares) Basic earnings per preferred share (in Korean won) 1,713 2,437
1 Although there is no preferred right on the preferred share, it is determined as an ordinary share with a different dividend rate (annually 1% additional dividends) from other types of ordinary share and therefore, it is included in calculation of basic earnings per share.
Diluted earnings per share
The Group did not issue any potential ordinary share and therefore, diluted earnings per share is identical to the basic earnings per share.
65 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
31. Cash Generated from Operations
Details of cash generated from operations for the years ended December 31, 2018 and 2017, are as follows:
2018 2017 (in millions of Korean won)
Profit for the period \ 376,271 \ 489,548 Adjustments for: 582,970 544,003 Finance income, net (23,357) (20,947) Loss on foreign currency translation, net 233 9,885 Depreciation and amortization 310,979 268,297 Loss on disposal of property, plant and equipment and intangible assets 5,842 9,281 Impairment loss on property, plant and equipment and intangible assets 5,251 40 Loss on disposal of investment property 819 89 Gain on disposal of available-for-sale financial assets (4,912) - Gain on disposal of non-current assets held-for-sale - (804) Gain on disposal of financial assets at fair value through profit or loss (101) - Gain on valuation of financial assets at fair value through profit or loss (2,289) - Income tax expense 158,565 208,775 Share of profit of associates (935) (1,110) Post-employment benefits 62,562 46,115 Loss (gain) on foreign currency transaction (6,582) 3,374 Loss on valuation and disposal of inventories 59,393 43,077 Others 17,502 (22,069) Changes in assets and liabilities from operating activities (61,160) (145,017) Decrease(increase) in trade receivables 53,837 (29,014) Decrease(increase) in other receivables (760) 4,369 Decrease(increase) in inventories (95,485) 17,364 Decrease(increase) in other assets (4,109) 14,116 Decrease in trade payables (15,063) (32,770) Increase(decrease) in other payables 50,898 (55,929) Increase(decrease) in provisions 3,960 (7,661) Increase in other liabilities 28,959 2,256 Decrease in contract liabilities (15,465) - Benefits payment (25,472) (15,343) Increase in plan assets, net (42,460) (42,405) Cash generated from operations \ 898,081 \ 888,534
66 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
Significant transactions not affecting cash flows for the years ended December 31, 2018 and 2017, are as follows:
(in millions of Korean won) 2018 2017
Reclassification of construction in-progress to property, plant and equipment \ 206,249 \ 977,880 Reclassification of construction in-progress to intangible assets 26,712 31,596 Reclassification of property, plant and equipment to investment property 6,410 131,830 Reclassification of investment property to property, plant and equipment 39,445 - Advances from disposal of non-current assets held-for- sale (206,067) - Changes in non-trade payables related to the acquisition of property, plant and equipment and intangible assets (93,153) (50,457) Changes in non-trade receivables related to the acquisition of property, plant and equipment and intangible assets 19,007 37
Changes in liabilities arising from financial activities for the years ended December 31, 2018 and 2017, are as follows:
(in millions of Korean won) Current portion Short-term of long-term Long-term borrowings borrowings borrowings Total
At January 1, 2017 \ 157,376 \ 48,309 \ - \ 205,685 Cash flows 28,405 (44,992) 45,426 28,839 Exchange differences (7,729) (3,317) (2,523) (13,569) At December 31, 2017 \ 178,052 \ - \ 42,903 \ 220,955 Cash flows (10,165) - - (10,165) Exchange differences 1,535 - 1,784 3,319 At December 31, 2018 \ 169,422 \ - \ 44,687 \ 214,109
67 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
32. Commitments and Contingencies
Important contracts entered into with financial institutions at the end of reporting period are as follows:
(in millions of Korean 2018 2017 won and thousands Financial Commitment Outstanding Outstanding of USD, EUR, HKD and institution Limit Limit balance balance JPY)
