HYUNDAI SECURITIES ANNUAL REPORT 2009 CONTENTS
04 Major Achievements 05 Hyundai Securities Awards 06 Message from CEO 08 Board of Directors 10 Innovative Pathfinder for all QnAs 12 Renovative one on one C&C 14 Glocalization over Globalization 16 Vision and Strategy 17 Review of Operations 26 Financial Section 114 Organization Structure 116 International Locations The Power of Hyundai Securities… the Pride that has led the history of Korea’s securities market over the past 47 years. The world can witness the power of Korea through the insights and thrust of Hyundai Securities, which broke through the crisis of the IMF period. Backed by such efforts, Korea has continued on its path of growth even as advanced economies faced difficulties during the global financial crisis.
Now, the Pride of Hyundai Securities looks even further beyond. Not content to modestly remain Korea’s leading securities company, Hyundai Securities will embark on a journey to become global Hyundai Securities.
‘Korea’s representative investment bank competing with global investment banks’
Hyundai Securities set the vision of establishing the No. 1 Financial Brand in Korea by 2020 and Joining the Top 10 in Asia and Emerging Markets. Hyundai Securities will grow into a company that competes with global investment banks, by lining up top talent both in and out of Korea for customers around the world in each and every business sector, as it leaps forward to become a most capable investment bank in terms of both scale and internal stability.‘ Korea’s representative investment bank competing with global investment banks’is the pride that hyundai securities will boast.
03 Major Achievements
2006 2007
2006.04 “Hyundai Hero Deposit-type RP”won 2007.05 Hyundai Securities IB signs ＼1.7 trillion the marketing excellence award of the MOU for composite complex development Korea Economic Daily. 2007.07 Hyundai Securities issues ＼150 million in 2006.11 Won Korea Stock Excellence Award, ABS for small and medium businesses an industry excellence award 2007.07 Hyundai Securities invests in Japanese 2006.12 2006 Korea Internet Excellence Award commercial real estate 2007.01 Hyundai Securities opened more than 2007.10 Hyundai Securities signs general business 100,000 CMA accounts, worth partnership MOU with Chinese firm 1 trillion won. Goutai Junan Securities 2007.02 Credit rating on Hyundai Securities 2007.11 Hyundai Securities opens office in was lifted to A+ Ho Chi Minh City, Vietnam 2007.12 Hyundai Securities exceeds 0.3 million CMA accounts and balance of ＼3 trillion 2007.12 Hyundai Securities advances into Kazakhstan. First among Korean securities companies, received approval for a representative office
2008 2009
2008.04 Hyundai Securities opens office 2009.07 No 1. In 1st Half IPO Underwriting in Almaty, Kazakhstan Performance 2008.06 Hyundai Securities customer 2009.07 Hyundai Asset Management was Launched satisfaction center selected best call center 2009.09 Hyundai Securities donated 700 Computers 2008.06 Launched overseas to Elementary and Middle Schools Home-Trading-System(HTS) in the Philippines. 2008.09 Ho Chi Minh office plays lead 2009.11 Hyundai Securities formed a real-time manager for the first time foreign exchange service business tie-up 200809 MOU Signed with RFCA in Kazakhstan with the Korea Exchange Bank. 2008.10 Hyundai Securities’ 2009.11 Hyundai Securities opened a real-time loan “fund fundamental index”first in industry transaction system available for sales. 2008.12 Sharing warmth activities regarding 2009.12 Hyundai newcomers,“We’ve learned the corporate social responsibity corporate culture of sharing!” 2009.12 Hyundai Securities started exchange-traded derivatives sales in the domestic market.
04 Hyundai Securities Awards
2006 YouFirst Award 2007 YouFirst Award
8th Hankyung Marketing Grand Prize Korea Quality Brand Grand Prize Korea Economic Daily Korea Economic Daily Korea Internet Grand Prize Internet Marketing Grand Prize Korea Internet & Security Agency Hangyeore 2006 Money Today Advertisement Grand Prize Money Today Advertisement Grand Prize Money Today Money Today Ranked 1st in Online Trading Service Ranked 1st in Online Trading Service Stockpia Stockpia Customer Satisfaction Mgrnt Grand Prize Ranked 1st Securities Company in Korea Economic Daily corporate image University News Network
2008 YouFirst Award 2009 YouFirst Award
Customer Satisfaction Management Grand Prize Customer Satisfaction Management Grand Prize Korea Economic Daily Korea Economic Daily 2008 Internet Marketing Grand Prize Grand Prize in financial products service Donga.com innovation (by Financial Supervisory Service) Best IPO Grand Prize Money Today Korea Herald Ranked 1st in Online Trading Service Grand Prize in Social Contribution Stockpia University News Network
05 Message from CEO
Dear shareholders and investors, Dear respected shareholders and investors,
In fiscal year 2009, the global financial crisis, triggered by the In fiscal year 2010, it is expected that exports will increase and subprime mortgage in the U.S. and the bankruptcy of a global company performance will improve as the global economy investment bank, was gradually stabilized through liquidity gradually enters the recovery stage. Furthermore, as the supply from central banks all over the world and various domestic economy recovers and the KOSPI is pushed forward governments’aggressive public stimulus packages. The to be included in advanced indices such as the MSCI and WGBI, domestic economy and stock market also showed signs of further bases are expected to be formed for the additional recovery, and the KOSPI index, which started the year at influx of global investment funds in the domestic capital 1,214.06, increased by 39.4% year-over-year to end the year at market. 1,692.85. Backed by this recovery in the securities market, our net operating revenue in 2009 rose by 20% year-over-year to On the other hand, it is expected that competition within the KRW618.4bn, and earnings before tax increased by 24% year- financial investment industry will only become fiercer against over-year to KRW250.5bn. Earnings before tax, which had us the following backdrops: if exit strategies start to be executed ranked sixth in the securities industry in fiscal year 2007, were in full swing all over the world, it is still possible that capital fourth-best in the industry in 2008, a position we continued to market funds may get out of the market; in just one year after hold during the difficult year of 2009. By business sector, the enforcement of the Capital Market Act, securities brokerage marked No. 2 and wealth management ranked No. 3 companies are working hard to reach breakeven points in new in the industry, proving our powerful competitiveness in the businesses such as FX margins, domestic, international brokerage and capital market businesses. futures business, payment settlement services, etc. which they started last year; and newly established bank-based and In terms of profit structure, in fiscal year 2008, the industrial fund-based securities companies are also pushing composition of brokerage vs. non-brokerage was 49.8%: forward with their sales more aggressively. 50.2%. The 2009 composition of brokerage slightly rose to 54.5% : 45.5%, leaving profit structure diversification as an Most of all, as large securities companies, which have been in unresolved task during the year. oligopolistic competition arrangements in the brokerage market, enter the low-commission market, the downward rigidity of commissions has started to collapse, and the profitability of the wealth management market has become aggravated with the introduction of the movement system of fund sales companies and the upper-limit system of sales commission, etc., ultimately bringing the financial investment industry into the turmoil of excessive competition.
Amid such competition and change, Hyundai Securities will prepare the grounds for sustainable growth by further cementing our competitiveness in the existing business areas in which we retain a competitive edge, advancing our profit structures by complementing weaker sectors, and realizing considerable business performance in new businesses and global sectors. To achieve these goals, we will push forward with the following priority tasks in fiscal year 2010.
First, we have set our management goal of making this year the original year of diversifying profit sources. To achieve this goal, we will reassess our business model from the beginning from the point view of company as a whole, enhance the organizational structure of the core businesses that possess both profitability and growth potential to double our competitiveness, and reorganize the structure of future business areas with strong growth potential, so that capacity can be focused on a company- wide scale. We will also focus our resources on more profitable future business areas while maintaining
06 competitiveness by reviewing the business avenues from depending on the market situation to maintain a certain the aspects of profitability and growth. In addition, based on level of return on shareholders’equity for the company. this business reassessment, the company-wide business The investment banking business will exert its efforts in support system will be reshuffled in terms of resource sales to achieve better performance levels than in the allocation, with changes made to organizational structure, previous year by actively advancing into new markets such budget, manpower, and the establishment of IT as overseas initial public offering(IPO) and special purpose infrastructure, etc. acquisition company(SPAC).
Second, we will innovate in all policies and systems by Fourth, we will support all our executives and employees so putting first priority on the smooth communication between that they can grow as top specialists with clear goal- sales and sales operations. Operating revenue of a financial oriented minds in their respective fields. Despite repetitive company is the main source of profit, as it is directly related everyday sales and other work tasks, employees with clear with operating profits. Such operating revenue is first goals and those without them will be set further and further generated at the sales sites. Therefore, I will exert my apart in terms of leading and absorbing work. Consequently, utmost this year to make Hyundai Securities“ a Securities their attitudes will affect the professionalism of employees, Company with Strong Sales Power”by putting more not to mention of the performance of the company. For emphasis on the sales sites, the forefronts of profit employees themselves as well as the company, we will do generation. All executives, including myself as the CEO, will our best to implant a goal-oriented consciousness and to undertake a range of initiatives by working at the forefront bring motivation to make them top specialists in their of sales. Managerial employees will innovate all policies and respective fields. Through these efforts, our company will systems by closely listening to voices from the sales sites. eventually sit at the top of the financial investment industry. Based on this, all sales-related employees will endeavor to focus on sales by working hard. We will do our best to Dear respected shareholders and investors, realize a sales-oriented corporate structure by reflecting the voices of sales employees in all management sales Although the global economy and the Korean economy are support systems, such as budget allocation, performance forecast to see more or less positive growth, the forecast of compensation, sales model development, customer our management environment seems more opaque than in management, product development, advertisement, and IT any other year, given the movement of securities market infrastructure establishment, etc. funds caused by a decrease in foreign exchange, and an increase of interest, money movements among banking- Third, each business will set new goals and work hard to securities-insurance industries, competition expansion secure competitiveness and capabilities. The brokerage following policy changes and deregulation, and cut-throat business shall strongly push forward with sales by competition in the financial investment industry. Having harmonizing sales propulsion, customer strategy, and shown an ability to overcome crises, Hyundai Securities content development, etc. emerging as the unparalleled promises that all of our employees and executives will make leader in the industry. The wealth management business fiscal year 2010 a successful year in which Hyundai will innovate all systems and infrastructure to become more Securities becomes a company that is loved and respected customer-based, growing to become the powerhouse of by all of its investors, clients, and employees, growing as wealth management, incorporating fund sales company Korea’s leading financial investment company by leading movement and a payment settlement service. The Capital the change, not just adapting to it. I wish happiness, good Market business, including equity and bond proprietary health, and achievement to all the shareholders, clients, and trading, and derivatives, etc. is a major profit source for the their families in 2009. Thank you. company, as it was in the previous year. Therefore, this year, the capital market business will flexibly hedge
Kyung-soo Choi Chief Executive Officer
07 Board of Directors
Providing Hyundai Securities strives for responsible, ethical, and transparent management based Guidance on an advanced corporate governance system implemented by the board of directors. for Righteous The board of directors consists of five outside directors and four corporate directors with extensive experience and expertise in finance, economics, management, legal Management affairs, and international practical experience. They provide guidance for righteous management in the internal decision making of Hyundai Securities and suggest strategic directions for its business operations.
Hyun, Jeong Eun Choi, Kyung Soo 01 Director | Chairman of the Board Director | President and Chief Executive Officer
Chung, Hang ki 02 Lim, Seung Cheol 03 Director | Managing Director Director | Auditor
Lee, Chul Song 04 Kim, Byung Bae 05 Corporate Director | Auditor Corporate Director
08 The board of directors is making concerted efforts to maximize corporate value and shareholder value through rational decision-making, while being mindful of the benefits and interests of its shareholders, in order to achieve its vision of becoming ‘Korea’s representative investment bank competing with global investment banks.’ In addition, the board shall put its best efforts into bringing the future of Hyundai Securities as a financial leader with advanced financial services on step closer.
06 07 Ahn, Jong Bum Cho, Jin Wan 01 Corporate Director Corporate Director | Auditor 02 03
Park, Kwang Chul 08 Corporate Director
04 05 06
07 08
09 10 INNOVATIVE PATHFINDER FOR ALL QNAS
Hyundai Securities has not stopped exploring growth engines with new concepts that change crisis into opportunities in a financial environment where crises and opportunities coexist. The industry’s first attempts made under the name of Hyundai Securities, far-reaching insight for the future and flexible handling, and various product line-ups that optimize the wealth management of clients all prove the strong pride of Hyundai Securities, pursuing the‘ Best.’Hyundai Securities continues to take these powerful steps by practicing sustainable management with unchallengeable creation and innovation.
11 12 RENOVATIVE ONE ON ONE
The power of predicting the future, accurate judgment of situations, and the ability to deal swiftly with change are core energies that make Hyundai Securities strong. Inexorable truth can be provided by any company, not only by Hyundai Securities. However, greeting today differently from yesterday, Hyundai Securities prepares for a tomorrow that is different from today. Renovate your wealth management through the customer tailored one-to-one C&C (Choice & Care) service of Hyundai Securities that represents the best in customer satisfaction.
13 14 GLOCALIZATION OVER GLOBALIZATION
Hyundai Securities meets the varied financial needs of global clients through glocalization, beyond the globalization. Having advanced to the major international financial hubs of New York, London, Hong Kong, Tokyo, and Shanghai, Hyundai Securities has secured global profit sources by fostering bases of overseas local corporations, and is now striving to create synergy in various business areas by linking with headquarters. On par with global level services by hiring global talent as well as developing individual products that conform to the characteristics of each region, Hyundai Securities is not far from emerging as one of leading securities companies in the world.
15 Vision and Strategy
Vision 2020
Korea’s Representative Investment Bank Competing with Global Investment Banks
Establishing the No. 1 Global Top 10 in Asia∙ Financial Brand in Korea Emerging Markets
Strategy
Action Plan by Business
● Enhance brokerage profitability through expanding off-line sales capabilities
● Develop new products such as Wrap, pension, and increase the asset - client base through the differentiation of wealth management services
● Maximize principal investment (PI) profits through both elastic market response and risk management
● Expand bond business scope, including overseas bond brokerage, sales of underwriting bonds, and retail bonds
● Secure a new IB growth engine by expanding Cross-border initial public offerings 16 REVIEW OF OPERATIONS
- Leading Player in Korea
- Diversified Revenue Structure with Sustainability
- Competitiveness in Brokerage
- Strengthening Wealth Management business
- Enhancing Revenue Structure by Proprietary Trading performance
- IB business Expansion over Asia and Emerging Market
- Step forward to the leading Investment Bank
17 LEADING PLAYER IN KOREA A large Securities Company creating top-class profits, with the largest scale of shareholder equity, largest sales network, and largest number of employees in the industry
Hyundai Securities is Korea’s representative large securities company with KRW 2.4tr in shareholder equity, KRW 11.8tr in assets, 146 sales network in and out of Korea, and 2500 employees. Hyundai Securities has firmly maintained its position as a total investment bank, possessing competitiveness in each of the business areas of brokerage, which traditionally has been strong, wealth management, trading, investment banking, etc. To note, we ranked 4th in the industry in the major profitability indicators in fiscal year 2009, with KRW 251.4bn in earnings before tax and KRW178.9bn in net income. In sales, we are currently ranked 2nd in the industry with a retail market share of 6%. While maintaining the top spot in the industry in scale, profitability, and sales, Hyundai Securities strives to become a Top 3 investment bank in 2010 based on our strong sales-oriented policies.
18 DIVERSIFIED REVENUE STRUCTURE WITH SUSTAINABILITY Establishing a Sustainable Management System by Advancing the Revenue Structure with the Expansion of the Revenue Portion of Commodity Management, Wealth Management, Investmant Banking
Hyundai Securities has been maintaining a stable growth trend for three consecutive fiscal years, recording KRW 699.4bn in net operating revenue in fiscal year 2009, a 20% year-over-year increase. Considering the composition trend of net operating revenue, that represented by brokerage decreased to a low level of 50%, while commodity management increased almost up to the 30% level, showing our improving business structure centered on brokerage, where profits fluctuated following the market situation in the past. Going forward, we will establish a sustainable management system by continuously advancing Hyundai Securities’ revenue structure by raising the revenue proportion of investment banking and wealth management up to the 10% levels, respectively, along with commodity management.
19 COMPETITIVENESS IN BROKERAGE
Possessing a Brokerage Competitive Edge Based on Solid Customer Base and Top-of-the-Industry On/Off- line Sales Capabilities
With a solid customer base and a top-level offline sales capacity, Hyundai Securities has traditionally been regarded as a powerhouse in brokerage. Hyundai Securities maintained the 2nd spot in the industry in retail market share, online and offline channel market share in fiscal year 2009, and average commission rates easily surpassed the industry average. As such, Hyundai Securities is leading the industry in both quantitative and qualitative terms. Based on our IT capabilities with top- notch technology, we provide an optimum online investment environment to our customers. Furthermore, we will firmly maintain our top position in the industry and earn the trust of investors of all ages by maintaining our service competitiveness in brokerage and set new trends in areas such as the establishment of a sales environment through smart phones and the provision of investment consulting by top specialists.
20 STRENGTHENING WEALTH MANAGEMENT BUSINESS Expanding the Brokerage Sales Base through Customer Asset Increases by enhancing the sales of wrap account, retirement pension, equity linked securities, collective investment securities, etc.
QnA is the wealth management brand of Hyundai Securities that was ’customized financial launched with great passion. Hyundai Securities solution, which can be represented by the C&C (Choice & Care) service, ’investment styles and offers a model that is optimized for the customers asset bases among funds, WRAP, bonds, ELS/DLS, retirement funds, and collective investment securities. By reproducing the honor of the past in the Buy Korea era, Hyundai Securities will emerge as a wealth management powerhouse.
21 ENHANCING REVENUE STRUCTURE BY PROPRIETARY TRADING PERFORMANCE
With KRW 2.3tr in principal, Hyundai Securities is expanding trading as a major revenue source along with commission revenue to improve a revenue structure mainly centered on commissions. We actively advance our revenue structure while enhancing profitability based on our management know-how, combined with Hyundai Securities financial infrastructure, specialists in each product areas, and the top- ’global class risk management system in the industry.
22 IB BUSINESS EXPANSION OVER ASIA AND EMERGING MARKET
Possessing a worldwide branch network even in emerging markets, including in Ho Chi Minh and Almaty, not to mention global financial hubs such as New York, London, Hong Kong, Tokyo, and Shanghai, Hyundai Securities has accumulated a proven track record in investment banking, especially in areas of funding, initial public offerings, and mergers and acquisitions. This is based on a wide global customer base and deep trust in the company both in and out of Korea. By utilizing our international investment banking know-how accumulated for decades, Hyundai Securities will raise the stature of Hyundai Securities investment banking in Asia and emerging markets.