Electronic AMOREPACIFIC \ 15,000 \ 160 \ 21,000 \ 1,135 Woori Bank loan agreement CORPORTION Letter of credit USD 4,000 USD 131 USD 4,000 - Electronic Innisfree Corporation Woori Bank 1,000 25 1,800 24 loan agreement Electronic Woori Bank - - 1,500 2 loan agreement Etude Corporation Korea Operating fund Development 10,000 8,000 - - loan agreement Bank AMOS Professional Electronic Woori Bank 1,000 - 1,000 85 Corporation loan agreement Corporate working Espoir Corporation Woori Bank capital loan 5,000 5,000 - - agreement Electronic 7,200 433 12,000 1,159 loan agreement AESTURA Corporation Woori Bank Operating fund 4,000 - 5,000 - loan agreement Electronic - - 600 - Woori Bank loan agreement Overdraft 3,000 - 3,000 - Operating fund 2,000 2,000 5,000 5,000 loan agreement PACIFICGLAS Inc. Kookmin Bank Facility 9,000 9,000 9,000 9,000 loan agreement Korea Operating fund Development 3,000 3,000 3,000 3,000 loan agreement Bank Electronic 600 - 1,000 - loan agreement Woori Bank Overdraft 1,000 - 1,000 - Letter of credit USD 2,000 - USD 2,000 - PACIFIC PACKAGE Korea Corporation Operating fund Development 9,000 9,000 9,000 9,000 loan agreement Bank Facility Kookmin Bank 7,000 7,000 7,000 7,000 loan agreement Korea Facility Development 60,000 60,000 60,000 60,000 loan agreement Bank COSVISION CO., LTD. Corporate working Woori Bank capital loan 10,000 - - - agreement
68 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
Amorepacific Global CITI N.A Long-term HKD 313,000 HKD 313,000 HKD 313,000 HKD 313,000 Operations Limited. HONG KONG borrowings CITI N.A Short-term HKD 220,000 HKD 110,000 HKD 220,000 HKD 110,000 HONG KONG borrowings CITY N.A Overdraft USD 10,000 - USD 10,000 - HONG KONG AMORE Cosmetics Citibank (China) Short-term borrowing - - USD 30,000 USD 30,000 (shanghai) Co., Ltd. Co., Ltd Hang Seng Overdraft and others HKD 15,000 - HKD 15,000 - AMOREPACIFIC Bank Hong Kong Co., Limited Bank of East Overdraft HKD 10,000 - HKD 10,000 - Asia Bank of Tokyo- Mitsubishi UFJ, Overdraft JPY 1,000,000 JPY 1,000,000 - - Ltd. Azabu AMOREPACIFIC Branch Japan CO., LTD SBJ BANK Short-term Yokohama - - JPY 1,000,000 JPY 500,000 borrowings Branch Sogebali S.A. Lease finance - - EUR 4,184 EUR 775 Citibank N.A Short-term AMOREPACIFIC EUR 7,000 EUR 7,000 EUR 7,000 EUR 7,000 France borrowings EUROPE S.A.S KEB Hana Bank Overdraft EUR 500 EUR 485 EUR 500 EUR 479 Paris Branch PACIFIC CREATION KEB Hana Bank Short-term EUR 12,500 EUR 12,500 EUR 12,500 EUR 12,500 S.A.S1 Paris Branch borrowings KEB Hana Bank Overdraft EUR 6,000 EUR 5,742 EUR 6,000 EUR 3,314 Paris Branch Annick Goutal S.A.S Citibank N.A Short-term EUR 6,000 EUR 6,000 EUR 3,000 EUR 3,000 France borrowings
1 Subsidiary of AMOREPACIFIC EUROPE S.A.S.
69 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
Details of payment guarantees provided to the Company at the end of reporting period are as follows:
Guaranteed by Remark 2018 2017 (in millions of Korean won)
Seoul Guarantee Performance AMOREPACIFIC Corporation \ 131,889 \ 9,592 Insurance guarantees Seoul Guarantee Performance Innisfree Corporation 139 226 Insurance guarantees Seoul Guarantee Performance Etude Corporation 46 53 Insurance guarantees Seoul Guarantee Performance Espoir Corporation 17 12 Insurance guarantees Seoul Guarantee Performance AESTURA Corporation 10 5 Insurance guarantees Seoul Guarantee Performance PACIFICGLAS Inc. 10 10 Insurance guarantees Seoul Guarantee Performance Osulloc Fam Co., Ltd. 135 151 Insurance guarantees Seoul Guarantee Performance COSVISION CO., LTD. 165 416 Insurance guarantees
Restricted financial instruments in use at the end of the reporting period are as follows:
(in millions of Korean won, Remark 2018 2017 thousands of RMB and HKD) Collateral provided for borrowings of Current financial deposits \ 131,463 \ 125,900 subsidiaries Agreement of shared growth and Current financial deposits 15,100 14,000 cooperation Non-current financial deposits Deposit for checking account 34 35 Non-current financial deposits Permission of door-to-door sales in China RMB 20,000 RMB 20,000 Available-for-sale financial Overdraft agreement and - HKD 14,615 assets bank payment guarantee of leased stores Overdraft agreement and Non-current financial deposits HKD 5,000 - bank payment guarantee of leased stores Overdraft agreement and Non-current financial deposits USD 194 - bank payment guarantee of leased stores
PACIFIC PACKAGE Corporation and Taeshin Inpack Corporation, the surviving company, have joint guarantee obligation to outstanding payables (including contingent liabilities incurred before the spin-off date).
Innisfree Corporation, a subsidiary, planned to donate \ 10,000 million to Innisfreemoeum foundation over 5 years by the approval of Board of Directors. The amount of accumulated contribution amounting to \ 8,000 million as at December 31, 2018.
70 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
As at December 31, 2018, the Group is a defendant in 3 cases aggregating \ 150 million for compensation for damages, injunction against patent infringement and others, and the Group is a plaintiff in 19 cases aggregating \ 422 million for annulment of assessment, injunction against patent infringement and others.
The outcome of the above cases cannot be reasonably estimated, and any outflows of resources and the timing are also uncertain. Therefore, the Group does not include the potential effects for the outcome of the cases in the consolidated financial statements as at December 31, 2018. The Group expects that these cases would not have any material impact on its financial statements.
As at December 31, 2018, the Group has entered into a long-term lease agreements with external customers in relation to a new building located in Yongsan until March, 2028.
As at December 31, 2017, the Group granted a right to resell the assets to the buyer in relation to the contract for disposal of the land and buildings located in Yongin-si, Gyeonggi Province, which was recognized as non-current assets held-for-sale. The exercise price was \ 180,067 million and exercise period was from August 23, 2018 to September 26, 2018, however, the buyer did not exercise the right to resell within the period. The Group has completed disposal of the land and building during the current year.
71 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
33. Related Party Transactions
Details of the parents and subsidiaries as at December 31, 2018 and 2017, are as follows:
Classification Name
Ultimate parent Kyung- Bae Suh
Ultimate parent company in the preparation of AMOREPACIFIC Group, Inc. consolidated financial statements for disclosure
Associates BBDO Korea Inc. Taiwan AMORE Co.,Ltd.
Other related parties Taeshin Inpack Corporation
Sales and purchases with related parties for the years ended December 31, 2018 and 2017, are as follows:
2018 Dividend (in millions of Korean won) Sales Purchases income Other cost
Associates
BBDO Korea Inc. \ 749 \ - \ 1,080 \ 30,491 Taiwan AMORE Co.,Ltd. - - 107 - Other related party Taeshin Inpack Corporation - 17,389 - - \ 749 \ 17,389 \ 1,187 \ 30,491
2017 Dividend (in millions of Korean won) Sales Purchases income Other cost
Associates
BBDO Korea Inc. \ - \ - \ 2,430 \ 22,371 Taiwan AMORE Co.,Ltd. - - 108 - Other related party Taeshin Inpack Corporation - 16,645 - - \ - \ 16,645 \ 2,538 \ 22,371
72 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
Outstanding balances arising from sales/purchases of goods and services as at December 31, 2018 and 2017, are as follows:
2018 Receivables Payables (in millions of Korean won) Trade Other Trade Other receivables receivables payables payables
Associates
BBDO Korea Inc. \ - \ 48 \ - \ 9,011 Taiwan AMORE Co.,Ltd. - - - - Other related party . Taeshin Inpack Corporation - - 1,363 - \ - \ 48 \ 1,363 \ 9,011
2017 Receivables Payables (in millions of Korean won) Trade Other Trade Other receivables receivables payables payables
Associates
BBDO Korea Inc. \ - \ - \ - \ 8,309 Taiwan AMORE Co.,Ltd. - - - - Other related party Taeshin Inpack Corporation - - 1,537 - \ - \ - \ 1,537 \ 8,309
The trade receivables from related parties are due theree months after the date of sale. The receivables from related parties are unsecured in nature and bear no interest.
There are no fund transactions with related parties for the year ended December 31, 2018.
As at December 31, 2018, there are no collaterals and payment guarantees provided to or provided by related parties other than the Group.