23 STEP FORWARD TO THE LEADING INVESTMENT BANK
Underpinned by the market dominance of the wealth management business, which brokerage sales, Hyundai Securities is has become our major revenue source growing as a large investment bank that along with brokerage, we flexibly adjust possesses the capabilities of the top the management scale of equities and three in the industry in all our business bonds by responding to financial market areas, including principal investments, indicators and reshuffling the wealth management, investment management system to outperform the banking, derivatives, retirement pension, market. We actively practice portfolio- overseas business, and new business. To diversified investment by expanding our reproduce the honor of the unparalleled investments in low-value, sound assets No. 1 era in the past, Hyundai Securities and also practice alternative investments fosters and invites top talent and such as real assets, as well as equities executes strategies to change its and bonds. Furthermore, we will organizational structure so that it can prioritize our list management through harmonize profitability, growth, and risk monitoring and hedges in the fast- management. In the brokerage business, changing financial market, and we will our major revenue source, we will maximize the profitability of the principal continue to enhance the competitiveness investment and do our utmost to achieve of our offline channel through the the highest-level return on expansion of superior customer service shareholders’equity in the industry. and efficient branch operation, while maintaining our loyal customer base. In In terms of revenue source addition, as the proportion of the online diversification, Hyundai Securities will channel of young people grows, Hyundai actively foster wealth management and Securities is working to secure new investment banking businesses. In customers and expand its mid- to long- wealth management, we are enhancing term sales base by developing online our wealth management capabilities services tailored to the tastes of through best program education offered customers in a range of age groups. In through cooperation with a foreign
24 consulting company. We continue to such as stock rental services. We will also secure our potential wealth management actively foster a next-generation growth customers by applying our proudly engine in the retail sector by expanding launched QnA and Choice & Care wealth cash management account (CMA) linked management services to customers of our products and services, such as small cash competitors. In addition, we will settlements, credit cards, etc. considerably expand our wealth management assets by enhancing the Having entered into seven advanced productability of cash management countries and emerging markets, account, accumulative funds, etc. and including New York, London, Hong Kong, providing new wrap services such as high- Tokyo, Shanghai, Ho Chi Mimh, and profit wrap products. In the investment Almaty, Hyundai Securities will become banking business, we continue to enhance equipped with a structure that can fully our underwriting capabilities by practicing compete with global investment banks by total financial consulting in our areas of focally growing each overseas branch strength, such as corporate bonds, through differentiated strategies by base. structured bonds, capital increases, initial We plan to make our Hong Kong public offerings, etc. We plan to foster the corporation our global business frontier overseas investment banking sector by base for Hyundai Securities for all strengthening sales and inviting promising overseas principal investment and companies in China, Japan, and Southeast investment banking investments, Asia to list on the Korea Stock Exchange. specializing in Asia ∙ emerging markets. Furthermore, we will work hard to secure Along with the strategies of each business, a solid track record to participate in large- Hyundai is dedicated to fostering talent scale mergers and acquisition deals by and securing top-class manpower. We actively exploring mid- to large-size strive to enhance our specialties and mergers and acquisition deals and cultivate a core talent pool by developing practicing private equity fund (PEF) employee careers through a systematic operations. To secure the mid- to long- education system that supports domestic term growth engine of Hyundai Securities, and overseas MBA programs and 600-plus we are actively expanding various new on/offline education programs. In addition, business areas and increasing the we will place our priorities on wholesale proportion of overseas business. We strive and retail sales by raising our research to capture early markets by advancing into poll ranking and enhancing brand value, the futures business, including foreign securing industry-best research exchange (FX) margin trading, and capabilities. We will provide the best in enhancing the business synergy between differentiated services to our customers, securities and asset management based on the best in information companies with the establishment of a technology (IT) credibility, by continuously separate asset management company. In pushing forward with system addition, we deal with the demands of sophistication for complex financial various institutional investors by business areas. expanding our prime brokerage services,
25 FINANCIAL SECTION
● MANAGEMENT’S DISCUSSION & ANALYSIS
● INDEPENDENT AUDITORS’REPORT
● NON-CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
● NON-CONSOLIDATED STATEMENTS OF INCOME
● NON-CONSOLIDATED STATEMENTS OF APPROPRIATIONS OF RETAINED EARNINGS
● NON-CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
● NON-CONSOLIDATED STATEMENTS OF CASH FLOWS
26 Management’s Discussion & Analysis
Financial Highlights
As of the year ended March
(KRW in billions) FY2009 FY2008 FY2007 Operating Results Operating revenues 2,863 2,934 2,967 Operating expenses 2,608 2,736 2,705 Operating income 255 198 187 Non-operating income 24 12 13 Non-operating expenses 28 7 18 Pretax income 251 203 257 Net income 179 149 187
Financial Condition Total assets 11,845 10,644 8,900 Total liabilities 9,406 8,364 6,641 Shareholders' equity 2,439 2,279 2,259 Return on average common shareholders' equity 7.6% 6.6% 9.9% Net Capital Ratio 578% 648% 616%
Common Share Data Number of outstanding shares 170,000,000 170,000,000 170,000,000 Book value per share (KRW in Won) 15,074 14,089 13,677 Earnings per share (KRW in Won) 1,052 878 1,338 Dividends declared and paid per common share (KRW in Won) 400 250 450 Fiscal year end stock price 13,600 11,400 15,450
Selected Data Total Employees 2,496 2,505 2,545 Branches(overseas) 140(7) 141(7) 140(7)
(KRW in bn) FY2009 FY2008 QoQ YoY Total 4Q 3Q 2Q 1Q Total 4Q 3Q 2Q 1Q NOI 699.4 181.1 126.9 176.9 214.6 584.7 158.5 205.0 86.0 135.2 43% 20% BK 381.1 80.1 70.6 108.3 122.1 291.0 75.2 78.6 60.1 77.1 13% 31% WM 26.6 6.8 6.4 6.8 6.6 26.2 4.5 4.7 7.0 10.0 6% 2% IB 24.4 4.2 5.4 4.7 10.0 18.0 5.8 4.1 1.7 6.3 -22% 35% Prop.Tr. 195.7 72.9 25.1 40.1 57.6 150.0 52.4 92.5 -9.8 14.9 190% 30% Finance 69.1 16.1 18.0 17.0 18.0 99.5 20.8 26.4 25.8 26.5 -11% -31% Others 2.6 1.0 1.4 0.0 0.3 -0.2 -0.1 -1.3 1.2 0.3 -21% 흑전
Brokerage Investment Banking Buoyed by increases in turnover and market share, brokerage Backed by the favorable performance of initial public offering revenue increased by 31% year-over-year and market share (IPO) and debt capital markets (DCM) sectors, revenues from increased by 3.4%p and 1.2%p based on stock brokerage and the investment banking (IB) business improved by 35% year- commission income, respectively. over-year, continuously increasing its contribution to the company. Wealth Management Despite a poor indirect investment market environment and the Proprietary Trading fund redemption trend, the balance of collective investment Proprietary trading revenue hiked by 30% as equity and bond securities, trusts, and WRAPS of Hyundai Securities continued to management realized favorable results through the rise. Revenue from wealth management rose by 2% year-over- simultaneous application of management scale adjustments year due to increases in commissions from collective investment depending on the market situation, and the composition of securities and trusts. appropriate portfolio and list management. The proprietary trading business continues to grow as a major revenue source for Hyundai Securities, along with the brokerage business.
27 Management’s Discussion & Analysis
1. Major Results of Operations
Operating income (KRW in 100mil) Pre-tax income (KRW in 100mil) YoY +29% YoY +24%
QoQ +319% QoQ +391%
688 2,552 722 2,514 753 1,984 784 2,027 164 147 650 589 929 922 1,049 1,056 340 38 359 38
1Q 2Q 3Q 4Q FY08 1Q 2Q 3Q 4Q FY09 1Q 2Q 3Q 4Q FY08 1Q 2Q 3Q 4Q FY09
With the revenue increases of brokerage and proprietary trading, our major revenue sources and favorable results SG & A (KRW in 100mil) in wealth management and the investment banking YoY +15% business, Hyundai Securities’operating income recorded QoQ +2% KRW 255.2bn in fiscal year 2009, up by 29% from KRW 198.4bn in the previous year. Earnings before tax rose by 1,123 4,442 832 3,863 24% year-over-year to KRW 251.4bn. 1,104 1,121 1,119 Selling and administrative expenses edged up 25% year- 898 over-year, mainly because of the expansion of information 1,012 1,096 technology investment for new business enhancement, which includes advertising expenses for sales 1Q 2Q 3Q 4Q FY08 1Q 2Q 3Q 4Q FY09 enhancement, the introduction of the small cash settlement system, and the promotion of effective budget management from companywide total cost reduction (TCR) enhancement. Net Operating Revenue
Net Operating income (KRW in 100mil) NOI by businesses (KRW in 100mil)
YoY +20% FY2008 FY2009
QoQ +43% 3,811
1,811 6,994 1,585 5,847 2,911 1,269 1,957 2,050 1,769 1,500 860 2,146 995 1,352 691 266 244 262 180
1Q 2Q 3Q 4Q FY08 1Q 2Q 3Q 4Q FY09 Brokerage Wealth Mgmt. IB Prop. Trading Finance
28 Management’s Discussion & Analysis
Net operating revenue increased by 20% year-over-year to KRW 699.4bn in fiscal year 2009. Net operating revenue can be broken down as follows: investment banking, brokerage, proprietary trading businesses all showed excellent performances, with increases of 35%, 31%, and 39%, respectively. However, interest income decreased by 31% compared with last year, mainly due to the interest rate drop.
NOI breakdown (KRW in 100mil) In terms of net operating revenue composition ratios, Brokerage Wealth Mgmt. IB brokerage rose by 4% to 54%, mainly due to increases in Interest Prop. Trading trading value and brokerage commission rates. As a result of our continuous efforts in business diversification and 8% 4% 11% revenue structure, the composition ratio of brokerage slid 26% 28% 16% 25% 18% by 14%, however, that of proprietary trading further 2% 2% 5% 2% 7% 17% 10% expanded to 28%, up by 20% compared with that of fiscal 8% 3% 3% year 2005 (8%), through active proprietary trading and 4% 4% rigorous risk management. Such revenue source 68% 59% 62% 50% 54% diversification efforts of Hyundai Securities will continue to create stable revenues in the future and eventually form an advanced business structure as the revenue contributions FY05 FY06 FY07 FY08 FY09 of wealth management, investment banking, and principal investment business areas continue to rise.
2. Operating Results by Business
Brokerage
Brokerage income (KRW in 100mil) The daily average turnover was KRW 8.4tr in fiscal year YoY +31% 2009, up 27% from KRW 6.4tn year-over-year. The QoQ +13% brokerage revenue of Hyundai Securities rose by 31%,
801 3,811 backed by the market share increase that outperformed the 752 2,910 706 increase rate of turnover. 786 1,083
601 1,221 771
1Q 2Q 3Q 4Q FY08 1Q 2Q 3Q 4Q FY09
29 Management’s Discussion & Analysis
Market share (turnover) (KRW in tr) The brokerage market share in fiscal year 2009 was 8.52%, up 2.88% (51%) year-over-year from the 5.64% in the Avg. daily turnover Hyundai Market share 12 8.52% previous year. This was made possible with the increase of 10 7.62% 6.18% 6.74% turnover. Equity-linked-warrants market share increase 8 5.64% with the recovery of the stock market. The monthly market 5.25% 5.12% 5.37% 5.00% 4.33% 6 share as of end-March 2010 was 8.52% after a sharp 4 increase backed by active trading of individual customers,
2 since recording 5.64% at end-April 2009. With the explosive
- growth of the equity-linked-warrants market, we expanded ‘08.1 3 6 9 ‘08.12 ‘09.3 6 9 12 ‘10.3 our equity-linked-warrants market dominance based on our information technology infrastructure and sales power, greatly contributing to the market share expansion.
Market share(commissions) The market share based on brokerage commission income YoY +1.2%P inched up in fiscal year 2009 by 1.2% (17%) to 8.17%, from 8.15% 8.17% 8.07% 8.14% 6.97% in the previous year. This is second in the industry 7.21% 7.47% 6.97% and was mainly achieved by the fact that Hyundai Securities maintained relatively high commission rates based on our brokerage competitiveness amid the overall descending trend of brokerage commission rates.
FY06 FY07 FY08 FY09 1Q 2Q 3Q 4Q(E)
Brokerage income Market share(turnover)
Turnover(on) Turnover(off) Commissions(on) Commissions(off) Overseas Domestic Retail
31% 30% 24% 20% 5% 5% 4% 3% 3% 2% 3% 38% 37% 35% 7% 6% 49% 8% 4% 56% 54% 53% 52% 52% 10% 9% 10% 59%
80% 65% 69% 70% 76% 94% 62% 63% 89% 90% 91% 85% 87% 86% 51% 46% 47% 48% 48% 44% 41%
FY06 FY07 FY08 FY09 1Q 2Q 3Q 4Q FY06 FY07 FY08 FY09 1Q 2Q 3Q 4Q FY06 FY07 FY08 FY09 1Q 2Q 3Q 4Q
30 Management’s Discussion & Analysis
Market share(commissions) Looking at the proportions of online/offline channels, both Overseas Domestic Retail the proportions of online channel brokerage and commission rose by 15%, 5% each year-over-year with the 6% 5% 5% 3% 4% 4% 5% 4% 4% 5% 3% primary market recovery from the first quarter of fiscal 5% 4% 5% year 2009. The portion of equity-linked-warrants individual investors increased. Despite the decrease of offline channel 93% 92% 91% 91% 89% 90% 90% brokerage following the increase of online brokerage, the commission proportion of the offline channel was maintained at the 50% level, with a slight drop due to our FY06 FY07 FY08 FY09 1Q 2Q 3Q 4Q relatively high average commission rates. However, it is expected that the proportion of online brokerage and commission will increase, so we will continue in our efforts to increase our brokerage by enhancing our online service competitiveness and profitability with the strengthening of VIP sales through offline channels at the same time.
By proportion of investor type, the proportion of individual investors sharply rose and the proportions of brokerage and commission in retail climbed by 8% and 1%, to 94% and 91%, respectively. The primary competitiveness of Hyundai Securities’brokerage is based on the retail investor. Therefore, if the investment culture centered on the individual investor expands, this will substantially help our profitability and competitiveness.
Client Assets
Retail (KRW in tr) Institutions (KRW in tr)
Financial products Brokerage deposits Financial products Brokerage deposits Institutions 43.0% Retail 57.0% 26.6 36.6 33.3 35.3 33.6 23.0 21.5 22.9 6.8 30.1 19.8 27.0 9.8 10.2 12.3 19.0 8.9 17.5 9.5 9.5 14.4 14.1 13.9 13.5 29.8 23.5 23.4 23.0 20.6 14.1 17.5 7.1 8.8 9.1 5.5 5.9
FY07 FY08 FY09 1Q 2Q 3Q 4Q FY07 FY08 FY09 1Q 2Q 3Q 4Q
Hyundai Securities’brokerage assets under management consist of equity valuation gains/losses for clients and their deposits for equities, futures, and options. Our financial assets include collective investment securities, wrap accounts, equity linked securities, cash management accounts (CMA), trusts, and bonds. In fiscal year 2009, assets under management surged by 35% year-over-year at KRW 6.2tr. The balance of financial assets gained 30% year-over-year to KRW 3.0tr, with the increase in balances of collective investment securities, retail general bonds, and trusts. The balances of client assets rose by KRW 9.1tr to a record KRW 32.2tr.
31 Management’s Discussion & Analysis
Financial products breakdown (KRW in tr) By financial asset type, repurchase agreement (RP) bonds Collective investment securities Wrap ELS RP�Fixed Income Trust CMA YoY +30% account for 39%, collective investment securities 22%,
29.8 trusts 12%, wrap 10%, cash management accounts (CMA) 2.8 24.2 24.4 3.7 9%, and equity-linked securities 6%. Bonds and collective 23.0 23.4 2.9 2.8 2.8 2.2 3.3 investment securities account for 61%, the largest portion. 15.7 2.5 2.5 3.7 11.8 2.2 5.1 6.9 7.7 7.6 repurchase agreement∙bonds soared by 131% with the 1.1 1.9 2.3 2.9 2.3 1.8 2.6 3.1 increased demand for the relatively safe retail bonds. 3.1 3.7 2.4 2.4 1.7 2.7 5.3 5.9 5.8 5.8 6.0 6.6 Collective investment assets rose by 11% despite the FY07 FY08 FY09 1Q 2Q 3Q 4Q overall fund-run trend in the stock market.
Wealth Management
WM income (KRW in 100mil) WM income breakdown (KRW in 100mil)
Collective Investment securities Wrap ELS Trust YoY +2%
QoQ +6% 68 68 66 64 7 8 5 68 266 9 7 7 45 262 7 5 47 11 11 10 47 64 2 45 17 2 2 70 68 10 3 9 42 42 100 66 33 36 41 31
1Q 2Q 3Q 4Q FY08 1Q 2Q 3Q 4Q FY09 FY08 3Q 4Q FY09 1Q 2Q 3Q 4Q
Revenue from wealth management inched up 2% year-over-year to KRW26.6bn with the surge in collective investment securities, wrap commissions and trust commissions, etc. By revenue composition, as the balances of collective investment securities, wrap, and trusts increased, the commission income of wealth management gained 5%, 16%, and 213%, respectively.
32 Management’s Discussion & Analysis
Trust balance breakdown (KRW in tr) The trust balance rose by KRW 1.2tn to KRW 3.7tn as the MMT Treasury Fixed deposit Others balances of money market trust, treasury stocks, and term 3.7 3.7 deposits surged by 8%, 15%, and 1068%, respectively. 3.3 0.4 0.4 0.4 0.1 2.5 2.5 0.2 0.3 0.8 0.1 0.3 0.1 0.4 0.5 0.4 0.0 1.6 0.3 0.1 2.8 0.1 2.4 0.4 2.1 1.9 1.8 0.9
3QFY08 4Q 1QFY09 2Q 3Q 4Q
Collective investment securities (KRW in tr) CMA balance & accounts (KRW in tr)
Equity Bond Hybrid MMF Others CMA balance 555 569 555 488 503 518 No. of accounts 468 6.6 6.0 379 5.9 5.8 5.8 335 5.3 0.94 305 1.1 1.06 1.25 1.01 241 1.0 2.71 168 2.2 2.9 2.9 2.01 2.8 2.8 2.8 1.0 2.2 1.96 1.86 2.7 2.5 2.5 2.3 0.9 0.62 0.41 0.62 0.48 2.1 0.7 1.4 1.21 1.37 1.55 0.9 1.10 1.5 1.0 1.0 1.02 1.02 0.99 0.96 FY07 FY08 FY09 1Q 2Q 3Q 4Q FY07 1Q 2Q 3Q 4Q FY08 1Q 2Q 3Q 4Q FY09 1Q 2Q 3Q 4Q
Retirement pension (KRW in 100mil) (accumulated) In fiscal year 2009, the balance of collective investment Reserve 22,813 20,165 securities increased by 11% to KRW 6.6tn as the balances of Accounts(accumulated) 18,345 19,024 short-term products such as money market trust (MMT) 13,619 1,371 and money market fund (MMF) sharply surged with the 12,745 continued trend of interest rate cuts. Cash management 7,328 893 account (CMA) balance stagnated at around KRW 2.8tn, 631 however, the number of accounts was 555,000, up 10% 6,687 593 441 497 year-over-year, backed by increases of issuances through 232 264 activated cross sales and the enforcement of credit card FY08 1Q 2Q 3Q 4Q FY09 1Q 2Q 3Q 4Q issuance work. Retirement pensions gained KRW 87.4bn in accumulation funds, with 9,194 more customers through continuous sales efforts. All in all, as the scale of our wealth management business continues to expand, its revenue contribution is expected to increase further in the future.
33 Management’s Discussion & Analysis
Investment Banking
Investment banking income (KRW in 100mil) Deals
YoY +35%
QoQ -23% Hyundai Food KRW59.7bn China Ocean ResourcesKRW53.3bn 42 244 58 180 54 47 41 HNK Machine Tool KRW50.5bn MoreensKRW26.6bn 17 100 63
1Q 2Q 3Q 4Q FY08 1Q 2Q 3Q 4Q FY09 Vitzro CellKRW17.6bn Kangwon B&EKRW 6.6bn
Underwriting (KRW in 100mil) FY2009 FY08QoQ YoY Type 1Q 2Q 3Q 4Q Total Corporatebond 7,350 4,350 3,743 4,420 19,863 10,900 18% 82% ABS/MBS 3,600 15,992 8,693 7,603 35,888 19,358 -13% 85% IPO 1,097 226 540 734 2,637 718 36% 267% Capitalincrease 960 2,978 327 98 4,363 1,312 -70% 233% Total 13,007 12,115 13,303 12,855 62,751 32,288 -3% 59%
Revenue from Hyundai Securities’investment banking business climbed by 35% year-over-year to KRW 24.4bn, as all the performances of representative underwritten initial public offering (IPO), debt capital market (DCM), and capital increases rose. The initial public offering business soared by 267% year-over-year, as we lead the underwriting of eight companies, including Hyundai Food System, China Ocean Resources, HNK Machine Tool, Moreens, etc. with a total underwriting value of KRW 263.8bn. Hyundai Securities’initial public offering deals had us ranked 5th in accumulative ranking in the 2009 Bloomberg initial public offering leading and underwriting list. We are proud to boast having successfully listed China Ocean Resources on the Korea Stock Exchange. At present, we are further enhancing our sales capabilities for sound companies in the Asian market, such as China and Japan, so as to expand our initial public offering capacity. We expect that the initial public offering performance in those regions will further expand in the future.