The compensation paid or payable to key management for employee services for the periods ended December 31, 2018 and 2017, consists of:
2018 2017 (in millions of Korean won)
Short-term employee benefits \ 16,011 \ 23,355 Post-employment benefits 2,506 1,986 \ 18,517 \ 25,341
73 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
34. Information About Non-controlling Interests
34.1 Changes in Accumulated Non-controlling Interests
The profit or loss allocated to non-controlling interests and accumulated non-controlling interests of subsidiaries that are material to the Group for the years ended December 31, 2018 and 2017, is as follows:
2018 Accumulated Profit or loss Dividends Non- non-controlling allocated to paid to Changes in Accumulated (in millions of Korean won) controlling interests at the non- non- non- non-controlling interest beginning of controlling controlling controlling interests at the rate (%) the year interests interests interests Others end of the year
AMOREPACIFIC Corporation 64.60 \ 2,841,159 \ 228,587 \ (59,911) \ - \ 16,689 \ 3,026,524 Innisfree Corporation 18.18 75,022 11,459 (2,311) - 210 84,380 Etude Corporation 19.52 15,293 (5,708) - - 239 9,824 Others 3,225 (353) - - 37 2,909 \ 2,934,699 \ 233,985 \ (62,222) \ - \ 17,175 \ 3,123,637
2017 Accumulated Profit or loss Dividends Non- non-controlling allocated to paid to Changes in Accumulated (in millions of Korean won) controlling interests at the non- non- non- non-controlling interest beginning of controlling controlling controlling interests at the rate (%) the year interests interests interests Others end of the year
AMOREPACIFIC Corporation 64.60 \ 2,651,510 \ 270,582 \ (73,942) \ 1,299 \ (8,290) \ 2,841,159 Innisfree Corporation 18.18 63,396 15,999 (4,445) - 72 75,022 Etude Corporation 19.52 15,212 658 (737) - 160 15,293 Others 3,518 (305) - - 12 3,225 \ 2,733,636 \ 286,934 \ (79,124) \ 1,299 \ (8,046) \ 2,934,699
74 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
34.2 Summarized Financial Information on Subsidiaries
Set out below is summarized financial information for each subsidiary that has non-controlling interests that are material to the Group. The amounts disclosed for each subsidiary are before inter-company eliminations.
Summarized consolidated statements of financial position as at December 31, 2018 and 2017, are as follows:
2018 AMOREPACIFIC Innisfree (in millions of Korean won) Corporation Corporation Etude Corporation
Current assets \ 1,567,236 \ 462,421 \ 44,626 Non-current assets 3,803,901 71,783 41,353 Current liabilities 763,212 57,733 32,949 Non-current liabilities 161,508 2,227 569 Equity 4,446,417 474,244 52,461
2017 AMOREPACIFIC Innisfree (in millions of Korean won) Corporation Corporation Etude Corporation
Current assets \ 1,677,479 \ 419,386 \ 61,320 Non-current assets 3,698,205 71,052 45,264 Current liabilities 1,046,448 65,230 27,037 Non-current liabilities 153,862 1,381 30 Equity 4,175,374 423,827 79,517
Summarized consolidated statements of comprehensive income for the periods ended December 31, 2018 and 2017, are as follows:
2018 AMOREPACIFIC Innisfree (in millions of Korean won) Corporation Corporation Etude Corporation
Revenue \ 5,277,845 \ 598,915 \ 218,282 Profit (loss) for the period 334,845 61,974 (28,281) Other comprehensive income 23,557 1,013 1,169 Total comprehensive income (loss) 358,402 62,987 (27,112)
75 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
2017 AMOREPACIFIC Innisfree (in millions of Korean won) Corporation Corporation Etude Corporation
Revenue \ 5,123,826 642,022 259,054 Profit for the period 398,003 78,134 3,342 Other comprehensive income (loss) (11,523) 395 822 Total comprehensive income 386,480 78,529 4,164
Summarized consolidated statements of cash flows for the periods ended December 31, 2018 and 2017, are as follows:
2018 AMOREPACIFIC Innisfree (in millions of Korean won) Corporation Corporation Etude Corporation
Cash flows from operating activities \ 646,677 \ 81,101 \ (14,499) Cash flows from investing activities (413,918) (87,890) (6,948) Cash flows from financing activities (103,445) (12,711) 8,000 Effects of exchange rate changes on cash and 2,009 (90) - cash equivalents Net increase (decrease) in cash and cash 131,323 (19,590) (13,447) equivalents Cash and cash equivalents at the beginning of the 604,188 310,328 17,251 year Cash and cash equivalents at the end of the year \ 735,511 \ 290,738 \ 3,804
2017 AMOREPACIFIC Innisfree (in millions of Korean won) Corporation Corporation Etude Corporation
Cash flows from operating activities \ 512,563 \ 69,770 \ (8,321) Cash flows from investing activities (400,841) 93,069 (6,442) Cash flows from financing activities (110,860) (24,445) (3,776) Effects of exchange rate changes on cash and (20,378) 21 (17) cash equivalents Net increase (decrease) in cash and cash (19,516) 138,415 (18,556) equivalents Cash and cash equivalents at the beginning of the 623,704 171,913 35,807 year Cash and cash equivalents at the end of the year \ 604,188 \ 310,328 \ 17,251
76 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
35. Risk Management
35.1 Financial Risk Management
The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk and cash flow interest rate risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize any adverse effects on the financial performance of the Group.
Risk management is carried out under policies approved by the Board of Directors. The Board of Directors reviews and approves written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity.
(a) Market risk
i) Foreign exchange risk
The Group operates internationally and is exposed to foreign exchange risk arising from various foreign currency transactions, primarily with respect to the US dollar, Euro and the Japanese yen.
The purpose of foreign exchange risk management is to maximize the Group’s value by minimizing the uncertainty and volatility of foreign exchange gains and losses from foreign exchange rate fluctuations.
The Company’s financial instruments denominated in major foreign currencies as at December 31, 2018 and 2017, are as follows:
2018 2017 (in millions of Korean won) Assets Liabilities Assets Liabilities
USD \ 234,558 \ 126,166 \ 268,960 \ 118,047 EUR 1,423 324 587 1,464
JPY 54 3,658 2 2,794
\ 236,035 \ 130,148 \ 269,549 \ 122,305
77 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
As at December 31, 2018 and 2017, if the foreign exchange rate of the Korean won fluctuated by 10% while other variables were fixed, the effects on profit before income tax would be as follows:
2018 2017 10% 10% 10% 10% (in millions of Korean won) Increase Decrease Increase Decrease
USD \ 10,839 \ (10,839) \ 15,091 \ (15,091) EUR 110 (110) (88) 88
JPY (360) 360 (279) 279
The above sensitivity analysis is done with foreign currency denominated assets and liabilities which are not in the Parent Company’s functional currency.
ii) Interest rate risk
Interest rate risk is defined as the risk that the interest income or expenses arising from deposits and borrowings will fluctuate because of changes in future market interest rate. The interest rate risk mainly arises on floating rate deposits and borrowings. The objective of interest rate risk management lies in maximizing corporate value by minimizing uncertainty in interest rates fluctuations and net interest expense.
At the end of the reporting period, the Group has more floating rate deposits than floating rate borrowings, and because of this, net interest expenses decrease when interest rates increase. However, the Group adequately minimizes risks from interest rate fluctuations through various policies, such as sharing excess cash within the Group (internal cash sharing) to minimize external borrowings, avoiding high rate borrowings, reforming capital structure, managing an appropriate ratio of fixed rate borrowings and floating rate borrowings, monitoring a fluctuation of domestic and foreign interest rates daily, weekly and monthly, establishing alternatives, and balancing floating rate short-term borrowings with floating rate deposits.
The Group invests in fixed interest assets with maturities of one year or less, and if the market interest rate increases, there is risk of decrease in fair value. However, the risk of changes in fair value is minor as the investments are short-term deposits.
At the end of the reporting period, if interest rates on floating rate borrowings had been 1% higher/lower with all other variables held constant, profit before income tax for the year would have been \ 687 million lower/higher, mainly as a result of higher/lower interest expense on floating rate borrowings.
(b) Credit Risk
Credit risk is managed on a group basis. Credit risk arises from cash and cash equivalents and deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions.
78 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
For banks and financial institutions, only independently rated parties with a minimum rating of ’A’ are accepted.
If wholesale customers are independently rated, these ratings are used. Otherwise, if there is no independent rating, risk control assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. If customers have no independent rating and their credit risk needs to be reduced, their credit is enhanced through pledged property and deposit and guarantee insurance. For customers without insurance and collateral, the Group strictly manages credit risk in accordance with the internal credit-rating standard. Sales to retail customers are settled in cash or using major credit cards.
The Group reviews whether the above trade receivables are individually or collectively impaired at the end of the every reporting period.
(c) Liquidity Risk
The Group holds sufficient amount of cash and cash equivalents and maintains a flexible fund capacity within credit limit by brisk business. Financial liabilities involved in sales except borrowings are basically paid within maximum three months after purchasing (average within two months), so maturity of all financial liabilities (with or without payment condition) are within three months. The Group manages liquidity by holding more cash and cash equivalents than monthly payments.