Debt capital market (DCM) performance soared by 85% year-over-year with KRW 648.1bn in asset-backed-securities (ABS), KRW 1.5tr in card and capital, and KRW 1.4tr in mortgage-backed-securities (MBS). All in all, investment banking performance gained 59% year-over-year to KRW 6.3tr in fiscal year 2009.
34 Management’s Discussion & Analysis
Proprietary Trading
Proprietary trading income (KRW in 100mil)Fixed income type & position (KRW in tr)
YOY +30% As of 2010. 3. 31
QoQ +190% Types Carrying value Proportions 729 1,957 State 1.77 27%
524 1,500 Local government 0.06 1% 251 401 925 Special (Incl. Finance special) 3.07(0.47) 47%(7%) 576 Corporate (Incl. Finance corporate) 1.69(1.13) 26%(17%) 149 98 Total 6.59 100% 1Q 2Q 3Q 4Q FY08 1Q 2Q 3Q 4Q FY09
Prop. trading vol (KRW in 100mil)Principal Inv. (KRW in 100mil) In fiscal year 2009, gains on proprietary trading increased
Avg. balance As of ’10.3.31 by 30% to KRW 195.7bn, backed by our excellent performance in equity and bond management. Equity RP Investment types PI
1Q 1.106 44,907 Equity 581 In equity proprietary trading, we have earned a superb Fixed income 884 track record through our own management philosophy 2Q 1.178 47,385 and continuous portfolio management by adjusting Collective invest. sec. 1,019 3Q 528 43,646 management scale elastically as we predict the market Loans purchased 100 situation and fostering proven top management talent. In 4Q 596 43,008 Total 2,584 addition, we achieve our core goals of profitability and stability as we establish the infrastructure to create stable revenue streams through our organic monitoring system and sound risk management.
In the case of the bond proprietary trading, as the proportion of the company’s revenue continues to rise, management policies are set to create conservative and stable performance through appropriate hedging and risk management, depending on the market interest rate trends. Based on the know-how of our in-house management specialists, our bond management business continuously outperforms the market.
The average annual equity and RP bond balances of Hyundai Securities’proprietary trading accounts were KRW 85.2bn and KRW 4.5tr, respectively, in fiscal year 2009. Going forward, we will actively operate our proprietary trading system by flexibly adjusting our management scale depending on the stock market environment. Such active expansion plans for proprietary trading are part of our strategy for diversifying our business portfolio and enhancing profitability.
Gains on trading in structured securities are reflected in various kinds of transactions, including the trading/valuation of stocks and bonds, the trading/valuation/redemption of structured securities and structured securities old, the trading/settlement of futures, and over-the-counter derivatives trading/valuation. Hyundai Securities’bond holdings stood at KRW6.59bn, of which low-risk bonds, such as financial bonds, national bonds, municipal bonds, special bonds, monetary stabilization bonds, and industrial financial bonds account for over 83%.
KRW 258.4bn is invested in principal investment (PI) in total, among which collective investments account for the largest portion with 39%. Through an 11% level principal investment (PI) investment of principal, we pursue revenue source diversification and mid- to long-term principal efficiency.
35 Management’s Discussion & Analysis
Interest Income
Finance income (KRW in 100mil) Customers’deposits, gains on valuation (KRW in tr, 100mil) (Avg. balance)
YOY -31% 150 155 Gain on valuation of reserve 137 for claims of customers’ 125 deposits(trust) 208 995 QoQ -10% 104 264 Reserve for claims for 161 691 79 85 customers’deposits (avg. balance) 79 258 180 1.34 170 1.28 265 1.12 1.20 1.11 1.16 180 0.94 1.01
1Q 2Q 3Q 4Q FY08 1Q 2Q 3Q 4Q FY09 FY08 1Q 2Q 3Q 4Q FY09 1Q 2Q 3Q 4Q
Call money (KRW in 100mil)(Avg. balance)
Call money(balance) Interest on call money
45 44
3,787
19 3,336 2,505 3,800 3,788 1,751 12 6 2,357 7 7 847 3
FY08 1Q 2Q 3Q 4Q FY09 1Q 2Q 3Q 4Q
Hyundai Securities interest income consists of interest on margin loans, interest on loans, and gains on valuations of reserves for claims of customer deposits. Interest on bonds, repurchase agreements (RPs), and other instruments are classified as gains on proprietary trading. Interest income declined by 31% year-over-year in fiscal year 2009, due to a decrease in gains on the valuation of reserves for claims of customer deposits, caused by interest rate decreases. The reserves for claims of customer deposits averaged KRW 1.22tr in fiscal year 2009, up by 14% compared with an average of KRW 1.07tr in fiscal year 2008. However, the valuation gains decreased by 39% year-over-year due to a decrease of interest rates under management caused by the interest rate fall. The average balance of call money was KRW 284.5bn in fiscal year 2009, up 5% from KRW 269.8bn in fiscal year 2008. However, interest on call money decreased by 75% year-over-year, mainly due to the interest rate decline.
36 Hyundai Securities Risk Management
Risk management policy Subcommittees under the council Hyundai Securities aims to systematically control and For the sake of reasonable decision-making, the council manage various risks (all possible losses that can be has subcommittees that provide professional advice and incurred) pertaining to our business activities, and deliberation on each agenda. The council efficiently realize a stable financial structure and management manages risks by convening a subcommittee for each system through the efficient allocation of resources. operating activity, including investment products, For this purpose, we endeavor to achieve marketable securities, over-the-counter derivatives, comprehensive risk management and optimum capital credit grants, and trusts. allocation by establishing a company-wide risk management structure, setting up comprehensive risk- Risk management department management processes, building a comprehensive risk- We have a risk management department that management system [ERMS, Enterprise risk- implements the risk management principles and management system], and developing a firm-wide risk- strategies set up by the committee and the council. The conscious culture. organization is represented by the CRO (Chief Risk Officer), the executive responsible for risk management Risk management structure affairs; the risk management department (to detect, measure, and control risks); and the risk review Risk management committee department (investment deliberations and post- We have in place a risk management committee, investment follow-up). (hereinafter referred to as“ the committee”), a final - The risk management department, as a , is run decision-making body for risk management. The independent of the , engaged in sales activities, and of committee is responsible for: 1) discussing and deciding the , a support unit in charge of financial and settlement on important matters that might affect the issues. company’s financial health; and 2) establishing and supervising asset-management structures, (including Risk management process total investment limits), and risk management strategies. The committee convenes more than once a Recognition of risks quarter. It includes directors, Risks are classified into the following categories: including the CEO and external directors, as its market risk, credit risk, operational risk, liquidity risk, members. legal risk, reputational risk, strategic risk, and systematic risk. Risk management council We established a risk management council, (hereinafter Risk measurement referred to as“ the council”), which discusses working- The risk management department establishes methods level agenda items (investment deliberations, etc.) for the measurement of each risk type, and reflects the entrusted by the committee, and establishes detailed results in the risk measurement system before plans related to risk management policy. periodically measuring and analyzing risks. The The council convenes more than once a month and department documents all matters related to consists of senior members of the company, including measurement models, such as the process and method the Chief Risk Officer of deciding variables used in measuring risk, the source of data, basic assumptions, and the conditions for system design. The details of risk measurement are stipulated in the risk management rules for each business.
37 Risk control The risk management department regularly monitors measures, and either reports or refers to the activities to ensure 1) investment positions are committee, and then takes measures according to the maintained at appropriate levels within investment outcome. limits, 2) those positions are effectively handled in Investment limit management is set and managed by response to changing risk levels during market reflecting the business strategy and risk appetite. We fluctuations, and 3) that risks are controlled actively manage the investment limit to minimize accordingly. If a position exceeds the investment limit, interference with other departments in decision-making each sales department looks into the causes, draws up discretion, while maintaining the company’s estimated losses within a tolerable scope.
Figure
Limit distribution plan recognition
Risk management �Business strategy committee/council �Risk appetite - capital
Limit distribution plan framing Limit monitoring Risk management �Business planning �Daily/monthly/quarterly basis department �Previous year actual results �Volume, loss, VaR, sensitivity, etc.
Front office Limit application RAPM Feedback �Limit application form �Department/period/products basis �Asset management planning form �Risk adjustment performance measure
Investment limit management covers all trading Risk Categories products and manages the limits of investment, losses, sensitivity, and credit risk. Hyundai Securities controls Market risk and manages risk through the“ Enterprise risk Market risk refers to risks associated with declines in management system”on a daily, monthly, and quarterly the value of Hyundai Securities’investment positions basis. due to changes in market factors, such as share prices, interest rates, and FX rates. We use VaR as the main Risk report tool to assess market risk. We use other indexes also, The risk management department monitors risk and including the limit of sensitivity by risk factor and stress limits utilization rates throughout the company, and test analysis. reports its findings to management on a daily basis. The department also reports the overall risk-management status to the council and the committee on a regular basis, and risk management progress to the board of directors twice a year.
38 VaR is a statistical index used to estimate maximum Operational risk losses in a confidence interval during a certain period of Operational risk refers to the risk of losses resulting time under normal market conditions. Our company from inadequate internal processes, personnel, or applies a 99% confidence interval and 10-day VaR in systems, or from external events. All branches and accordance with risk assessment standards departments conduct risk management activities, such recommended by regulations on the financial as identifying operational risks, risk and control self- investment industry, and Financial Supervisory Service assessment (RCSA), reporting losses, and monitoring (FSS) guidelines. key risk indicators (KRIs). The risk management department verifies and manages related data, analyzes Liquidity risk KRIs, and quantifies operational risks to control and Liquidity risk is the risk that liabilities cannot be met by mitigate enterprise-wide operational risks. trading assets. By law, the asset-to-liability ratio must exceed 100%, and ours stood at as of the end of fiscal Capital Adequacy year 2009. In addition, we established contingency plans to brace for liquidity risk following any sudden shock in Net capital ratio system the market. Capital market laws regulate the capital of financial investment companies in order to protect investors and Credit risk ensure the sustainable operation of companies in a Credit risk refers to the risk of asset value declines rapidly changing market environment. The law associated with trading partners’defaults, bankruptcy, stipulates that financial investment companies’net and credit rating changes. We set single name capital ratio must exceed 150% to maintain capital concentration ratios according to the corresponding adequacy under the PCA (Prompt Corrective Action) trader’s credit rating, and manage credit risk in framework. Hyundai Securities aims to maintain a net accordance with FSS standards. Furthermore, we use capital ratio of more than 300%. credit VaR, our internal model index. - The net capital ratio is the minimum level of capital required to liquidate the company in case of bankruptcy, without incurring losses for customers and creditors. The ratio shows whether capital is kept at an adequate level against asset holding risks (market, credit, and operational risks), and is calculated based on the following equation:
Net capital Asset on B/S - Liabilities on B/S - Subtracted items + Added items × 100% = × 100% Total exposure Market risk + Credit risk + Operational risk
39 Hyundai Securities’net capital ratio Hyundai Securities aims to maintain a net capital ratio management target of over 300%. This clearly indicates of more than 300%. Our net capital ratio surged YoY to that we are fulfilling the requirements of financial as of end-Mar 2010, far in excess of our risk- soundness and capital adequacy. Our most recent net capital adequacy ratio figures are as follows:
Net capital adequacy ratio trend (Unit: KRW mil) FY 2009 2008 2007 Net capital 1,88,726 1,688,707 1,544,254 Total exposure 313,290 263,411 250,872 Net capital adequacy ratio 578.29 641.09 615.55
Others
Building an“ Enterprise Risk Management System” We have been developing a comprehensive risk- firm-wide performance measurement and resource management system, the ERMS, since April 2009 in distribution from to. response to changes in the regulatory environment; With the goal of establishing the best risk management more specifically, possible structural changes and system in the industry, we developed the system over a greater fluctuations resulting from the Capital Market 14-month-long effort to incorporate market risk, credit and Financial Investment Services Act. We seek to seize risk, operational risk, capital adequacy, and a risk opportunities afforded by market changes to launch database within our risk management framework. new products.
Figure
Market risk Credit risk Liquidity risk Operational risk Comprehensive risk �In-house development �Use of an internal �Elaborate liquidity �Introduce operational �Capital adequacy, of a process engine credit rating model ratio computation risk management investment limit management, for OTC derivatives →Establish a credit →Strengthen liquidity →Efficient emergency plans for →Verifying new risk management management improvement in crises products’fair prices system internal controls →Establish risk quickly management at an advanced level
Comprehensive risk management system: Linked to the International Financial Reporting Standards (IFRS) projects, Establish the best risk management system in the industry.
Developing a firm-wide Risk-Conscious Culture improvements in risk management. We have We have continuously conducted risk management employees in charge of risk management in all education for all employees to create an enterprise- branches and departments for risk prevention activities. wide culture of risk management. We also conduct risk-management-related education To this end, Hyundai Securities holds risk management for all employees, both online and offline, more than seminars for management to seek further once a year to minimize risk-related losses.
40 INDEPENDENT AUDITORS’REPORT
Deloitte Anjin LLC 14Fl., Hanwha Securities Bldg., 23-5 Yoido-dong, Youngdeungpo-gu, Seoul 150-717, Korea Tel +82 (2) 6676 1000 ㅣ Fax +82 (2) 6674 2114 www.deloitteanjin.co.kr
English Translation of a Report Originally Issued in Korean
To the Shareholders and Board of Directors of Hyundai Securities Co., Ltd.
We have audited the accompanying non-consolidated statement of financial position of Hyundai Securities Co., Ltd. (the “Company”) as of March 31, 2010, and the related non-consolidated statements of income, appropriations of retained earnings, changes in shareholders' equity and cash flows for the years then ended, all expressed in Korean won. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of the Company for the yer ended March 31, 2009, which are presented for comparative purposes, were audited by Samil PricewaterhouseCoopers whose report dated May 21, 2009, expressed an unqualified opinion on those stastements.
We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 2010 financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2010, and the results of its operations, changes in its retained earnings and its shareholders’ equity, and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the Republic of Korea (See Note 2).
Accounting principles and auditing standards and their application in practice vary among countries. The accompanying financial statements are not intended to present the financial position, results of operations, changes in shareholders’equity and cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying financial statements are for use by those knowledgeable about Korean accounting procedures and auditing standards and their application in practice.
May 18, 2010
Notice to Readers This report is effective as of May 18, 2010, the audit report date. Certain subsequent events or circumstances may have occurred between the auditors’ report date and the time the auditors’ report is read. Such events or circumstances could significanrly affect the accompanying financial statements and may result in modifications to the auditors’ report.
41 NON-CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS OF MARCH 31, 2010 AND 2009
Korean won (In thousands)
2010 2009 ASSETS CASH AND DEPOSITS: Cash and cash equivalents (Notes 9 and 25) ＼ 272,573,600 ＼ 153,511,496 Deposits (Notes 3 and 9) 1,329,936,255 1,594,012,743 1,602,509,855 1,747,524,239 SECURITIES: Trading securities (Notes 4 and 6) 6,151,288,738 5,880,954,384 Available-for-sale securities (Notes 2, 6 and 7) 1,416,293,935 324,044,284 Investment securities using the equity method (Note 8) 170,772,855 185,555,070 Derivatives linked securities (Note 5) 577,104,016 1,023,217,774 8,315,459,544 7,413,771,512 DERIVATIVES INSTRUMENTS ASSETS: Derivatives instruments assets (Note 24) 29,896,123 127,512,007 LOANS: Loans, less allowance for doubtful accounts of ＼37,436,522 thousand in 2010 and ＼29,921,564 thousand in 2009 (Notes 2, 10, 11, 12 and 21) 1,245,578,303 750,117,182 TANGIBLE ASSETS: Property and equipment, net of accumulated depreciation of ＼169,535,873 thousand in 2010 and ＼151,043,950 thousand in 2009 (Note 13) 259,746,725 266,828,232 OTHER ASSETS Receivables, less allowance for doubtful accounts of ＼1,234,997 thousand in 2010 and ＼744,116 thousand in 2009 (Note 12) 111,935,636 79,209,405 Accrued income, less allowance for doubtful accounts of ＼417,804 thousand in 2010 and ＼419,540 thousand in 2009 (Note 12) 61,446,329 58,378,174 Advanced payments (Note 21) 37,544,959 27,553,201 Prepaid expenses 2,388,205 1,984,326 Refundable income tax (Note 20) - 13,769,171 Prepaid value added tax 63,531 - Guarantee deposits (Note 9) 82,277,535 78,538,840 Collective fund for default loss (Note 3) 6,534,196 6,745,876 Intangible assets (Note 14) 46,868,918 30,880,431 Others 42,235,685 40,897,207 391,294,994 337,956,631 TOTAL ASSETS ＼ 11,844,485,544 ＼ 10,643,709,803
(Continued)
42 Korean won (In thousands)
2010 2009 LIABILITIES AND SHAREHOLDERS’ EQUITY DEPOSITS: Customers’ deposits ＼ 1,359,811,865 ＼ 1,412,859,771 Others 4,622,903 - 1,364,434,768 1,412,859,771 BORROWINGS: Call money (Note 15) 326,000,000 60,000,000 Borrowings (Note 15) 603,287,038 228,518,254 Bonds sold under repurchase agreements (Note 21) 4,744,101,975 3,829,191,416 Securities sold (Note 2) 18,673,973 7,613,682 Derivatives linked securities sold (Note 5) 1,710,640,510 2,049,621,429 Derivatives instruments liabilities (Note 24) 63,411,878 336,533,327 Debentures (Note 16) 200,349,130 200,875,290 7,666,464,504 6,712,353,398 OTHER LIABILITIES: Accrued severance benefits, net of National Pension Fund for severance and retirement benefits of ＼128,869 thousand in 2010 and ＼142,236 thousand in 2009, and individual severance insurance deposits of ＼68,590,584 thousand in 2010 and ＼45,306,387 thousand in 2009, and retirement pension assets of ＼1,980,413 thousand in 2010 (Note 2) 22,351,486 34,821,661 Income tax payable (Note 20) 13,654,309 - Accounts payable (Notes 9, 21 and 22) 243,092,336 120,247,268 Accrued expenses 16,605,906 24,507,474 Guarantee deposits received 14,723,679 13,564,570 Advances from customers 7,595 - Unearned income 2,909,782 5,003,912 Deferred income tax liabilities (Note 20) 16,968,913 8,431,231 Withholdings (Note 9) 13,004,668 9,034,853 Others (Note 9) 31,488,049 23,497,509 374,806,723 239,108,478 TOTAL LIABILITIES 9,405,705,995 8,364,321,647 COMMITMENTS AND CONTINGENCIES (Note 22)
(Continued)
43 NON-CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS OF MARCH 31, 2010 AND 2009
Korean won (In thousands)
2010 2009 SHAREHOLDERS’ EQUITY: Capital stock (Note 17) ＼ 850,000,000 ＼ 850,000,000 Capital surplus 836,361,851 836,361,851 Capital adjustments (Note 17) (68,161,137) (68,161,137) Accumulated other comprehensive income (Notes 7, 8, 20 and 23) 85,122,239 64,145,995 Retained earnings (Note 17) 735,456,596 597,041,447 TOTAL SHAREHOLDERS’ EQUITY 2,438,779,549 2,279,388,156 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY ＼ 11,844,485,544 ＼ 10,643,709,803
See accompanying notes to non-consolidated financial statements.
44 NON-CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED MARCH 31, 2010 AND 2009
Korean won (In thousands, except per share amounts)
2010 2009 OPERATING REVENUES: Commissions received (Notes 21 and 27) ＼ 476,169,781 ＼ 366,667,053 Gain on sales of trading securities 285,988,569 144,839,037 Gain on valuation of trading securities (Note 4) 38,751,707 59,354,014 Gain on sales of available-for-securities 19,799,214 757,281 Reversal of impairment loss on securities (Note 7) 3,200,000 22,640 Gain on valuation of securities sold 934,973 1,698,758 Gain on valuation of derivatives linked securities (Note 5) 447,872,506 122,997,524 Gain on derivatives linked securities transactions 121,312,564 151,189,280 Gain on valuation of derivatives linked securities sold (Note 5) 13,774,524 670,604,694 Gain on derivatives linked securities sold transactions 393,956,230 611,826,043 Gain on derivatives transactions (Note 24) 617,367,623 347,382,157 Interest income (Notes 4, 7, and 21) 388,768,203 377,431,035 Gain on valuation and disposal of loans 2,823,517 1,917,969 Gain on foreign currency transactions 5,627,522 6,159,971 Gain on valuation of reserve for claims of customer’s deposits (trust) 34,596,639 56,722,207 Others 11,731,605 14,740,103 2,862,675,177 2,934,309,766 OPERATING EXPENSES: Commissions expenses (Note 21) 41,012,677 30,036,313 Loss on sales of trading securities 120,907,080 192,721,058 Loss on valuation of trading securities (Note 4) 12,959,431 24,181,535 Loss on sales of available-for-securities 2,880,805 1,330,870 Impairment loss on securities (Note 7) 8,906,241 6,610,635 Loss on valuation of securities sold 940,585 1,783,002 Loss on valuation of derivatives linked securities (Note 5) 8,545,995 344,874,542 Loss on derivatives linked securities transactions 197,879,643 625,714,819 Loss on valuation of derivatives linked securities sold (Note 5) 776,287,858 204,717,083 Loss on derivatives linked securities sold transactions 343,478,522 92,944,385 Loss on derivatives transactions (Note 24) 456,348,776 592,161,322 Interest expense 175,767,521 218,802,055 Loss on valuation and disposal of loans 7,644,427 2,580,103 Loss on foreign currency transactions 9,208,278 10,378,923 Selling and administrative expense (Notes 13, 14, 21 and 28) 444,220,118 386,300,340 Others 483,434 751,564 2,607,471,391 2,735,888,549 OPERATING INCOME 255,203,786 198,421,217
(Continued)
45 NON-CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED MARCH 31, 2010 AND 2009
Korean won (In thousands, except per share amounts)
2010 2009 NON-OPERATING INCOME: Gain on disposal of property and equipment ＼ - ＼ 3,069 Rental income (Note 21) 7,857,852 6,189,284 Gain on equity method valuation (Note 8) 7,672,813 2,530,734 Gain on disposal of investment securities using the equity method (Note 8) - 255,920 Others 8,240,278 2,720,540 23,770,943 11,699,547 NON-OPERATING EXPENSES: Loss on disposal of property and equipment 14,951 100,850 Loss on equity method valuation (Note 8) 4,977,370 3,127,928 Donations 3,833,807 3,057,443 Others 18,713,393 1,129,526 27,539,521 7,415,747 INCOME BEFORE INCOME TAX 251,435,208 202,705,017 INCOME TAX EXPENSE (Note 20) 72,574,038 53,515,794 NET INCOME ＼ 178,861,170 ＼ 149,189,223 INCOME PER SHARE (Note 18) ＼ 1,106 ＼ 913
See accompanying notes to non-consolidated financial statements.
46 NON-CONSOLIDATED STATEMENTS OF APPROPRIATIONS OF RETAINED EARNINGS FOR THE YEARS ENDED MARCH 31, 2010 AND 2009
Korean won (In thousands)
2010 2009 RETAINED EARNINGS BEFORE APPROPRIATIONS: Unappropriated retained earnings carried over from prior year ＼ - ＼ - Net income 178,861,170 149,189,223 178,861,170 149,189,223 APPROPRIATIONS: Voluntary reserves 107,676,329 104,698,600 Legal reserves 6,471,349 4,044,602 Dividends (Note 19) 64,713,492 40,446,021 178,861,170 149,189,223 UNAPPROPRIATED RETAINED EARNINGS TO BE CARRIED FORWARD TO SUBSEQUENT YEAR ＼ - ＼ -
See accompanying notes to non-consolidated financial statements.
47 NON-CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED MARCH 31, 2010 AND 2009
Korean won (In thousands) Accumulated Capital Capital other Retained Capital stock Total surplus adjustments comprehensive earnings income
As of April 1, 2008 ＼ 850,000,000 ＼ 836,361,851 ＼ (30,279,532) ＼ 80,899,032 ＼ 522,184,545 ＼ 2,259,165,896 Cash dividends - - - - (74,332,321) (74,332,321) Retained earnings after appropriations 850,000,000 836,361,851 (30,279,532) 80,899,032 447,852,224 2,184,833,575 Net income - - - - 149,189,223 149,189,223 Purchase of treasury stock - - (37,881,605) - - (37,881,605) Gain on valuation of available-for-sale securities - - - (36,149,511) - (36,149,511) Loss on valuation of available-for-sale securities - - - (5,298,032) - (5,298,032) Changes in equity arising from application of the equity method - - - 16,356,046 - 16,356,046 Negative changes in equity arising from application of the equity method - - - 5,648,053 - 5,648,053 Overseas operation translation income - - - 2,690,407 - 2,690,407 As of March 31, 2009 ＼ 850,000,000 ＼ 836,361,851 ＼ (68,161,137) ＼ 64,145,995 ＼ 597,041,447 ＼ 2,279,388,156 As of April 1, 2009 ＼ 850,000,000 ＼ 836,361,851 ＼ (68,161,137) ＼ 64,145,995 ＼ 597,041,447 ＼2,279,388,156 Cash dividends - - - - (40,446,021) (40,446,021) Retained earnings after appropriations 850,000,000 836,361,851 (68,161,137) 64,145,995 556,595,426 2,238,942,135 Net income - - - - 178,861,170 178,861,170 Gain on valuation of available-for-sale securities - - - 57,969,633 - 57,969,633 Loss on valuation of available-for-sale securities - - - (22,372,774) - (22,372,774) Changes in equity arising from application of the equity method - - - (11,195,762) - (11,195,762) Negative changes in equity arising from application of the equity method - - - (2,676,820) - (2,676,820) Overseas operation translation income - - - (748,033) - (748,033) As of March 31, 2010 ＼850,000,000 ＼836,361,851 ＼ (68,161,137) ＼ 85,122,239 ＼ 735,456,596 ＼ 2,438,779,549
See accompanying notes to non-consolidated financial statements.
48 NON-CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 2010 AND 2009
Korean won (In thousands)
2010 2009 CASH FLOWS FROM OPERATING ACTIVITIES: Net income ＼ 178,861,170 ＼ 149,189,223 Adjustments to reconcile net income to net cash provided by operating activities: Gain on valuation of trading securities, net (25,792,276) (35,172,479) Loss (gain) on sales of available-for-sale securities, net (16,918,409) 573,588 Impairment loss on securities, net 5,706,241 6,587,995 Loss on valuation of securities sold, net 5,612 84,245 Loss (gain) on valuation of derivatives linked securities, net (439,326,511) 221,877,017 Loss (gain) on valuation of derivatives linked securities sold, net 762,513,335 (465,887,611) Loss (gain) on valuation of derivatives, net (214,346,080) 189,146,593 Provision for doubtful accounts, net 8,127,860 1,413,698 Loss (gain) on foreign currency translation, net (2,260,216) 2,810,818 Provision for severance benefits 19,360,889 24,004,312 Depreciation 19,108,778 18,886,840 Amortization 12,882,825 3,241,938 Loss on disposal of property and equipment, net 14,951 97,781 Loss (gain) on equity method valuation, net (2,695,443) 597,194 Gain on disposal of loans (2,823,517) - Gain on valuation of reserve for claims of customer’s deposits (trust) (34,596,639) (56,722,207) Others, net (1,542,022) (144,062) Changes in assets and liabilities from operations: Decrease (increase) in deposits 250,188,858 (246,491,282) Increase in trading securities (282,962,896) (2,218,205,935) Dividends from investment securities using the equity securities 5,727,017 1,624,638 Decrease in derivatives linked securities 885,440,269 644,053,955 Decrease in derivative assets 117,343,320 12,970,906 Decrease (increase) in loans (476,762,192) 439,726,693 Increase in receivables (33,211,400) (56,608,213) Increase in accrued income (3,066,419) (6,218,397) Increase in advanced payments (9,991,759) (5,853,911) Increase in prepaid expenses (403,879) (273,301) Decrease (increase) in refundable income tax 13,769,171 (13,769,171) Decrease in collective fund for default loss 211,680 804,708 Decrease in deferred income tax assets - 45,084,564 Decrease (increase) in customers’ deposits (53,047,906) 323,053,181 Increase in securities sold under repurchase agreements 914,910,559 1,495,894,799
(Continued)
49 NON-CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED MARCH 31, 2010 AND 2009
Korean won (In thousands)
2010 2009 Increase (decrease) in securities sold 11,054,679 (7,424,754) Increase (decrease) in derivatives linked securities sold (1,101,494,254) 166,173,482 Increase (decrease) in derivatives instruments liabilities (78,502,805) 301,886 Payment of severance benefits (6,579,820) (11,336,661) Decrease in National Pension Fund 13,367 - Increase in individual severance insurance deposits (23,284,198) (6,899,971) Increase in retirement pension assets (1,980,413) - Increase (decrease) in income tax payable 13,654,309 (24,926,178) Increase in accounts payable 104,556,416 33,641,608 Decrease in accrued expenses (7,901,568) (6,133,884) Increase in advances from customers 7,595 - Increase (decrease) in withholdings 3,969,815 (11,715,396) Decrease in unearned income (2,094,130) (725,420) Increase (decrease) in deferred income tax liabilities (565,233) 8,431,231 Others, net 15,862,516 23,532,557 Net cash provided by operating activities 521,141,247 639,296,617 CASH FLOWS FROM INVESTING ACTIVITIES: Withdrawal of long-term financial instruments 254,378,594 - Disposal of available-for-sale securities 421,865,770 48,128,553 Disposal of investment securities using the equity method 330,445 609,920 Disposal of privately placed bonds 9,823,517 - Disposal of property and equipment 23,077 79,406 Decrease in guarantee deposits 10,153,007 16,385,073 Acquisition of long-term financial instruments (208,903,984) (114,515,786) Increase in restricted deposits (3,000) - Acquisition of available-for-sale securities (1,418,822,394) (116,885,030) Acquisition of investment securities using the equity method (8,223,728) (92,206,820) Acquisition of privately placed bonds (28,572,595) - Acquisition of property and equipment (9,567,396) (51,863,571) Increase in guarantee deposits (13,891,701) (13,229,220) Increase in intangible assets (10,646,027) (28,633,061) Other, net (834,501) 221,940 Net cash used in investing activities (1,002,890,916) (351,908,596) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from call money 266,000,000 - Proceeds from bank overdrafts 9,930,318 - Proceeds from borrowings from KSFC 329,306,603 140,104,079 Proceeds from other borrowings 1,126,380,726 1,403,194,608
(Continued)
50 Korean won (In thousands)
2010 2009 Proceeds from debentures 199,329,900 - Increase in guarantee deposits received 6,367,576 741,527 Payment of call money - (254,000,000) Repayment of other borrowings (1,090,848,863) (1,405,994,608) Payment of debentures (200,000,000) - Decrease in guarantee deposits received (5,208,466) (1,923,014) Acquisition of treasury stock - (37,881,605) Payments of dividends (40,446,021) (74,332,321) Net cash provided by (used in) financing activities 600,811,773 (230,091,334) NET INCREASE IN CASH AND CASH EQUIVALENTS ＼ 119,062,104 ＼ 57,296,687 CASH AND CASH EQUIVALENTS, AT THE BEGINNING OF THE YEAR 153,511,496 96,214,809 CASH AND CASH EQUIVALENTS, AT THE END OF THE YEAR (Note 25) ＼ 272,573,600 ＼ 153,511,496
See accompanying notes to non-consolidated financial statements.
51 NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2010 AND 2009
1. GENERAL
Hyundai Securities Co., Ltd. (the“ Company”) was established in 1962, under the name of Kookil Securities Co., Ltd. The Company changed its name to“ Hyundai Securities Co., Ltd”on June 5, 1986. In 1975, the Company’s shares were listed on the Korean Stock Exchange and as of March 31, 2010, all issued and outstanding shares are publicly traded. After several capital increase, capital stock of the Company is ＼850,000 million as of March 31, 2010. The Company has 139 branch offices in Korea, 1 overseas branch and 3 overseas offices as of March 31, 2010.
The Company's shareholders and their respective percentage of ownership as of March 31, 2010 are as follows:
Shareholders Number of shares Percentage of ownership (%) Hyundai Merchant Marine Co., Ltd. 39,382,676 23.2% Treasury stock 8,215,870 4.8% Others 122,401,454 72.0% 170,000,000 100.0%
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Non-Consolidated Financial Statement Presentation
The Company maintains its official accounting records in Korean won and prepares statutory financial statements in the Korean language (Hangul) in conformity with the accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these financial statements are intended for use by those who are informed about Korean accounting principles and practices. The accompanying financial statements have been condensed, restructured and translated into English (with certain expanded descriptions) from the Korean language financial statements. Some supplementary information included in the Korean language financial statements, but not required for a fair presentation of the Company's financial position, results of operations, changes in shareholders’equity or cash flows, is not presented in the accompanying financial statements.
The Company has renamed the balance sheets as of March 31, 2010 and 2009 to statements of financial position in accordance with the amendment made to Article No. 1-2 of the Act on External Audit for Stock Companies in the current period.
The 2010 financial statements prepared for the regular shareholders’meeting were approved on May 12, 2010 by the board of directors.
52 Revenue Recognition
The Company recognizes commissions, and trading gains and losses on the contract date. The Company, however, recognizes commissions, and trading gains and losses in connection with over-the counter (OTC) transactions on the collection date.
The Company recognizes the interest income to the loan in proportion to the loan period, however, the accrued interest income on loan that is uncertain to collect its principal or interest income is recognized when the cash is received and the interest income is reversed.
Allowance for Doubtful Accounts
Regulation on Capital Market and Financial Investment Business Act (the“ Act”) requires the Company to classify all outstanding loans and accounts receivable (loans, receivables, accrued income, loans purchased, advances for customers, dishonored loans, privately placed bonds and others) into five categories as normal, precautionary, substandard, doubtful or estimated loss, based on borrowers’repayment capability and historical financial transaction records. The Supervisory Regulation also requires providing the minimum rate of allowance for doubtful accounts for each category balance using the prescribed minimum percentages of 0.5 percent, 2 percent, 20 percent, 75 percent and 100 percent, respectively. In addition, the Company does not provide allowance for doubtful accounts for receivables from standardized transactions, call loans, which were classified as normal loan and bonds purchased under reverse repurchase agreements in accordance with article 3- 8, clause 2 of the Act.
Investments in Securities Other Than Those Accounted for Using the Equity Method
Debt and equity securities are initially stated at the market value of consideration given for acquisition (market value of securities acquired if market value of consideration given is not available) plus incidental costs attributable to the acquisition of the securities and are classified into trading, available-for-sale and held-to-maturity securities depending on the purpose and nature of acquisition. The Company presents trading securities as short-term investments, and available-for-sale securities and held-to-maturity securities as short-term investments or long-term investment securities depending on their nature in the statements of financial position. The moving average method is used to determine the cost of securities for the calculation of gain (loss) on disposal of those securities.
The following is the specific valuation method applied for debt and equity securities:
1) Trading securities
Securities that are bought and held principally for the purpose of selling them in the near term with active and frequent buying and selling, including securities which consist of a portfolio of securities with the clear objective of generating profits on short- term differences in price, are classified as trading securities. Trading securities are recorded at their fair value and unrealized gains or losses from trading securities are recorded as gain (loss) on valuation of trading securities included in the non- operating income (expense).
53 2) Held-to-maturity securities
Debt securities that have fixed or determinable payments with a fixed maturity are classified as held-to-maturity securities only if the Company has both the positive intent and ability to hold those securities to maturity.
After initial recognition, held-to-maturity securities are stated at amortized cost in the statements of financial position. When held-to-maturity securities are measured at amortized costs, the difference between their acquisition cost and face value is amortized using the effective interest rate method and the amortization is included in the cost and interest income.
When the possibility of not being able to collect the principal and interest of held-to-maturity securities according to the terms of the contracts is high, the difference between the recoverable amount (the present value of expected cash flows using the effective interest rate upon acquisition of the securities) and book value is recorded as impairment loss on held-to-maturity securities included in operating expense and the held-to-maturity securities are stated at the recoverable amount after impairment loss. If the value of impaired securities subsequently recovers and the recovery can be objectively related to an event occurring after the impairment loss was recognized, the reversal of impairment loss is recorded as reversal of impairment loss on held-to-maturity securities included in operating revenues. However, the resulting carrying amount after the reversal of impairment loss shall not exceed the amortized cost that would have been measured, at the date of the reversal, if no impairment loss was recognized.
3) Available-for-sale securities
Debt and equity securities that do not fall under the classifications of trading or held-to-maturity securities are categorized and presented as available-for-sale securities included in investment assets. However, if an available-for-sale security matures or it is certain that such security will be disposed of within one year from the date of the statements of financial position, it is classified as a current asset.
Available-for-sale securities are recorded at fair value. Unrealized gain or loss from available-for-sale securities are presented as gain or loss on valuation of available-for-sale securities included in accumulated other comprehensive income (loss) under shareholders’equity. In addition, accumulated gain or loss on valuation of available-for-sale securities is reflected in either gain or loss on disposal of available-for-sale securities or impairment loss on available-for-sale securities upon disposal or recognition of impairment of the securities. However, available-for-sale equity securities that are not marketable and whose fair value cannot be reliably measured are recorded at acquisition cost.
When there is objective evidence that the available-for-sale securities are impaired and the recoverable amount is lower than the cost (amortized cost for debt securities) of the available-for-sale securities, an impairment loss is recognized as impairment loss on available-for-sale securities in operating expense and the related unrealized gain or loss remaining in shareholders’equity is adjusted to the impairment loss. If the value of impaired securities subsequently recovers and the recovery can be objectively related to an event occurring after the impairment loss was recognized, the reversal of impairment loss can be recognized up to the previously recorded impairment loss as a reversal of loss on impairment of available-for-sale securities in operating revenues. However, if the fair value increases after the impairment loss is recognized but does not relate to the recovery of impairment loss as described above, the increase in fair value is recorded in shareholders’equity.
54 4) Reclassification of securities
Trading securities should not be reclassified as other categories of securities. However, when those securities can no longer be held for sale in the near-term to generate profits from short-term price differences, the trading securities can be reclassified as available-for-sale or held-to-maturity securities. When those securities are no longer traded in an active market, such securities are reclassified as available-for-sale securities.
When trading securities are reclassified to other categories, the fair value (latest market value) as of the date of the reclassification becomes new acquisition cost of the security and the security’s unrealized holding gain or loss through the date of the reclassification is recorded in current operations.
Securities Borrowed (Loaned)
The Company has loaned or borrowed securities and the lists of these securities as of March 31, 2010 are as follows (Korean won in thousands):
Assets Depreciation Amounts Appraisal standard Borrowed security Stock ＼ 18,673,973 Fair value
Investment Securities Using the Equity Method
Investments in equity securities of companies, over which the Company exercises significant influence, are reported using the equity method of accounting.
1) Accounting for changes in the equity of the investee
Under the equity method of accounting, the Company records changes in its proportionate equity of the net assets of the investee depending on the nature of the underlying changes in the investee as follows: (i)“ gain (loss) on equity method valuation”in the non-operating income (expense) for net income (loss) of the investee; (ii)“ increase (decrease) in retained earnings of associates”in the retained earnings for changes in beginning retained earnings of the investee; (iii)“ increase (decrease) in equity of associates”in accumulated other comprehensive income (loss) for other changes in stockholders’ equity of the investee.
When the equity method investee’s unappropriated retained earnings carried over from prior period changes due to significant error corrections, the Company records the changes in equity as“ gain (loss) on equity method valuation”included in the non- operating income (expense) if the impact of the changes on the Company’s non-consolidated financial statements is not significant. If the changes results from the changes in accounting policies of the equity method investee, they are reflected in unappropriated retained earnings carried over from prior period in accordance with SKAS on changes in accounting policy and errors corrections. When the investee declares cash dividends, the dividends to be received are deducted directly from the investment securities using the equity method.