The table below analyses the Group’s non-derivative financial liabilities into relevant maturity groupings based on the remaining period at the statement of financial position date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. These contracts are managed on a net-fair value basis rather than by maturity date.
2018 (in millions of Korean won) Up to 1 year 1 to 2 years 2 to 5 years Over 5 years Total Book amount
Trade payables \ 88,803 \ - \ - \ - \ 88,803 \ 88,803 Borrowings 172,406 45,095 - - 217,501 214,109
Other payables 276,585 - - - 276,585 276,585
Other liabilities 141,073 16,171 - - 157,244 155,800
2017 (in millions of Korean won) Up to 1 year 1 to 2 years 2 to 5 years Over 5 years Total Book amount
Trade payables \ 100,566 \ - \ - \ - \ 100,566 \ 100,566 Borrowings 180,832 708 43,295 - 224,835 220,955
Other payables 230,603 - - - 230,603 230,603
Other liabilities 211,803 10,435 - - 222,238 220,927
79 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
35.2 Capital Risk Management
The Group’s capital risk management purpose is maximising shareholders’ value through maintaining a sound capital structure. The Group monitors financial ratios, such as liability to equity ratio and net borrowing ratio each month and implements required action plan to improve the capital structure.
Debt-to-equity ratio and net borrowing ratio are as follows:
(in millions of Korean won) 2018 2017
Liabilities (A) \ 1,144,904 \ 1,403,262 Equity (B) 6,242,470 5,931,974 Cash and cash equivalents, and current financial deposits (C) 1,540,210 1,391,968 Borrowings (D) 214,109 220,955 Debt-to-equity ratio (A/B) 18.34% 23.66% Net borrowings ratio (D-C)/B (-)21.24% (-)19.74%
80 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
36. Fair Value Estimation
36.1 Fair Value Hierarchy
There are no significant changes in business and economic circumstances which affect the fair value of financial assets and liabilities of the Group for the year ended December 31, 2018.
The Group classifies fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in measurements.
Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1).
All inputs other than quoted prices included in level 1 that are observable (either directly that is, prices, or indirectly that is, derived from prices) for the asset or liability (Level 2).
Unobservable inputs for the asset or liability (Level 3).
(in millions of Korean won) 2018 Level 1 Level 2 Level 3 Total
Recurring fair value measurements Financial assets at fair value through \ 3,956 \ 437,633 \ 5,510 \ 447,099 profit or loss Financial assets at fair value through 9,163 - 1,513 10,676 other comprehensive income Disclosed fair value Investment property - - 422,185 422,185
(in millions of Korean won) 2017 Level 1 Level 2 Level 3 Total
Recurring fair value measurements Available-for-sale financial assets \ 18,242 \ - \ - \ 18,242 Disclosed fair value Investment property - - 431,368 431,368
81 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
36.2 Valuation Technique
Valuation techniques used in the recurring fair value measurements categorized as Level 2 and Level 3 of the fair value hierarchy as at December 31, 2018, are as follows:
(a) Investment property
The fair value of investment property is measured on a basis of a valuation by an independent appraiser who holds a recognized and relevant professional qualification or a value of land determined by the local government in Korea for property tax assessment purposes and a valuation by reflecting the similar recent transaction price which is available to use.
(b) Financial assets at fair value through other comprehensive income and Financial assets at fair value through profit or loss
Valuation techniques and inputs used in the financial assets categorized within Level 2 and Level 3 of the fair value hierarchy as at December 31, 2018, are as follows:
(in millions of Korean won) 2018 Fair value Level Valuation techniques Inputs
Financial assets at fair value through other comprehensive income Present value Perpetual earning growth rate Unlisted equity securities \ 1,513 3 technique and others
Financial assets at fair value through profit or loss Stock price of underlying Unlisted equity securities 5,510 3 Option pricing model assets and others Present value Credit risk adjusted discount Beneficiary certificates 437,633 2 technique rate
82 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
36.3 Financial Instruments Measured at Cost
Details of financial instruments measured at cost as at December 31, 2018 and 2017, are as follows:
(in millions of Korean won) 2018 2017
Debt instruments at amortized cost Asset backed securities \ 30,000 \ 30,000 Government-issued securities 4,247 5,345 \ 34,247 \ 35,345
Debt instruments at amortized cost are measured at fair values, because the difference between their fair values and the acquisition costs is immaterial.
Other financial assets and liabilities whose book amount is a reasonable approximation of fair value are excluded from the separate fair value disclosures.