55 2) Treatment of investment difference
Difference between the acquisition cost and the Company’s proportionate equity in the fair value of net assets of the investee upon acquisition “( investment difference”) is considered as (negative) goodwill and accounted for in accordance with accounting standards for business combination. The goodwill portion is amortized over useful lives within 5 years on a straight line method and the negative goodwill portion is amortized over the weighted average useful lives of depreciable non-monetary assets of the investee are included in“ gain (loss) on equity method valuation”.
When the Company’s equity interest in the investee increases due to an increase (or decrease) in contributed capital with (or without) consideration, the changes in the Company’s proportionate equity in the investee are accounted for as investment difference. If the Company’s equity interest decreases, the changes are accounted for as“ gain (loss) on disposal of investment securities using the equity method”. However, if the investee is the Company’s subsidiary, those changes are accounted for included in the capital surplus (capital adjustments).
3) Difference between the fair value and book value of net asset of the investee
Upon acquisition of the investment securities using the equity method, the Company’s proportionate shares in the differences between the fair values and book values of the identifiable assets and liabilities of the investee are amortized/reversed and included in“ gain (loss) on equity method valuation”in accordance with the investee’s methods of accounting for the assets and liabilities.
4) Elimination of unrealized gain or loss from intercompany transactions
The Company’s proportionate share in the gain (loss) arising from transactions between the Company and the investee, which remains in the book value of assets held as of the date of the statements of financial position, is considered unrealized gain (loss) and adjusted to the investment securities using the equity method. If the investee is a subsidiary of the Company, unrealized gain (loss) from sale of an asset by the Company to the investee (downstream transaction) is fully eliminated and adjusted to the investment securities using the equity method.
5) Impairment loss on investment securities using the equity method
When there is objective evidence that the investment securities using the equity method is impaired and the recoverable amount is lower than the carrying amount of the investment securities using the equity method, an impairment loss is recognized as“ loss on impairment of investment securities using the equity method”included in non-operating expense and the unamortized investment difference is first reduced. When the recoverable amount is recovered after the recognition of impairment loss, the reversal of impairment loss is recognized as income up to the previously recorded impairment loss. The book value of the investment securities using the equity method after the reversal of the impairment loss cannot exceed the book value calculated as if the impairment loss would not been originally recognized. The reversal of the impairment loss recognized against the unamortized investment difference is not allowed.
56 6) Translation of financial statements of overseas investees
For overseas investees whose financial statements are prepared in foreign currencies, the equity method of accounting is applied after assets and liabilities are translated in accordance with the accounting treatments for the translation of the financial statements of overseas’subsidiaries for consolidated financial statements. The Company’s proportionate share of the difference between assets net of liabilities and shareholders’equity after translation into Korean won is accounted for as “increase (decrease) in equity of associates”included in accumulated other comprehensive income (loss).
7) Suspension of applying the equity method.
When the Company applies the equity method, the Company stops to apply the equity method in case the book value of investment securities using the equity method becomes under“ 0”due to the loss of investee. In addition, the Company deducts the loss that was not recognized on the financial statement before the current year from the paid in capital increase, including the increase of capital surplus and capital adjustments, as the decrease of retained earnings carried from the last year or negative changes in equity arising from application of the equity method.
Property and Equipment
Property and equipment are stated at cost (acquisition cost or manufacturing cost plus expenditures directly related to preparing the assets ready for use). Assets acquired from investment-in-kind, by donation or free of charge in other ways are stated at fair value. Expenditures after acquisition or completion that increase future economic benefit in excess of the most recently assessed capability level of the asset are capitalized and other expenditures are charged to current operations as incurred.
In accordance with the Company’s policy, borrowing costs in relation to the manufacture, purchase, construction or development of assets are charged to current operations as incurred.
When the expected future cash flow from use or disposal of the property and equipment is lower than the carrying amount due to obsolescence, physical damage or other causes, the carrying amount is adjusted to the recoverable amount (the higher of net sales price or value in use) and the difference is recognized as an impairment loss. When the recoverable amount subsequently exceeds the carrying amount of the impaired asset, the excess is recorded as a reversal of impairment loss to the extent that the reversed asset does not exceed the carrying amount before previous impairment as adjusted by depreciation.
Depreciation method and useful lives of assets are as follows:
Assets Depreciation Useful lives Buildings Straight-line method 40 Vehicles Straight-ling method 4 Furniture and fixtures Straight-line method 4 Other tangible assets Straight-line method 4
57 Intangible Assets
Intangible assets are stated at cost, net of amortization computed using the straight-line method over the estimated economic useful lives of related assets. Development costs are amortized over the estimated economic useful life from the date of usage of the related products. Ordinary development and research expenses are charged to current operations.
The Company assesses the potential impairment of intangible assets when there is evidence that events or changes in circumstances have made the recovery of an asset’s carrying value to be unlikely. The carrying value of the assets is reduced to the estimated realizable value, and an impairment loss is recorded as a reduction in the carrying value of the related asset and charged to current operations. However, the recovery of the impaired assets is recorded in current operations up to the cost of the assets, net of accumulated amortization before impairment, when the estimated value of the assets exceeds the carrying value after impairment.
The useful lives of assets are as follows:
Assets Useful lives Development cost 4 Software 4 Other intangible assets 5
Collective Fund for Default Loss
Collective fund for default loss is a deposit at the Korea Stock Exchange, KOSDAQ and ECN, whenever stock transaction occurred, as a percentage of the transaction amount to compensate for any default loss.
Accounting for Lease Contracts
All lease contracts that prohibit from cancelling the contract during the lease period are classified as capital lease, in case the ownership of the lease property shall be transferred to the lessee, it has the option to purchase the lease property at a price lower than the fair value, the lease period exceeds 75 percent of the estimated useful life of the lease property, or the present value of the basic lease payments exceeds 90 percent of the fair value of the leased assets. All other lease contracts are classified as an operating lease.
Assets leased and capital lease liabilities under capital lease are recorded at the smaller amounts between the present value of future cash flows from lease payments and the fair market value of the assets. The aggregate lease payments are recorded as a capital lease obligation, net of accrued interest as determined by the excess of lease payments over the cost of the leased assets. Accrued interest is charged to expense over the lease terms using the effective interest rate method.
58 Accounting for Foreign Currency Transactions and Translation
The Company maintains its accounts in Korean won. Transactions in foreign currencies are recorded in Korean won based on the prevailing rates of exchange on the transaction date. Monetary accounts with balances denominated in foreign currencies are recorded and reported in the accompanying financial statements at the exchange rates prevailing at the date of the statements of financial position. The balances have been translated using the Basic Rate announced by the Seoul Money Brokerage Services, Ltd., which was ＼1,130.80 and ＼1,377.10 to U.S. $1.00 at March 31, 2010 and 2009, respectively and the translation losses or gains are reflected in current operations.
Valuation of Receivables and Payables at Present Value
Sales with deferred payment term, loans or other similar transactions are stated at present value if the differences between nominal value and present value of receivables or payables incurred are significant. The present value discount is amortized using the effective interest method, and the amortization of the present value discount or premium is recorded as interest income or expense.
Readjustment of Receivables and Payables
Receivables and payables, whose contractual terms are modified in a debt restructuring due to mutual agreement such as commencement of reorganization, court receivership and workout plans, are accounted for at the present value of expected future cash flows, if the book value of the loan differs from the present value. The difference between book value and present value is offset against the allowance for doubtful accounts, and any remaining amounts are charged to current operations as bad debt expense. The difference between book value of a receivable and its present value is recorded as allowance for doubtful accounts, which is presented as a deduction from the receivable. The present value discount is amortized over the remaining maturity using the effective interest rate method, and the amortization amount of the present value discount account is recorded as interest income. The additional impairment loss on securities of ＼8,906,241 thousand is due to readjustment of receivables for the year ended of March 31, 2010.
Translation of Financial Statements of Overseas Affiliates Stated in Foreign Currency
For overseas affiliates whose financial statements are prepared in foreign currency, assets and liabilities are translated at the exchange rate at the date of the statements of financial position, shareholders’equity is translated at the historical exchange rate, and items in statement of income are recorded at the average exchange rate of the reporting period. Gain (loss) from foreign currency translation of overseas affiliate is recorded as accumulated other comprehensive income (loss). When subsequent gain (loss) from foreign currency translation of overseas affiliate arises, it is offset against the previously recognized gain (loss) and charged to gain or loss on the accounting period in which such overseas affiliates are liquidated, closed or disposed of.
59 Accrued Severance Benefits
In accordance with the Company's policy, all employees with more than one year of service are entitled to receive lump-sum severance payments upon termination of their employment, based on their current rates of salary and length of service. The accrual for severance benefits is computed as if all employees were to terminate at the date of the statements of financial position and amounted to ＼93,051,352 thousand and ＼80,270,284 thousand as of March 31, 2010 and 2009, respectively. In accordance with the National Pension Law of Korea, a portion of its severance benefits, which had been transferred in cash to the National Pension Fund through March 1999, were presented as a deduction from accrued severance benefits.
The Company has insured a portion of its obligations for severance benefits by making deposits that will be directly paid to employees with Korea Life Insurance Co., Ltd. and other, and records them as deposits for severance insurance deposits which are directly deducted from accrued severance benefits. However, as of the date of statements of financial position, the Company records the retirement deposits in excess of accrued severance benefits liabilities as an investment asset.
Since beginning of the current year, the Company provides defined contribution benefit plan to its officers and benefit plan asset or pension asset is deducted from accrued severance benefits.
Actual payments for severance indemnities amounted to ＼6,579,820 thousand and ＼11,336,661 thousand for the years ended March 31, 2010 and 2009, respectively.
Pension plan assets as of March 31, 2010 consist of the following (Korean won in thousands):
Description Amount Cash and cash equivalents 528,176 Securities 1,047,836 Other assets 404,401 1,980,413
Bonds under Resale or Repurchase Agreements
Bonds purchased under resale agreements are recorded as loans and bonds sold under repurchase agreements are recorded as borrowings when the Company purchases or sells securities under resale or repurchase agreements.
Discounts on Debentures
Discounts on debentures are amortized over the term of the debentures using the effective interest rate method. Amortization of discount is recorded as part of interest expense.
60 Valuation of Derivatives Linked Securities
The Company valuates derivatives linked securities, such as equity linked securities sold and equity linked warrants sold, and derivatives linked securities sold based on the market value and reflects gains or losses from transaction, valuation and early or maturity redemption in current operations as gain (loss) on derivatives linked securities (sold) transactions.
Accounting for Derivative Instruments
Derivative instruments are classified as used for trading activities or for hedging activities according to their transaction purposes. All derivative instruments are accounted for at fair value with the valuation gain or loss recorded as an asset or liability. If the derivative instrument is not part of a transaction qualifying as a hedge, the adjustment to fair value is reflected in current operations. The accounting for derivative transactions that are part of a qualified hedge based both on the purpose of the transaction and on meeting the specified criteria for hedge accounting differs depending on whether the transaction is a fair value hedge or a cash flow hedge. Fair value hedge accounting is applied to a derivative instrument designated as hedging the exposure to changes in the fair value of an asset or a liability or a firm commitment (hedged item) that is attributable to a particular risk. The gain or loss both on the hedging derivative instruments and on the hedged item attributable to the hedged risk is reflected in current operations.
Cash flow hedge accounting is applied to a derivative instrument designated as hedging the exposure to variability in expected future cash flows of an asset or a liability or a forecasted transaction that is attributable to a particular risk. The effective portion of gain or loss on a derivative instrument designated as a cash flow hedge is recorded as accumulated other comprehensive income (loss) and the ineffective portion is recorded in current operations. The effective portion of gain or loss recorded as accumulated other comprehensive income (loss) is reclassified to current earnings in the same period during which the hedged forecasted transaction affects earnings. If the hedged transaction results in the acquisition of an asset or the incurrence of a liability, the gain or loss in accumulated other comprehensive income (loss) is added to or deducted from the asset or the liability.
Trust Accounts
In accordance with the amendment of the Trust Business Law, the Company obtained trust business authorization from the Financial Supervisory Commission and started its trust business. Accordingly, the Company separately records the trust assets from the owned assets of the Company. The Company offers operational, managerial and disposal services to trust assets and receives fee on trust assets recognized as operating income.
Income Tax Expense
The Company recognizes income tax expense determined by adding or deducting changes in deferred income tax assets (liabilities) to or from total income tax and surtaxes to be paid for the current period. The deferred income tax assets or liabilities will be charged or credited to income tax expense in the period each temporary difference reverses in the future.
61 The Company recognizes deferred tax liabilities basically for all taxable temporary differences, but recognizes deferred tax assets for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized. Also, the Company recognizes deferred tax assets for all deductible temporary differences arising from investments in subsidiaries and associates to the extent that it is probable that the temporary difference will be reversed in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized. In addition, current tax and deferred tax is charged or credited directly to equity if the tax relates to items that are credited or charged directly to equity in the same or different period.
Reclassification
With the application of the Instruction of the Regulations of the Financial Investment Services and for a better comparability with financial statements for the year ended March 31, 2010, certain accounts from prior year’s financial statement were reclassified and the ordering of accounts was changed according to their appearance on financial statements for the year ended March 31, 2010. Such reclassification does not affect prior year’s net income and net asset value.
March 31, 2010 Korean won (In thousands) After reclassifications Before reclassifications Difference Available-for-sale securities: Corporate bonds ＼ 187,786,292 ＼ 225,950,719 ＼ (38,164,427) Loans: Privately placed bonds 38,164,427 - 38,164,427 Allowance for doubtful loans: Allowance for doubtful privately placed bonds (1,506,098) - (1,506,098) Allowance for doubtful other Assets: Allowance for doubtful privately placed bonds - (1,506,098) 1,506,098
＼ 224,444,621 ＼ 224,444,621 ＼ -
March 31, 2009 Korean won (In thousands) After reclassifications Before reclassifications Difference Available-for-sale securities: Corporate bonds ＼ 11,442,395 ＼ 23,263,467 ＼ (11,821,072) Loans: Privately placed bonds 11,821,072 - 11,821,072 Allowance for doubtful loans: Allowance for doubtful privately placed bonds (212,673) - (212,673) Allowance for doubtful other Assets: Allowance for doubtful privately placed bonds - (212,673) 212,673
＼ 23,050,794 ＼ 23,050,794 ＼ -
62 3. RESTRICTED DEPOSITS
Restricted deposits as of March 31, 2010 and 2009 are as follows:
Korean won (In thousands)
2010 2009 Deposits: Subscription deposits ＼ - ＼ 13,500,000 Reserve for claims of customers’deposits 15,037,589 10,033,830 Reserve for claims of customers’deposits (trust) 1,194,211,651 1,365,792,938 Deposits for exchange-traded derivatives 172,587 - Guarantee deposits for stock borrowings from KSFC 2,618,376 - Long-term financial instruments 28,988,067 - Restricted deposits 41,000 38,000 Others 5,383,782 4,855,942 1,246,453,052 1,394,220,710 Other assets: Collective fund for default loss 6,534,196 6,745,876 ＼ 1,252,987,248 ＼ 1,400,966,586
The subscription deposits that have to be separately deposited in Korea Securities Finance Corporation or bank until the days before the payment date for securities in accordance with the Financial Investment Services Regulations No 4-44 cannot be used as collateral.
The reserve for claims of customers’ deposits is deposited separately in a form of trust in KSFC to meet the demands of investees, such as return of deposit and others, in accordance with article 74 of the Capital Market and Financial Investment Business Act. The deposits for exchange-traded derivatives which the investors pay for FX margin trading to Korea Exchange Bank and FDM, are recognized as deposits. The long-term financial instruments, which are pledged for the balance billing, are limited to use. The guarantee deposits for stock borrowings from KSFC are the margin accounts of investee’s lending and borrowing securities transactions which are deposited in KSFC. Also, the restricted deposits are deposited for opening checking account. The others are deposited as the margin accounts for the ELS transactions with counterparties.
Collective fund for default loss is accumulated at the Korea Stock Exchange and Securities Industry Association in accordance with Capital Market and Financial Investment Business Act as compensation for the loss caused by breach of trading contract in security markets.
63 4. TRADING SECURITIES
(1) Stocks as of March 31, 2010 and 2009 are as follows:
Korean won (In thousands) 2010 2009 Book value before valuation 303,911,023 256,578,363 Fair value (book value) 322,829,119 244,526,744 Gain (loss) on valuation 18,918,096 (12,051,619)
(2) The details of bonds as of March 31, 2010 and 2009 are as follows:
March 31, 2010 Korean won (In thousands) Book value before valuation Par value Book value Government and public bonds ＼ 1,839,679,013 ＼ 1,826,612,011 ＼ 1,848,015,876 Special bonds 2,343,559,474 2,316,958,825 2,342,861,148 Corporate bonds 1,458,002,046 1,438,111,029 1,452,987,938 ＼ 5,641,240,533 ＼ 5,581,681,865 ＼ 5,643,864,962
March 31, 2009 Korean won (In thousands) Book value before valuation Par value Book value Government and public bonds ＼ 1,391,877,472 ＼ 1,369,672,417 ＼ 1,391,610,110 Special bonds 2,243,893,798 2,251,142,970 2,260,955,724 Corporate bonds 1,650,607,701 1,666,208,389 1,671,670,597 ＼ 5,286,378,971 ＼ 5,287,023,776 ＼ 5,324,236,431
64 Fair value is calculated based on average price from Korea Investors Service Inc. (KIS) and Korea Bond Pricing & KR Co (KBP). The fair values of bonds consist of book value, accrued interest receivables and accrued interest on bonds.
(3) Collective investment securities as of March 31, 2010 and 2009 are as follows:
Korean won (In thousands) 2010 2009 Bond Style ＼ 64,605,234 ＼ 67,934,591 Money Market Fund 831,774 1,353,736 Stock Style 18,679,875 17,497,354 Hybrid Style 1,123,698 836,466 ＼ 85,240,581 ＼ 87,622,147
Collective investment securities are appraised at NRV as of March 31, 2010 and 2009. The bonds that are included in bond style of collective investment securities are appraised by adding the interest receivables of the bonds on the acquisition value of the bonds. The gain and loss on valuation of collective investment securities is ＼6,108,118 thousand and ＼643,382 thousand, respectively.
The unsold collective investment securities as of March 31, 2010 include ＼55,021,973 thousand of the corporate bonds which are issued by the company that shows signs of insolvency, or insolvency, due to its ongoing corporate restructuring agreements and others. These kinds of unsold collective investment securities are the recoverable amounts, which are appraised by depreciating additionally ＼6,474,990 thousand from the standard price of ＼61,496,963 thousand, which is calculated by the investment trust management company under the generally accepted accounting principles in the Republic of Korea, of the corporate commercial papers and bonds issued by Seoul Guarantee Insurance Company and others. The Company classifies the unsold collective investment securities as trading securities based on the interpretation.
65 However, the recoverable amounts of corporate bonds above could be influenced by the economic situation of the Republic of Korea. This uncertainty is not reflected on the non-consolidated financial statements.
(4) Corporate commercial papers as of March 31, 2010 and 2009 are as follows:
March 31, 2010 Korean won (In thousands) Fair value Accumulated Acquisition cost (Book value) valuation gain
Korea Express Co., Ltd. CP ＼ 30,000,000 ＼ 30,069,164 ＼ 69,164 Lotte Samkang Co., Ltd. CP 9,000,000 9,008,759 8,759 KDB Capital Corporation CP 10,000,000 10,107,975 107,975 IBK Capital Corporation CP 40,000,000 40,159,589 159,589 KT Capital Corporation CP 10,000,000 10,008,589 8,589 ＼ 99,000,000 ＼ 99,354,076 ＼ 354,076
March 31, 2009 Korean won (In thousands) Fair value Accumulated Acquisition cost (Book value) valuation gain
Shinsegae Co., Ltd. CP ＼ 20,000,000 ＼ 20,030,334 ＼ 30,334 GS-Caltex Corporation. CP 28,000,000 28,378,192 378,192 Hyundai Motor Co. CP 40,000,000 40,360,679 360,679 Samsung Techwin Co., Ltd. CP 20,000,000 20,381,803 381,803 Hyundai Capital Services, Inc. CP 40,000,000 40,135,940 135,940 Daewoo Gamsam Prugio-2 Co. CP 30,000,000 30,076,295 76,295 Cheonan Cheongdang First Co., Ltd. CP 5,000,000 5,006,818 6,818 Cheongjin Metro First Co., Ltd. CP 10,000,000 10,052,759 52,759 Military Mutual Aid Association CP 20,000,000 20,084,537 84,537 Korea Gas Corporation. CP 10,000,000 10,061,705 61,705 ＼ 223,000,000 ＼ 224,569,062 ＼ 1,569,062
(5) Interest income from trading securities amounted to ＼251,446,923 and ＼243,630,346 in 2010 and 2009, respectively.