83 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
37. Changes in Accounting Policies
37.1 Adoption of Korean IFRS 1109 Financial Instruments
As explained in Note 2, the Group has applied Korean IFRS 1109 Financial Instruments on January 1, 2018, the date of initial application. In accordance with the transitional provisions in Korean IFRS 1109, comparative figures for prior reporting period have not been restated. The application of Korean IFRS 1109 does not have impact on the Group’s retained earnings and the impact on the statement of financial position at the date of initial application is as follows:
(a) Classification and Measurement of Financial Instruments
On the date of initial application of Korean IFRS 1109, January 1, 2018, the Group’s management has assessed which business models apply to the financial assets held by the Group and has classified its financial instruments into the appropriate Korean IFRS 1109 categories. The main effects resulting from this reclassification are as follows.
Fair value through other Amortized cost comprehensive (Held-to-maturity income financial assets, Fair value (Available-for-sale loans and through profit or financial assets in receivables in (in millions of Korean won) Notes loss 2017) 2017) 2 Total
Financial assets – January 1, 2018 Beginning balance – Korean IFRS 1039 1 \ - \ 61,738 \ 2,010,255 \ 2,071,993 Reclassification from available-for-sale financial assets to financial assets at fair value through profit or loss (i) 10,632 (10,632) - - Reclassification of asset backed securities and government bonds from available-for- sale financial assets to financial assets at amortized cost (ii) - (35,345) 35,345 - Reclassification of equity investments that are not held for trading from available-for- sale financial assets to equity instruments at fair value through other comprehensive income (iii) - - - - Reclassification from loans and receivables including beneficiary certificates to financial assets at fair value through profit or loss (iv) 385,881 - (385,881) - Beginning balance - Korean IFRS 1109 1 \ 396,513 \ 15,761 \ 1,659,719 \ 2,071,993
1The beginning balance as at January 1, 2018, presented available-for-sale financial assets at fair value through other comprehensive income, and loans and receivables at amortized cost, respectively.
2Cash and cash equivalents are included.
84 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
(i) Reclassification from available-for-sale to fair value through profit or loss
As at January 1, 2018, beneficiary certificates amounting to \ 4,142 million and convertible preferred shares amounting to \ 6,490 million were reclassified from available-for-sale to financial assets at fair value through profit or loss. They do not meet the criteria to be classified as at amortized cost in accordance with Korean IFRS 1109, because their cash flows do not represent solely payments of principal and interest.
(ii) Reclassification from available-for-sale to amortized cost
As at January 1, 2018, asset backed securities and government bonds were reclassified from available-for-sale to amortized cost. The Group hold the assets to collect contractual cash flows and these cash flows consist solely of payments of principal and interest on the principal amount outstanding.
(iii) Reclassification of equity investments from available-for-sale to fair value through other comprehensive income
The Group elected to present changes in the fair value of all its equity investments that are not held for trading previously classified as available-for-sale in other comprehensive income. As a result, assets with a fair value of \ 15,761 million were reclassified from available-for-sale financial assets to financial assets at fair value through other comprehensive income. As at January 1, 2018, related accumulated other comprehensive income of \ 4,633 million were not reclassified to profit or loss even though these assets are disposed of.
(iv) Reclassification from loans and receivables to debt instruments at fair value through profit or loss
As at January 1, 2018, beneficiary certificates and others were reclassified from financial assets at amortized costs to debt instruments at fair value through profit or loss. Debt instruments is composed of beneficiary certificates reclassified to financial assets at fair value through profit or loss. They do not meet the criteria to be classified as at amortized cost in accordance with Korean IFRS 1109, because their cash flows do not represent solely payments of principal and interest, or business model is achieved both by collecting contractual cash flows and selling of these assets.
85 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
(v) Reclassifications of financial instruments on adoption of Korean IFRS 1109
On the date of initial application, January 1, 2018, the financial instruments of the Group with any reclassifications noted, were as follows:
(in millions of Korean won) Measurement category Carrying amount Korean IFRS Korean IFRS Korean IFRS 1039 Korean IFRS 1109 1039 1109 Difference
Current financial assets Amortized costs 821,787 Cash and cash equivalents Amortized costs Fair value through \ 1,207,668 - 385,881 profit or loss Current financial deposits Amortized costs Amortized costs 168,000 168,000 - Available-for-sale Current debt securities Amortized costs 30,000 30,000 - financial assets Trade receivables Amortized costs Amortized costs 364,620 364,620 - Current other receivables Amortized costs Amortized costs 25,122 25,122 - Other current assets1 Amortized costs Amortized costs 3,310 3,310 - Non-current financial assets Non-current financial Amortized costs Amortized costs \ 16,300 16,300 - deposits Amortized costs 5,345 Available-for-sale - Non-current debt securities Fair value through 13,687 financial assets 8,342 - profit or loss Non-current other Amortized costs Amortized costs 225,235 225,235 - receivables Fair value through other comprehensive 15,760 - Available-for-sale Equity instruments income 18,051 financial assets Fair value through 2,291 - profit or loss 1 Consists of accrued revenues.
(b) Impairment of Financial Assets
The Group has two types of financial assets subject to Korean IFRS 1109’s new expected credit loss model:
trade receivables for sales of inventory
debt investments carried at amortized cost
The adoption of Korean IFRS 1109 does not have an impact on impairment of financial assets.
86 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
37.2 Adoption of Korean IFRS 1115 Revenue from Contracts with Customers
As explained in Note 2, the Group has applied Korean IFRS 1115 Revenue from contracts with customers from January 1, 2018. In accordance with the transitional provisions in Korean IFRS 1115, comparative figures have not been restated. The application of Korean IFRS 1115 has impact on the financial statements as follows.
The impact on the Group’s statements of financial position at the date of initial application is as follows:
January 1, 2018 December 31, 2017 After (in millions of Korean won) Before adjustments Adjustments adjustments
Total assets \ 7,335,236 \ - \ 7,335,236 Deferred revenue1 66,907 (66,907) - Other current liabilities2 488,445 (16,577) 471,868 Contract liabilities - 82,303 82,303 Total liabilities \ 1,403,262 \ (1,181) \ 1,402,081 Retained earnings \ 2,422,585 \ 477 \ 2,423,062 Non-controlling interests 2,934,699 704 2,935,403 Total equity \ 5,931,974 \ 1,181 \ 5,933,155
1 Accounting for customer loyalty program
Under the previous standard, the consideration received from the sale of goods was allocated to the award points and the goods sold using the residual method. Under this method, a part of the consideration was allocated to the award points in advance and the residual part of the consideration was allocated to the goods sold.
Under Korean IFRS 1115, the total consideration is allocated to the award points and goods based on the relative stand-alone selling prices.
Due to this change in policy, the contract liability recognized in relation to the customer loyalty program as at January 1, 2018, was \ 1,181 million lower than the amount previously recognized as deferred revenue. The retained earnings increased by \ 477 million as a consequence.
2 Accounting for advances from customers
In accordance with Korean IFRS 1115, advanced from customers amounting to \ 16,577 million was reclassified from other current liabilities to contract liabilities.
87 AMOREPACIFIC Group, Inc. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2018 and 2017
Financial statement line items affected by the adoption of the new rules in the current period are as follows:
Consolidated Statement of financial position as at December 31, 2018
Amount before application of Korean (in millions of Korean won) Reported amount Adjustments IFRS 1115
Total assets \ 7,387,374 \ - \ 7,387,374 Deferred revenue - 48,230 48,230 Other current liabilities 207,945 19,135 227,080 Contract liabilities 66,838 (66,838) - Total liabilities \ 1,144,904 \ 527 \ 1,145,431 Retained earnings \ 2,545,799 \ (321) \ 2,545,478 Non-controlling interests 3,123,637 (205) 3,123,432 Accumulated other comprehensive income (21,030) (15) (21,045) Total equity \ 6,242,470 \ (527) \ 6,241,943
Consolidated Statements of comprehensive income for the year ended December 31, 2018
Amount before application of Korean (in millions of Korean won) Reported amount Adjustments IFRS 1115
Sales \ 6,078,179 \ 655 \ 6,078,834 Profit for the period 376,271 655 376,926 Total comprehensive income \ 401,573 \ 637 \ 402,210
Consolidated Statements of cash flows for the year ended December 31, 2018
Amount before application of Korean (in millions of Korean won) Reported amount Adjustments IFRS 1115
Profit for the period \ 376,271 \ 655 \ 376,926 Changes in operating assets and liabilities (61,001) (655) (61,656) Increase in other liabilities (263,923) (16,120) (280,043) Decrease in contract liabilities (15,465) 15,465 - Cash generated from operations \ 902,728 \ - \ 902,728
After applying Korean IFRS 1115, cash generated from operating is identical to that of the previous standard although profit for the period in cash flows decreased by \ 655 million.
88