66 5. DERIVATIVES LINKED SECURITIES AND DERIVATIVES LINKED SECURITIES SOLD
Derivatives linked securities and derivatives linked securities sold as of March 31, 2010, are as follows:
Korean won (In thousands) Result of valuation Before valuation Appraisal value Valuation gain Valuation loss Derivatives linked securities: Equity linked securities ＼ 117,759,677 ＼ 544,903,596 ＼ 435,687,164 ＼ 8,543,245 Warrants 841,476 898,750 60,024 2,750 Others 19,176,352 31,301,670 12,125,318 - Assets ＼ 137,777,505 ＼ 577,104,016 ＼ 447,872,506 ＼ 8,545,995 Derivatives linked securities sold: Equity linked securities sold ＼ 600,903,946 ＼ 1,347,303,583 ＼ 10,211,922 ＼ 756,611,559 Warrants sold 3,823,812 4,055,979 2,755,704 2,987,871 Others 343,399,418 359,280,948 806,898 16,688,428 Liabilities ＼ 948,127,176 ＼ 1,710,640,510 ＼ 13,774,524 ＼ 776,287,858
Equity Linked Securities “( ELS”) and others (Interest rate linked securities and others) are contracts of which the interest and maturity amount of securities are determined by the price of stock index and interest rate, respectively. Stock warrants are contracts of which the maturity amount is determined by stock index and take option premium only without guarantee of principal. The Company appraises these contracts at fair value at the date of the statements of financial position and reflects valuation gain or loss in current operations.
67 6. COLLATERALIZED SECURITIES
Collateralized securities as of March 31, 2010 and 2009 are as follows:
Korean won (In thousands) 2010 2009 Description Book value Collatera amount Book value Collatera amount Stocks ＼ 69,248,016 ＼ 69,248,016 ＼ 67,173,106 ＼ 67,173,106 Guarantee deposits on KRX 26,689,000 26,689,000 27,738,290 27,738,290 Guarantee deposits for lending and borrowing securities on Korea Securities Depository 95,937,016 95,937,016 94,911,396 94,911,396 Bonds - - 50,917,009 53,012,729 Guarantee deposits for futures trading 15,000,000 15,176,700 75,576,161 76,122,290 Guarantee deposits for Korea Securities Finance Corporation 200,977,197 202,123,135 1,002,819 1,003,242 Margin accounts for derivatives trading 19,122,049 19,413,604 101,702,216 100,784,815 Guarantee deposits for derivatives trading 2,230,727 2,364,255 60,000,549 60,651,850 Guarantee deposits for lending and borrowing securities 28,636,732 29,090,628 49,722,496 49,417,118 Guarantee deposits for trading bonds under repurchase agreements - - 955,956 1,003,509 Guarantee deposits 265,966,705 268,168,322 339,877,206 341,995,553 ＼ 361,903,721 ＼ 364,105,338 ＼ 434,788,602 ＼ 436,906,949
(*) Collateral amount is the appraised amount calculated by multiplying certain rate to fair market price of stocks and bonds.
68 7. AVAILABLE-FOR-SALE SECURITIES:
(1) Available-for-sale securities as of March 31, 2010 and 2009, are as follows:
Korean won (In thousands) 2010 2009 Stocks ＼ 256,921,154 ＼ 222,455,291 Investment in partnerships 62,719,650 40,600,414 Special bonds 766,986,258 - Corporation bonds 187,786,292 11,442,395 Collective investment securities 109,986,389 26,520,190 Others 31,894,192 23,025,994 ＼ 1,416,293,935 ＼ 324,044,284
Among the available-for-sale securities above, the marketable equity securities are appraised by the closing price at the date of statements of financial position, and the collective investment securities are appraised by the sale price proposed by the fund management company. The detachable stock rights of the others are appraised by the price calculated by using Black-Sholes Model. The commercial bonds of others, special bonds and corporate bonds are appraised using the yield rate of fair value provided by the external fund valuation institutions.
69 (2) Stocks as of March 31, 2010 and 2009 are as follows:
March 31, 2010 Korean won (In thousands) No. of Percentage of Acquisition Net asset Book Investees shares ownership (%) cost (fair) value value
Marketable equity securities: Hyundai Engineering & Construction Co., Ltd. 813,149 0.73 ＼ 39,289,832 ＼ 50,496,553 ＼ 50,496,553 Hyundai Elevator Co., Ltd. 356,209 4.99 30,527,111 18,843,456 18,843,456 Hyundai Development Company 830,000 1.10 43,990,000 27,431,500 27,431,500 Visang Inc. (Common stock) 333,924 3.41 8,431,581 4,240,835 4,240,835 Moorim P&P Co., Ltd. 291,940 0.94 3,328,116 2,379,311 2,379,311 Daewoo Securities Green Korea Special Purpose Acquisition Company 371,700 1.38 1,300,950 1,351,130 1,351,130 Hyundai Dream Together Special Purpose Acquisition Company 25,000 0.65 50,000 184,250 184,250 Kumho Industrial Co., Ltd. (*) 6,805,848 1.40 24,780,093 24,780,092 24,780,092 151,697,683 129,707,127 129,707,127 Unlisted equity securities: Korea Exchange (**) 624,190 3.12 2,807,105 74,121,314 74,121,314 Korea Securities Finance Corporation (**) 2,152,828 3.17 10,757,876 20,938,405 20,938,405 Korea Securities Depository (**) 59,320 0.94 496,910 5,666,840 5,666,840 Korea Securities Computer Corporation (**) 58,120 1.09 290,600 2,974,000 2,974,000 Korea Money Brokerage Corporation (**) 10,000 0.50 50,000 278,770 278,770 Hyundai Asan Corporation 587,839 4.27 20,322,600 5,299,908 5,405,175 Hyundai Futures Corporation 396,000 8.61 2,009,700 3,770,377 1,882,774 Hyundai Logiem Co.,Ltd. 609,000 4.99 4,485,285 6,030,455 4,485,285 Hyundai Research Institute 200,000 10.00 480,685 901,931 480,685 C9 Asset Management Corporation (***) 140,000 9.52 700,000 635,607 700,000
70 March 31, 2010 Korean won (In thousands) No. of Percentage of Acquisition Net asset Book Investees shares ownership (%) cost (fair) value value
Reyon Pharmaceutical Co., Ltd. 99,000 0.81 625,000 483,358 625,000 Reyon Pharmaceutical Co., Ltd. (Preferred stock) 297,000 2.43 2,025,000 1,450,075 2,025,000 Hanwon Square PFV Co., Ltd. 190,000 19.00 950,000 - 760,000 Pantech Co., Ltd. 12,746,528 0.77 2,428,316 2,446,182 582,796 E&B Stars Co., Ltd. 8,292 4.55 462,000 86,131 78,540 Hyundai Auction Real Estate Fund 1st 298,791 0.99 226,484 734,428 226,484 Others 37,650,747 5,982,961 5,982,959 86,768,308 131,800,742 127,214,027 ＼ 238,465,991 ＼ 261,507,869 ＼ 256,921,154
(*) The Kumho Industrial Co., Ltd. 234, 253 and 256 corporate bonds are reclassified to available-for-sale securities due to the company restructuring. The impairment loss on bonds of ＼8,869,965 thousand is accounted for considering the recoverable amount.
(**) These unlisted equity securities are carried at values published by Nice Pricing Services Inc., an independent valuation organization, based on the professional judgment and one or more of rational valuation methods using reasonable financial estimations, such as DCF model, Price Earnings Ratio (PER) or others.
(***) As of March 31, 2010, the disposal is restricted to sell.
The Company used recent audited (or provisional settlement of) financial statements for valuation of net asset value. The non marketable stocks are accounted for at their acquisition costs since the information for valuation of fair value is not available and the fair value cannot be reliably estimated with other proper method.
71 March 31, 2009 Korean won (In thousands) No. of Percentage of Acquisition Net asset Book Investees shares ownership (%) cost (fair) value value
Marketable equity securities: Hyundai Engineering & Construction Co., Ltd. 813,149 0.73 ＼ 36,795,027 ＼ 47,975,791 ＼ 47,975,791 Moorim P&P Co., Ltd. 371,560 1.19 5,502,804 1,776,057 1,776,057 Hyundai Elevator Co., Ltd. 356,209 4.99 30,527,111 25,183,976 25,183,976 Hyundai Development Company 830,000 1.10 43,990,000 27,929,500 27,929,500 Visang Inc. (Common stock) 333,924 3.41 8,431,581 4,341,012 4,341,012 125,246,523 107,206,336 107,206,336 Unlisted equity securities: Korea Exchange (*) 624,190 3.12 2,807,105 66,082,371 66,082,371 Korea Securities Finance Corporation (*) 2,152,828 3.17 10,757,876 16,533,719 16,533,719 Korea Securities Depository (*) 56,496 0.94 496,910 4,729,732 4,729,732 Korea Securities Computer Corporation (*) 58,120 1.09 290,600 1,810,438 1,810,438 Korea Money Brokerage Corporation (*) 10,000 0.50 50,000 229,980 229,980 Hyundai Asan Corporation 587,839 4.27 21,229,535 5,552,115 5,405,175 Hyundai Futures Corporation 396,000 8.61 2,009,700 3,391,354 1,882,774 Hyundai Research Institute 200,000 10.00 480,685 556,487 480,685 C9 Asset Management Corporation 140,000 9.52 700,000 633,946 700,000 Visang Inc. (Preferred stock) 209,000 2.09 7,106,000 2,229,167 7,106,000
72 March 31, 2009 Korean won (In thousands) No. of Percentage of Acquisition Net asset Book Investees shares ownership (%) cost (fair) value value
Reyon Pharmaceutical Co., Ltd. 99,000 0.81 625,000 346,639 625,000 Reyon Pharmaceutical Co., Ltd. (Preferred stock) 297,000 2.43 2,025,000 1,039,918 2,025,000 Hanwon Square PFV Co., Ltd. 190,000 19.00 950,000 - 760,000 Pantech Co., Ltd. 9,713,264 1.77 2,428,316 582,796 582,796 E&B Stars Co., Ltd. 8,292 4.55 462,000 52,562 78,540 Hyundai Auction Real Estate Fund 1st 298,791 0.99 820,564 1,475,222 491,511 Others 35,887,921 5,780,559 5,725,234 89,127,212 111,027,005 115,248,955 ＼ 214,373,735 ＼ 218,233,341 ＼ 222,455,291
(*) These unlisted equity securities are carried at values published by Nice Pricing Services Inc., an independent valuation organization, based on the professional judgment and one or more of rational valuation methods using reasonable financial estimations.
The Company adjusted acquisition cost of Moorim P&P Co., Ltd. to net asset value and the difference between the acquisition cost and net asset value (＼1,810,028 thousand) was reflected as impairment loss on available-for-sale securities in 2009.
The Company adjusted acquisition cost of Enbastars Co., Ltd. to net asset value and the difference between the acquisition cost and net asset value (＼383,460 thousand) was reflected as impairment loss on available-for-sale securities in 2009.
73 (3) Investment in partnerships as of March 31, 2010 and 2009 are as follows:
March 31, 2009 Korean won (In thousands) Percentage of Acquisition Net asset Book value Investees ownership (%) cost value (*) 2010 2009 H&Q AP Korea 16.88 ＼ 1,148,350 ＼ 994,439 ＼ 1,148,350 ＼ 1,869,150 KTB 2007 Private Equity Fund 8.70 29,217,306 27,978,710 29,217,306 23,880,000 NPS 06-7 KDBC Corporate Restructuring Fund 15.00 6,042,000 5,804,422 6,042,000 5,928,000 Tube Midas Venture Investment Fund 5.00 1,650,000 1,862,407 1,650,000 1,000,000 Corporate restructuring fund QCP 13 16.67 4,405,000 4,008,810 4,405,000 750,000 Asia Orchid Venture Fund 1 15.38 892,308 839,719 892,307 1,200,000 KLAUS Private Equity Fund 9.55 1,276,125 912,308 912,308 972,864 West End Corporate Restructuring Fund 10.34 3,000,000 3,278,742 3,000,000 3,000,000 BKC-NICE NO.1 Corporate Restructuring Fund 13.29 638,175 1,303,643 638,175 1,200,000 TSyoon 2th CRC Fund 23.25 5,000,000 4,890,405 5,000,000 - Shibuya Sakuragaoka Property TMK 100.00 4,793,804 3,299,288 4,793,804 - NAU IB 6th fund 40.00 4,000,000 4,000,000 4,000,000 - IBK KTAC Private Equity Fund No. 2 - - - - 800,000 Others 1,020,400 994,839 1,020,400 400 ＼ 63,083,468 ＼ 60,167,732 ＼ 62,719,650 ＼ 40,600,414
(*) The Company used recent audited (or provisional settlement of) financial statements for valuation of net asset value.
Investments in partnerships are accounted for at their acquisition costs since the information for valuation of fair value is not available and the fair value cannot be reliably estimated with other proper method.
In 2009, the Company reflected an impairment loss of ＼679,781 thousand considering the collectability of KLAUS Private Equity Fund.
74 (4) Special bonds as of March 31, 2010 are as follows:
March 31, 2010 Korean won (In thousands) Acquisition Accumulated Accumulated Investees Par value Fair value Book value cost unrealized gain impairment loss
The Korea Development Bank09coup0300-0914-1 ＼ 50,000,000 ＼ 50,000,000 ＼ 51,396,701 ＼ 51,396,701 ＼ 1,396,701 - The Korea Development Bank09coup0206-0825-2 50,000,000 50,000,000 50,983,124 50,983,124 983,124 - The Korea Development Bank09coup0200-0828-1 50,000,000 50,000,000 50,913,619 50,913,619 913,619 - The Korea Development Bank09coup0300-1105-1 50,000,000 50,000,000 51,331,794 51,331,794 1,331,794 - Industrial Bank of Korea(new)0910coups 2A-20 50,000,000 50,000,000 51,126,744 51,126,744 1,126,744 - Small & Medium Industry Promotion 319 50,000,000 50,000,000 50,944,216 50,944,216 944,216 - Small & Medium Industry Promotion 325 50,000,000 50,000,000 51,117,249 51,117,249 1,117,249 - Small & Medium Industry Promotion 327 50,000,000 50,000,000 51,433,917 51,433,917 1,433,917 - Korea Housing Finance Corporation 19 50,000,000 50,000,000 51,369,654 51,369,654 1,369,654 - SH Corporation 73 50,000,000 50,000,000 50,920,238 50,920,238 920,238 - SH Corporation 74 50,000,000 50,000,000 51,064,350 51,064,350 1,064,350 - Kosaf 9 50,000,000 50,000,000 50,900,916 50,900,916 900,916 - Kosaf 10 50,000,000 50,000,000 51,067,996 51,067,996 1,067,996 - Korea Finance Corporation 09coup0300-1110-1 50,000,000 50,000,000 51,388,331 51,388,331 1,388,331 - National Agricultural Cooperative Federation 2009-10coup2Y-C 50,000,000 50,000,000 51,027,409 51,027,409 1,027,409 - ＼ 750,000,000 ＼ 750,000,000 ＼ 766,986,258 ＼ 766,986,258 ＼ 16,986,258 -
The difference between the acquisition cost and fair value of special bonds of ＼16,986,258 thousand (before reflecting deferred income tax effect) is reflected in accumulated other comprehensive income as gain on valuation of available-for-sale securities.
75 (5) Corporate bonds as of March 31, 2010 and 2009 are as follows:
March 31, 2010 Korean won (In thousands) Acquisition Accumulated Accumulated Investees Par value Fair value Book value unrealized impairment cost gain (loss) loss Pantech 24-1 ＼ 4,483,045 ＼ 4,483,045 ＼ 2,241,523 ＼ 2,241,523 ＼ - ＼ 2,241,522 SMI XVI ABS Securitization Specialty CO. 1-7 6,306,021 6,500,000 6,252,494 6,252,494 (53,527) - SMI XVI ABS Securitization Specialty CO. 1-8 4,331,269 4,500,000 2,420,156 2,420,156 (1,911,113) - Shinsung Engineering & Construction 91 87,651 87,651 26,932 26,932 - 60,719 Shinhan Bank 13-09 coup 2A 49,992,500 50,000,000 50,949,320 50,949,320 956,820 - Hana Bank 09-09 coup 24 ⓐ 49,995,000 50,000,000 51,003,022 51,003,022 1,008,022 - SOIL Corporation 43-1 30,000,000 30,000,000 30,674,803 30,674,803 674,803 - Easy Bio System 9CB 2,797,155 2,799,000 3,155,067 3,155,067 357,912 - GS CALTEX 118-1 20,000,000 20,000,000 20,608,182 20,608,182 608,182 - Woori Bank 13-10 coup 2ⓐ 12 20,000,000 20,000,000 20,454,793 20,454,793 454,793 - ＼187,992,641 ＼ 188,369,696 ＼ 187,786,292 ＼ 187,786,292 ＼ 2,095,892 ＼ 2,302,241
The difference between the acquisition cost and fair value of corporate bonds of ＼2,095,892 thousand (before reflecting deferred income tax effect) is reflected in accumulated other comprehensive income as gain on valuation of available-for-sale securities. The Company recognized impairment loss of securities of ＼36,276 thousand of Shinsung Engineering & Construction 91 corporate bond due to bond debt restructuring in 2010.
76 March 31, 2009 Korean won (In thousands) Acquisition Accumulated Accumulated Investees Par value Fair value Book value unrealized impairment cost gain (loss) loss Pantech 24-1 ＼ 4,483,045 ＼ 4,483,045 ＼ 2,241,523 ＼ 2,241,523 ＼ - ＼ 2,241,522 SMI XVI ABS Securitization Specialty CO. 1-7 6,306,021 6,500,000 5,778,384 5,778,384 (527,637) - SMI XVI ABS Securitization Specialty CO. 1-8 4,331,269 4,500,000 3,358,555 3,358,555 (972,714) - Shinsung Engineering & Construction 91 122,213 122,213 63,933 63,933 - 58,280 ＼ 15,242,548 ＼ 15,605,258 ＼ 11,442,395 ＼ 11,442,395 ＼ (1,500,351) ＼ 2,299,802
During the year ended March 31, 2009, the Company reclassified Shinsung Engineering & Construction 91 corporate bond as available-for-sale securities due to continuous operating loss and worsening cash flow. Also, the Company recognized impairment loss on securities of ＼58,280 thousand considering the collectability.
77 (6) Collective investment securities as of March 31, 2010 and 2009 are as follows:
March 31, 2010 Korean won (In thousands) Acquisition Accumulated Accumulated Investees Fair value Book value cost unrealized gain (loss) Impairment loss
Shang-Hai real estate Fund ＼ 7,647,314 ＼ 9,444,127 ＼ 9,444,127 ＼ 1,796,813 ＼ - GB Vietnam Private Fund 2,000,000 1,286,407 1,286,407 (713,593) - Bond Market Stabilization Private Fund 1 13,500,000 14,426,640 14,426,640 926,640 - Hyundai YouFirst Real Estate Private Trust 1 4,500,000 4,578,615 4,578,615 78,615 - Hyundai Dream Equity Trust 1 10,000,000 11,999,500 11,999,500 1,999,500 - Hyundai Green Equity Trust 1 5,000,000 6,042,400 6,042,400 1,042,400 - Hyundai Smart Index alpha Derivative Trust 1 5,000,000 6,109,400 6,109,400 1,109,400 - Hyundai Trust Bond Trust 1 30,000,000 31,039,800 31,039,800 1,039,800 - Hyundai Market Neutral Derivative Trust 1 10,000,000 10,169,400 10,169,400 169,400 - Korea Investment Private Long Shot hybrid fund 1 10,000,000 10,689,299 10,689,299 689,299 - Hyundai China A Share Trust 1 4,000,000 4,200,801 14,200,801 200,801 - MBC-E&B Drama Fund 479,086 - - - 479,086
＼ 102,126,400 ＼ 109,986,389 ＼ 109,986,389 ＼ 8,339,075 ＼ 479,086
78 March 31, 2009 Korean won (In thousands) Acquisition Accumulated Accumulated Investees Fair value Book value cost unrealized gain (loss) Impairment loss
Shang-Hai real estate Fund ＼ 7,647,314 ＼ 11,596,005 ＼ 11,596,005 ＼ 3,948,691 ＼ - GB Vietnam Private Fund 2,000,000 1,301,065 1,301,065 (698,935) - Bond Market Stabilization Private Fund 1 13,500,000 13,623,120 13,623,120 123,120 - MBC-E&B Drama Fund 479,086 - - - 479,086 ＼ 23,626,400 ＼ 26,520,190 ＼ 26,520,190 ＼ 3,372,876 ＼ 479,086
The collective investment securities classified as available-for-sale are assessed by the same method used on the assessment of those classified as trading securities. The difference between the acquisition cost and fair value of corporate bonds of ＼8,339,075 thousand (before reflecting deferred income tax effect) is reflected in accumulated other comprehensive income as gain on valuation of available-for-sale securities.
Also, the Company recognized impairment loss of ＼479,086 thousand considering the collectivity of MBC-E&B Drama Fund.
(7) Other available-for-sale securities as of March 31, 2010 and 2009 are as follows:
Korean won (In thousands) March 31, 2010 2010 2009 Acquisition Accumulated Accumulated Description Fair value Book value Unrealized Book value Unrealized cost gain(loss) gain(loss) Commercial papers ＼ 23,130,000 ＼ 23,130,000 ＼ 23,130,000 ＼ - ＼ 22,800,000 ＼ (7,200,000) Stock warrants 4,118,140 8,764,192 8,764,192 4,646,052 225,994 (1,083,006) Total ＼ 27,248,140 ＼ 31,894,192 ＼ 31,894,192 ＼ 4,646,052 ＼ 23,025,994 ＼ (8,283,006)
79 In 2009, the Company recognized impairment loss of ＼3,200,000 thousand considering the collectability of Sonjung City Development Co., Ltd.
In 2010, the Company recognized reversal of impairment loss of ＼3,200,000 thousand considering the collectability of Sonjung City Development Co., Ltd. due to change of construction company and others.
(8) Maturities of special bonds, corporate bonds and commercial papers as of March 31, 2010 are as follows:
Korean won (In thousands) Description Within 1 year Over 1 year to 5 years Total Special bonds ＼ - ＼ 766,986,258 ＼ 766,986,258 Corporate bonds 6,252,494 181,533,798 187,786,292 Commercial bonds 10,000,000 13,130,000 23,130,000 ＼ 16,252,494 ＼ 961,650,056 ＼ 977,902,550
(9) Changes in gain and loss on valuation of available-for-sale securities (before reflecting deferred income tax effect) for the year ended March 31, 2010 are as follows:
Korean won (In thousands) Description Beginning balance Increase (decrease) Ending balance Stocks ＼ 58,020,579 ＼ 9,375,703 ＼ 67,396,282 Investments in partnerships (1,347,355) 983,537 (363,818) Special bonds - 16,986,258 16,986,258 Corporate bonds (1,500,351) 3,596,243 2,095,892 Collective investment securities 3,372,876 4,966,200 8,339,075 Others (5,083,006) 9,729,058 4,646,052 ＼ 53,462,743 ＼ 45,636,999 ＼ 99,099,741
(10) Interest income from available-for-sale securities amounted to ＼31,282,237 thousand and ＼2,937,437 thousand in 2010 and 2009, respectively.
80 8. INVESTMENT SECURITIES USING THE EQUITY METHOD
(1) Investment securities using the equity method as of March 31, 2010 and 2009 are as follows (Korean won in thousands) :
2010 Book value No. of Shares Percentage of Acquisition Net asset Investees 2010 2009 owned ownership (%) cost value
Hyundai Securities America Inc. 220 100% ＼32,735,839 ＼26,289,525 ＼26,289,525 ＼30,752,055 Hyundai Securities Asia Ltd. 10,000,000 100% 8,918,826 26,734,369 26,734,369 30,906,630 Hyundai Securities Europe Ltd. 11,000,000 100% 19,130,104 17,522,697 17,522,697 20,284,306 Hyundai Wise Asset Management Co., Ltd. 659,997 33.00% 3,827,983 4,629,876 4,629,876 4,033,010 Shibuya Sakuragaoka Property TMK(*) - - - - - 5,751,243 Osaka Kitahama 3 Undisclosed Association 1,419,326,000 75.00% 1,419,326 2,058,534 - 2,037,312 Core-clean Tech Venture Investment 2 Association 582,000,000 25.84% 582,000 549,163 549,163 567,036 Investment Opportunity Limited (**) 60,000 50% 626,100 880,630 880,630 806,152 Hyundai Asset Management Co., Ltd. 6,000,000 100% 30,000,000 25,541,152 25,541,152 28,638,983 Korea Pacific No.08 Ship Investment Co., Ltd. 2,292,971 99.57% 11,134,410 11,134,397 11,134,397 11,505,395 Korea Pacific No.09 Ship Investment Co., Ltd. 2,292,971 99.57% 11,464,855 11,464,919 11,464,919 11,505,394 Korea Pacific No.10 Ship Investment Co., Ltd. 2,292,971 99.57% 11,464,855 11,483,386 11,483,386 11,505,411 Korea Pacific No.11 Ship Investment Co., Ltd. 2,292,971 99.57% 11,464,855 11,481,834 11,481,834 11,485,277 Korea Pacific No.12 Ship Investment Co., Ltd. 2,300,495 99.57% 11,502,475 11,530,877 11,530,877 7,888,433 Korea Pacific No.13 Ship Investment Co., Ltd. 2,300,495 99.57% 11,502,475 11,530,030 11,530,030 7,888,433 ＼165,774,103 ＼172,831,389＼ 170,772,855 ＼185,555,070
(*) As of March 31, 2010, the Company reclassified investment securities using the equity method as investments in partnerships of available-for-sale securities since the Company no longer have significant influence.
(**) Offshore fund established in Labuan Island, Malaysia.
81 (2) The financial statements used in the equity method are as follows:
Investees Date of financial statements Description Hyundai Securities America Inc. March 31, 2010 Provisional settlement of financial statements Hyundai Securities Asia Ltd. March 31, 2010 Provisional settlement of financial statements Hyundai Securities Europe Ltd. March 31, 2010 Provisional settlement of financial statements Hyundai Wise Asset Management Co., Ltd. March 31, 2010 Provisional settlement of financial statements Shibuya Sakuragaoka Property TMK March 31, 2010 Provisional settlement of financial statements Osaka Kitahama 3 Undisclosed Association March 31, 2010 Provisional settlement of financial statements Core-clean Tech Venture Investment 2 Association March 31, 2010 Provisional settlement of financial statements Investment Opportunity Limited. March 31, 2010 Provisional settlement of financial statements Hyundai Asset Management Co., Ltd. March 31, 2010 Provisional settlement of financial statements Korea Pacific No.08 Ship Investment Co., Ltd. March 31, 2010 Provisional settlement of financial statements Korea Pacific No.09 Ship Investment Co., Ltd. March 31, 2010 Provisional settlement of financial statements Korea Pacific No.10 Ship Investment Co., Ltd. March 31, 2010 Provisional settlement of financial statements Korea Pacific No.11 Ship Investment Co., Ltd. March 31, 2010 Provisional settlement of financial statements Korea Pacific No.12 Ship Investment Co., Ltd. March 31, 2010 Provisional settlement of financial statements Korea Pacific No.13 Ship Investment Co., Ltd. March 31, 2010 Provisional settlement of financial statements
These securities were accounted for using the equity method of accounting based on provisional settlement of financial statements as the audited financial statements on these companies could not be obtained at the Company’s year-end closing. In order to verify the reliability of such unaudited financial statements, the Company has performed the following procedures and found no significant exceptions:
a. Obtained the unaudited financial statements signed by the investee’s chief executive officer and statutory auditor
b. Identified whether the major transactions or accounting events, including those disclosed to public by the investee, which were acknowledged by the Company, are properly reflected in the unaudited financial statements
c. Analyzed the effect of potential difference between the unaudited and audited financial statements
(3) The details of valuation of investment securities using the equity method for the years ended March 31, 2010 and 2009 are as follows:
82 March 31, 2010 Korean won (In thousands) Beginning Acquisition/ Gain (loss) on Other Ending Investees equity method increase balance Disposal valuation (decrease) (*) balance Hyundai Securities America Inc. ＼ 30,752,055 ＼ - ＼ 1,120,707 ＼ (5,583,237) ＼ 26,289,525 Hyundai Securities Asia Ltd. 30,906,630 - (229,747) (3,942,514) 26,734,369 Hyundai Securities Europe Ltd. 20,284,306 - 471,452 (3,233,061) 17,522,697 Hyundai Wise Asset Management Co., Ltd. 4,033,010 - 96,321 500,545 4,629,876 Shibuya Sakuragaoka Property TMK 5,751,243 940,078 (207,949) (6,483,372) - Osaka Kitahama 3 Undisclosed Association 2,037,312 - (1,419,326) (617,986) - Core-clean Tech Venture Investment 2 Association 567,036 - (17,873) - 549,163 Investment Opportunity Limited. 806,152 - 234,224 (159,746) 880,630 Hyundai Asset ManagementCo., Ltd. 28,638,983 - (3,102,475) 4,644 25,541,152 Korea Pacific No.08 Ship Investment Co., Ltd. 11,505,395 (330,445) 1,113,535 (1,154,088) 11,134,397 Korea Pacific No.09 Ship Investment Co., Ltd. 11,505,394 - 772,076 (812,551) 11,464,919 Korea Pacific No.10 Ship Investment Co., Ltd. 11,505,411 - 1,049,624 (1,071,649) 11,483,386 Korea Pacific No.11 Ship Investment Co., Ltd. 11,485,277 - 1,040,820 (1,044,263) 11,481,834 Korea Pacific No.12 Ship Investment Co., Ltd. 7,888,433 3,641,825 887,649 (887,030) 11,530,877 Korea Pacific No.13 Ship Investment Co., Ltd. 7,888,433 3,641,825 886,405 (886,633) 11,530,030 ＼185,555,070 ＼ 7,893,283 ＼ 2,695,443 ＼ (25,370,941) ＼ 170,772,855
(*) These are composed of decrease due to dividend (＼5,727,017 thousand) from Korea Pacific No. 08 ~ 13 Ship Investment Co., Ltd., changes in accumulated other comprehensive income of investee of ＼375,992 thousand, transfer of investment securities using equity method to available-for-sales securities (＼6,483,372 thousand) and changes in overseas operation translation (＼13,536,544 thousand).
83 March 31, 2009 Korean won (In thousands) Beginning Acquisition/ Gain (loss) on Other Ending Investees equity method increase balance Disposal valuation (decrease) (*) balance Hyundai Securities America Inc. ＼ 22,807,915 ＼ - ＼ (833,855) ＼ 8,777,995 ＼ 30,752,055 Hyundai Securities Asia Ltd. 22,824,809 - 499,997 7,581,824 30,906,630 Hyundai Securities Europe Ltd. 15,949,397 - (904,993) 5,239,902 20,284,306 Hyundai Wise Asset Management Co., Ltd. 4,910,182 - 235,352 (1,112,524) 4,033,010 Shibuya Sakuragaoka Property TMK 3,772,057 - 359,459 1,619,727 5,751,243 Osaka Kitahama 3 Undisclosed Association 1,440,288 - - 597,024 2,037,312 Core-clean Tech Venture Investment 1 Association 354,000 - - (354,000) - Core-clean Tech Venture Investment 2 Association 582,000 - (14,964) - 567,036 Investment Opportunity Limited. - 626,100 (17,743) 197,795 806,152 Hyundai Asset Management Co., Ltd. - 30,000,000 (1,356,373) (4,644) 28,638,983 Korea Pacific No.08 Ship Investment Co., Ltd. - 11,464,855 298,550 (258,010) 11,505,395 Korea Pacific No.09 Ship Investment Co., Ltd. - 11,464,855 298,550 (258,011) 11,505,394 Korea Pacific No.10 Ship Investment Co., Ltd. - 11,464,855 225,364 (184,808) 11,505,411 Korea Pacific No.11 Ship Investment Co., Ltd. - 11,464,855 204,096 (183,674) 11,485,277 Korea Pacific No.12 Ship Investment Co., Ltd. - 7,860,650 204,683 (176,900) 7,888,433 Korea Pacific No.13 Ship Investment Co., Ltd. - 7,860,650 204,683 (176,900) 7,888,433 ＼ 72,640,648 ＼ 92,206,820 ＼ (597,194) ＼ 21,304,796 ＼ 185,555,070
(*) These are composed of decrease due to dividend (＼1,624,638 thousand) from Korea Pacific No. 08 ~ 13 Ship Investment Co., Ltd., changes in accumulated other comprehensive income of investee of ＼22,240,921 thousand, overseas operation translation of ＼1,042,513 thousand and disposal (＼354,000 thousand).
84 (4) The adjustments of investee’s financial statements due to the difference of accounting standards are as follows:
Korean won (In thousands)
Date of the Net asset value Adjustment Net asset value Investees statement of Reasons before financial position adjustment amount after adjustment Hyundai Securities America Inc. March 31, 2010 (*) ＼ 26,351,916 ＼ (62,391) ＼ 26,289,525 Hyundai Securities ASIA Ltd. March 31, 2010 (*) 31,142,307 (4,407,938) 26,734,369 Hyundai Securities Europe Ltd. March 31, 2010 (*) 17,630,689 (107,992) 17,522,697
(*) The Company adjusted overseas subsidiaries’financial statements since there are differences in generally accepted accounting principles as compared to Korean GAAP.
(5) In 2010, there is no difference occurred newly between the acquisition cost and the Company’s proportionate equity in the fair value of net assets of the investee upon acquisition “( investment difference”), and all investment difference occurred before March 31, 2009 had been amortized.
(6) Financial information of investees accounted for using the equity method as of and for the year ended March 31, 2010 is as follows:
Korean won (In thousands)
Investees Total assets Total liabilities Operating revenues Net income (loss) Hyundai Securities America Inc. (*) ＼ 26,693,337 ＼ 403,812 ＼ 4,310,165 ＼ 1,232,479 Hyundai Securities Asia Ltd. (*) 27,103,415 369,046 13,016,047 1,541,305 Hyundai Securities Europe Ltd. (*) 18,277,308 754,611 3,396,498 418,972 Hyundai Wise Asset Management Co., Ltd. 16,830,592 2,800,665 4,557,825 706,845 Osaka Kitahama 3 Undisclosed Association 2,744,712 - - - Core-clean Tech Venture Investment 2 Association 2,162,054 37,113 - (69,163) Investment Opportunity Limited. 1,761,260 - 531,629 468,449 Hyundai Asset Management Co., Ltd. 25,818,904 277,752 3,059,769 (3,102,475) Korea Pacific No.08 Ship Investment Co., Ltd. 13,158,377 1,975,446 1,131,442 1,068,502 Korea Pacific No.09 Ship Investment Co., Ltd. 14,054,824 2,539,930 1,129,692 1,062,966 Korea Pacific No.10 Ship Investment Co., Ltd. 13,762,277 2,228,836 1,132,626 1,066,061
85 Korean won (In thousands)
Investees Total assets Total liabilities Operating revenues Net income (loss) Korea Pacific No.11 Ship Investment Co., Ltd. 13,705,642 2,173,760 1,134,052 1,066,987 Korea Pacific No.12 Ship Investment Co., Ltd. 13,824,390 2,243,367 979,251 959,483 Korea Pacific No.13 Ship Investment Co., Ltd. 13,845,902 2,265,730 974,022 934,097
(*) The Company adjusted overseas subsidiaries’financial statements since there are differences in generally accepted accounting principles as compared to Korean GAAP.
(7) There are no significant unrealized profits (losses) in 2010 and 2009.
9. ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES
Assets and liabilities denominated in foreign currencies as of March 31, 2010 and 2009 consist of the following (Korean won in thousands):
2010 2009 Description U.S. dollar (*) Korean won U.S. dollar (*) Korean won Assets: Cash and cash equivalents US$ 33,834,368 ＼ 38,259,903 US$ 3,578,357 ＼ 4,927,756 Deposits 27,988,767 31,649,698 27,619,069 38,034,220 Guarantee deposits 120,689 136,475 113,176 155,855 US$ 61,943,824 ＼ 70,046,076 US$ 31,310,602 ＼ 43,117,831 Liabilities: Accounts payable US$ 3,690,422 ＼ 4,173,129 US$ 3,690,422 ＼ 5,082,080 Withholdings 2,418 2,734 - - Other liabilities 27,388,000 30,970,350 16,972,000 23,372,141 US$ 31,080,840 ＼ 35,146,213 US$ 20,662,422 ＼ 28,454,221
(*) Foreign currencies other than U.S. dollars are translated into U.S. dollars.
10. BROKER’S LOAN
The Company extends loans to its customers from funds borrowed from KSFC or from its own funds. The loans bear annual interest at 7.2~9.7 percent and are due in 90 days. Customers provide collateral such as marketable securities or cash equivalents for 140 percent or more of the loan amount.
86 11. ADVANCES FOR CUSTOMERS
Advances for customers consist of advances for payment on bonds guarantee, advances for payments on loss compensation and advances for payments for others.
Advances for payment on bonds guarantee are principally from guarantees of indebtedness of Korean companies, which issued corporate bonds. The Company has provided payment guarantees to the debtors and upon the occurrence of the debtors’ failure to make payment to the creditors, the Company pays directly to the creditors upon maturity.
Advances for payment on loss compensation are compensation receivables occurred from customers’ loss due to employees’ misappropriation and arbitrary transactions.
The Company made advanced payments on behalf of the securities companies to which the Company is responsible for the payments in advance according to the former law on securities transaction.
12. ALLOWANCE FOR DOUBTFUL ACCOUNTS
(1) Regulation on Capital Market and Financial Investment Business Act (the“ Act”) requires the Company to classify all outstanding loans and accounts receivable (brokers’loans, loans for debt-equity swap, accrued income, accounts receivable from customers, loans, advances for customers, dishonored bonds and others) into five categories as normal, precautionary, substandard, doubtful or estimated loss, based on borrowers’repayment capability and historical financial transaction records.
(2) The details of classification of loans and accounts receivable as of March 31, 2010 are as follows (Korean won in thousands):
Normal Precautionary Substandard Doubtful Loss Total
Broker’s loans ＼ 799,614,461 ＼ - ＼ - ＼ - ＼ - ＼ 799,614,461 Loans 80,549,839 - - - - 80,549,839 Loans purchased 134,000,000 - 12,200,000 6,800,000 - 153,000,000 Advances for customers - - 10,099 2,961,206 13,781,743 16,753,048 Dishonored loans - - - - 6,933,050 6,933,050 Privately placed bonds 32,843,667 - 5,320,760 - - 38,164,427 Receivables (*) 49,144,207 - - 196,580 841,893 50,182,680 Accrued income 61,752,158 - - 11,691 100,285 61,864,134 ＼1,157,904,332 ＼ - ＼ 17,530,859 ＼ 9,969,477 ＼ 21,656,971 ＼ 1,207,061,639
(*) The Company does not provide allowance for doubtful accounts for receivables of ＼62,987,952 thousand since it has not matured at the relevant period.
87 (3) The details of bonds as determined by estimating the loss by the Company as of March 31, 2010 are as follows (Korean won in thousands) :
Company Bond amounts Claim amounts Statute of limitations Receivables (*) ＼ 841,893 ＼ 841,893 Accrued income (*) 100,285 100,285 Advances for customers Gukmin Rental Company 13,487,360 13,487,360 2009.6.16 Advances for payment on loss compensation (*) 294,383 294,383 13,781,743 13,781,743 Dishonored loans Koryo securities Inc. 459,988 459,988 2010.3.14 Dae rung Co., Ltd. 2,539,146 2,539,146 2010.3.14 Seah Besteel Corporation 3,923,716 3,923,716 2008.9.22 Bond Park 10,200 10,200 2009.2.28 6,933,050 6,933,050 ＼ 21,656,971 ＼ 21,656,971
(*) These consisted of a number of private investors.
(4) The percentage of allowance for doubtful accounts to total loans for recent 3 years is as follows (Korean won in thousands):
Total loans Allowance for doubtful accounts Percentage 2010.3.31 ＼ 1,207,061,639 ＼ 39,089,323 3.24% 2009.3.31 836,289,981 31,085,220 3.72% 2008.3.31 1,111,617,928 32,426,699 2.92%
88 13. PROPERTY AND EQUIPMENT
(1) The changes in property and equipment in 2010 and 2009 are as follows:
March 31, 2010 Korean won (In thousands) Beginning Ending Acquisition Disposal Others Depreciation balance balance
Land ＼ 114,154,831 ＼ 105,828 ＼ - ＼ - ＼ - ＼ 114,260,659 Buildings 118,205,354 846,417 - 2,667,615 3,767,155 117,952,231 Vehicles 74,404 - 15,025 - 24,866 34,513 Furniture and equipment 22,887,720 5,786,512 11,772 - 10,272,563 18,389,897 Others 11,505,923 2,828,639 11,231 (169,712) 5,044,194 9,109,425 ＼ 266,828,232 ＼ 9,567,396 ＼ 38,028 ＼ 2,497,903 ＼ 19,108,778 ＼ 259,746,725
March 31, 2009 Korean won (In thousands) Beginning Ending Acquisition Disposal Depreciation balance balance
Land ＼ 90,169,971 ＼ 23,984,860 ＼ - ＼ - ＼ 114,154,831 Buildings 112,195,170 9,466,526 -3,456,342 118,205,354 Vehicles 106,783 - - 32,379 74,404 Furniture and equipment 20,534,816 12,566,147 65,904 10,147,339 22,887,720 Others 11,006,391 5,846,038 95,726 5,250,780 11,505,923 ＼ 234,013,131 ＼ 51,863,571 ＼ 161,630 ＼ 18,886,840 ＼266,828,232
(2) The value of Company-owned land (90,068.98 square meters and 89,980.40 square meters as of March 31, 2010 and 2009, respectively) is ＼142,684,090 thousand and ＼143,544,856 thousand, using the disclosed land price pursuant to the Laws on Disclosure of Land Price and Valuation of Land as of March 31, 2010 and 2009, respectively.
(3) As of March 31, 2010, a substantial portion of the Company’s land and buildings are pledged as collateral to a maximum of ＼10,429,340 thousand and leasehold rights amount to ＼3,348,193 thousand for the deposits for rent.
(4) As of March 31, 2010, buildings of head quarter and branches, furniture are insured for ＼153,996,502 thousand with Hyundai Marine & Fire Insurance Co., Ltd. In addition, the Company also carries a general insurance policy and liability insurance for vehicles with Hyundai Marine & Fire Insurance Co., Ltd.
89 (5) The Company has leased vehicles as of March 31, 2010, under operating lease agreements with Hyundai Capital Services, Inc. The payment schedule of the lease obligations is as follows (Korean won in thousands):
Period Amount 2010.4.1 ~ 2011.3.31 ＼ 52,612 2011.4.1 ~ 2015.3.31 28,930 ＼ 81,542
14. INTANGIBLE ASSETS (1) Intangible assets as of March 31, 2010 and 2009 are as follows:
March 31, 2010 Korean won (In thousands) Accumulated Acquisition cost Book value amortization
Development costs ＼ 55,162,986 ＼ 36,941,723 ＼ 18,221,263 Software 23,163,809 14,851,000 8,312,809 Others 23,463,284 3,128,438 20,334,846 ＼ 101,790,079 ＼ 54,921,161 ＼ 46,868,918
March 31, 2009 Korean won (In thousands) Accumulated Acquisition cost Book value amortization
Development costs ＼ 52,229,238 ＼ 30,612,164 ＼ 21,617,074 Software 20,689,529 11,426,172 9,263,357 ＼ 72,918,767 ＼ 42,038,336 ＼ 30,880,431
90 (2) The changes in intangible assets in 2010 and 2009 are as follows:
March 31, 2010 Korean won (In thousands) Beginning Ending Increase Decrease Amortization balance balance
Development costs ＼ 21,617,074 ＼ 2,933,748 ＼ - ＼ 6,329,559 ＼ 18,221,263 Software 9,263,357 2,474,280 - 3,424,828 8,312,809 Others - 23,463,284 - 3,128,438 20,334,846 ＼ 30,880,431 ＼ 28,871,312 ＼ - ＼ 12,882,825 ＼ 46,868,918
March 31, 2009 Korean won (In thousands) Beginning Ending Increase Decrease Amortization balance balance
Development costs ＼ 1,676,768 £‹ 21,117,873 ＼ - ＼ 1,177,567 ＼ 21,617,074 Others 3,812,540 7,515,188 - 2,064,371 9,263,357 ＼ 5,489,308 ＼ 28,633,061 ＼ - ＼ 3,241,938 ＼ 30,880,431
15. BORROWINGS
(1) Call money as of March 31, 2010 and 209 are as follows (Korean won in thousands):
Amount Lender Annual interest rate (%) 2010 2009 Tong Yang Securities Inc. 2.10 ＼ 326,000,000 ＼ 60,000,000
91 (2) Bank overdraft from banks as of March 31, 2010 and 2009 are as follows (Korean won in thousands):
Amount Lender Annual interest rate (%) 2010 2009 Hana Bank 7.85 ＼ 9,930,318 ＼ -
(3) Borrowings from Korea Securities Finance Corporation as of March 31, 2010 and 2009 are as follows (Korean won in thousands):
Amount Lender Annual interest rate (%) 2010 2009 Korea Securities Finance Corporation and others 0.60 ~ 4.28 ＼ 510,624,857 ＼ 181,318,254
(4) Other borrowings as of March 31, 2010 and 2009 consist of the following:
Amount Lender Annual interest rate (%) 2010 2009 Bank of Korea 2.17 ＼ 6,700,000 ＼ 47,200,000 Woori Investment & Securities Co., Ltd. 2.83 50,000,000 - Ministry of Strategy and Finance 0.60 ~ 0.61 26,031,863 - ＼ 82,731,863 ＼ 47,200,000
92 16. DEBENTURES
Debentures as of March 31, 2010 and 2009 are as follows:
Annual Korean won (In thousands) Description Issuance date Maturity interest rate (%) 2010 2009 Publicly-offered 26th debentures 2007.3.06 2010.3.06 5.23 ＼ - ＼ 200,000,000 Publicly-offered 27th debentures 2008.1.08 2011.1.08 7.22 1,000,000 1,000,000 Publicly-offered 28th debentures 2010.2.03 2013.2.03 5.70 200,000,000 - 201,000,000 201,000,000 Less: Discount on debenture issued (650,870) (124,710) ＼ 200,349,130 ＼ 200,875,290
17. SHAREHOLDERS’EQUITY
(1) As of March 31, 2010 and 2009, details of capital stock are as follows:
Korean Won
2010 2009 Authorized shares 600,000,000 shares 600,000,000 shares Par value per share ＼ 5,000 ＼ 5,000 Outstanding shares 170,000,000 shares 170,000,000 shares Capital stock ＼ 850,000,000,000 ＼ 850,000,000,000
(2) Treasury stock
The Company holds 8,215,870 shares of its common stock as of March 31, 2010, and intends to sell the shares in the near future.
93 (3) Restricted retained earnings
As of March 31, 2010, restricted retained earnings are as follows (Korean won in thousands):
Description Amount Legal basis Legal reserve (*) ＼ 20,222,764 The Commercial Code of the Republic of Korea, Article 458 Reserve for loss on electronic financial transactions (**) 500,000 Regulation on Supervision of Electronic Financial Activities, Article 5 ＼ 20,722,764
(*) The Commercial Code of the Republic of Korea requires the Company to appropriate, as a legal reserve, an amount equal to a minimum of 10% of cash dividends paid, until such reserve equals 50% of its issued capital stock. This reserve is not available for the payment of cash dividends, but may be transferred to capital stock, or used to reduce accumulated deficit, if any, with the ratification of the Company’s majority shareholders.
(**) In accordance with the provisions of Article 5 of Regulation on Supervision of Electronic Financial Activities, the Company provides reserve for loss on electronic financial transactions to make reparation for the damage in process of the electronic transfers or operations.
18. INCOME PER SHARE
(1) Ordinary net income per share for the years ended March 31, 2010 and 2009 is calculated as follows:
Korean won
2010 2009 Net income ＼ 178,861,170,143 ＼ 149,189,223,295 Weighted average number of common shares outstanding 161,784,130 163,445,808 Ordinary net income per share ＼ 1,106 ＼ 913
94 (2) Weighted average number of common shares outstanding for the year ended March 31, 2010 is calculated as follows:
Number of Number of days Weighted number shares issued outstanding of shares
April 1, 2009 170,000,000 365 62,050,000,000 Treasury stock (carried forward) (8,215,870) 365 (2,998,792,550) 161,784,130 59,051,207,450
Weighted-average number of common shares outstanding: 59,051,207,450 shares ÷ 365 days = 161,784,130 shares
Diluted earnings per share is the same as basic earnings per share since there are no diluted securities outstanding as of March 31, 2010 and 2009.
19. DIVIDENDS
Dividends for the years ended March 31, 2010 and 2009 are calculated as follows (Korean won):
(1) Details of dividends
2010 2009 Dividends per share (dividend rate) ＼ 400 (8%) ＼ 250 (5%) Number of shares outstanding 161,783,730 161,784,130 Cash dividends 64,713,492,000 40,446,021,000
(2) Dividend payout ratio
2010 2009 Cash dividends ＼ 64,713,492,000 ＼ 40,446,021,000 Net income 178,861,170,143 149,189,223,295 Dividend payout ratio 36.18% 27.11%
95 (3) Dividend yield ratio
2010 2009 Dividends per share ＼ 400 ＼ 250 Market price per share as of the date of statements of financial position date 13,600 11,400 Dividend yield ratio 2.94% 2.19%
20. INCOME TAX EXPENSE AND DEFERRED INCOME TAXES
(1) Income tax expense for the years ended March 31, 2010 and 2009 are as follows:
Korean won (In thousands)
Description 2010 2009 Income tax currently payable ＼ 73,139,270 ＼ - Changes in deferred income taxes due to temporary difference (*1) (9,760,839) 52,614,143 Changes in deferred income taxes due to carry-forwarded tax loss (*2) 13,397,932 (13,397,932) Changes in deferred income taxes due to tax credits (*3) 4,900,589 (4,900,589) Deferred income tax directly reflected to equity (9,102,914) 19,200,172 Income tax expense 72,574,038 53,515,794 (*1) Deferred income tax assets (liabilities) due to temporary difference, net at the end of the year (16,968,913) (26,729,750) Deferred income tax assets (liabilities) due to temporary difference, net at the beginning of the year (26,729,752) 25,884,393 Changes in deferred income taxes due to temporary difference 9,760,839 (52,614,143) (*2) Deferred income tax assets due to carry-forwarded tax loss, net at the end of the year - 13,397,932 Deferred income tax assets due to carry-forwarded tax loss, net at the beginning of the year 13,397,932 - Changes in deferred income taxes due to carry- forwarded tax loss (13,297,932) 13,297,932 (*3) Deferred income tax assets due to tax credits, net at the end of the year - 4,900,589 Deferred income tax assets due to tax credits, net at the beginning of the year 4,900,589 - Changes in deferred income taxes due to tax credits (4,900,589) 4,900,589
96 (2) Tax reconciliation items between pretax accounting income and taxable income for the years ended March 31, 2010 and 2009 are as follows:
Korean won (In thousands) Description 2010 2009 Income before income tax ＼ 251,435,208 ＼ 202,705,017 Income tax payable applying tax rate (2010: 24.2%, 2009: 27.5%) 60,823,120 55,713,080 Reconciliation: Non-taxable Income (224,024) (508,661) Non-deductible expense 909,644 1,205,578 Additional (payment of) income tax 2,724,298 - Exclusion from deferred income tax 8,341,000 (2,894,203) Income tax expense ＼ 72,574,038 ＼ 53,515,794 Effective income tax rate 28.86% 26.40%
(3) The table below shows the accumulated temporary differences, carry-forwarded tax loss and total amount of deferred income tax assets (liabilities) for the year ended and as of March 31, 2010:
Korean won (In thousands)
Beginning Increase Ending balance (**) (decrease) balance
1) Deductible temporary difference: Allowance for doubtful accounts ＼ 2,150,077 ＼ (893,200) ＼ 1,256,877 Commission (local subsidiary) (***) 2,080,658 3,596,039 5,676,697 Impairment loss on securities 66,658,531 5,006,281 71,664,812 Accrued severance benefits 56,046,962 8,960,115 65,007,077 Loss on valuation of collective investment securities 33,645,043 (5,100,542) 28,544,501 Securities sold 315,533 5,612 321,145 Loss on valuation of options 34,761 19,139 53,900 Loss on valuation of OTC derivatives 216,739,550 (212,320,184) 4,419,366 Loss on sales of foreign bonds 5,040,480 - 5,040,480 Loss on foreign exchanges translation 2,810,887 164,917 2,975,804 Other non-operating expenses 16,429,810 11,488,485 27,918,295 Advertising (dream point) 5,109,284 (380,972) 4,728,312
97 Korean won (In thousands)
Beginning Increase Ending balance (**) (decrease) balance
Loss on valuation of derivatives linked securities sold ＼ - ＼ 267,691 ＼ 267,691 Loss on valuation of derivatives linked securities 445,042,575 (439,326,511) 5,716,064 Employee welfare fund 2,950,000 650,000 3,600,000 Accrued expenses (education tax) - 1,400,000 1,400,000 Dividends (specific overseas company) (***) 11,987,221 7,821,610 19,808,831 Donations in excess of tax limit 3,894,843 (3,894,843) - Carry-forwarded tax loss 55,363,355 (55,363,355) - Sub-total 926,299,570 (677,899,718) 248,399,852 2) Temporary difference to be added: Severance insurance deposits (45,306,387) (19,700,690) (65,007,077) Gain on equity method valuation (5,353,218) 3,031,574 (2,321,644) Accrued interest receivable (19,433,554) (6,802,418) (26,235,972) Gain on valuation of stock (27,900,271) (18,589,043) (46,489,314) Gain on valuation of bonds (40,412,759) (2,604,858) (43,017,617) Gain on settlement of futures (12,323,137) 10,712,736 (1,610,401) Collective fund for default loss (445,550) - (445,550) Gain on sales of investment securities (196,170) - (196,170) Stock of affiliated company (9,791,465) - (9,791,465) Allowance for reduction entry (***) (16,982,736) - (16,982,736) Gain on valuation of negotiable commercial papers (1,569,062) 1,214,986 (354,076) Interest incurred during construction (508,913) 17,303 (491,610) Gain on valuation of derivatives linked securities sold (762,311,278) 62,311,278 - Gain on valuation of available-for-sale securities (53,462,743) (45,636,998) (99,099,741) Capital variation of equity method (16,738,214) 14,188,032 (2,550,182) Overseas operation translation income (1,546,741) 1,546,741 - Sub-total (1,014,282,198) 699,688,643 (314,593,555) Total ＼ (87,982,628) ＼ 21,788,925 ＼ (66,193,703)
98 Korean won (In thousands)
Beginning Increase Ending balance (**) (decrease) balance
Unrecognized amount (37,483,790) 4,022,515 Recognized amount (***) (50,498,838) (70,216,218) Statutory tax rate (*) 24.2% or 22.0% 24.2% or 22.0% Deferred income tax assets (liabilities) (13,331,820) (16,968,913) Tax credits 4,900,589 (4,900,589) - Deferred income tax assets (liabilities), net ＼ (8,431,231) ＼ (16,968,913)
(*) The income tax rate used in computing deferred income tax assets (liabilities) is the expected margin tax rate, which is applicable to the forecasted period when the temporary differences are reversed. However, temporary difference to be added, which is related to equity method valuation, is supposed to be realized by dividend and the effective tax rate for calculating deferred income tax is adjusted considering deduction rate of dividend income.
(**) Some beginning balance amounts were changed based on the final tax return. The amounts were adjusted to the beginning balance of 2010.
(***) As of March 31, 2010, deferred income tax assets, which are related to deductible temporary differences and carry- forwarded tax loss, are recognized within the limit of taxable profit that is certainly realizable. But the Company did not recognize the deferred income taxes, which are related to allowance for reduction entry, gain and loss on equity method valuation and capital variation of equity method since it is not certain that these can be realized.
(4) Deductible temporary difference, which were excluded due to uncertainty of its realization as of March 31, 2010 and 2009, are as follows:
Korean won (In thousands) Description 2010 2009 Commission (local subsidiary) ＼ 5,676,697 ＼ - Dividends (specific overseas company) 19,808,831 - ＼ 25,485,528 ＼ -
99 (5) Temporary differences to be added, which were excluded due to uncertainty of its realization as of March 31, 2010 and 2009, are as follows:
Korean won (In thousands) Description 2010 2009 Allowance for reduction entry ＼ 16,982,736 ＼ 16,982,736 Gain (loss) on equity method valuation 1,775,737 5,042,346 Capital variation of equity method 2,704,541 15,458,708 ＼ 21,463,014 ＼ 37,483,790
(6) As of March 31, 2010 and 2009, deferred income tax assets (liabilities), which were added or subtracted to shareholders’equity, are as follows:
March 31, 2010 Korean won (In thousands) Before reflecting After reflecting Tax effect tax effect tax effect
Gain on valuation of available-for-sale securities ＼ 135,713,499 ＼ (29,856,970) ＼ 105,856,529 Loss on valuation of available-for-sale securities (36,613,758) 8,055,027 (28,558,731) Capital variation of equity method 5,859,395 (110,119) 5,749,276 Negative capital variation of equity method (3,590,705) 425,571 (3,165,134) Overseas operation translation income 5,240,299 - 5,240,299 ＼ 106,608,730 ＼ (21,486,491) ＼ 85,122,239
March 31, 2009 Korean won (In thousands) Before reflecting After reflecting Tax effect tax effect tax effect
Gain on valuation of available-for-sale securities ＼ 61,393,457 ＼ (13,506,561) ＼ 47,886,896 Loss on valuation of available-for-sale securities (7,930,714) 1,744,758 (6,185,956) Capital variation of equity method 17,407,619 (462,581) 16,945,038 Negative capital variation of equity method (669,404) 181,089 (488,315) Overseas operation translation income 6,328,613 (340,281) 5,988,332 ＼ 76,529,571 ＼ (12,383,576) ＼ 64,145,995
100 (7) Income tax payable and refundable income tax before offsetting as of March 31, 2010 and 2009 is as follows:
Korean won (In thousands)
Description 2010 2009 Refundable income tax before offsetting ＼ 59,484,961 ＼ 13,769,171 Income tax payable before offsetting 73,139,270 - Refundable income tax (income tax payable) after offsetting ＼ (13,654,309) ＼ 13,769,171
21. RELATED PARTY TRANSACTIONS
(1) Related parties as of March 31, 2010 are as follows:
Description Related party Hyundai Securities Asia Ltd. Hyundai Securities America Inc. Hyundai Securities Europe Ltd. Hyundai Asset Management Co., Ltd. Korea Pacific No.08 Ship Investment Co., Ltd. The subsidiaries Korea Pacific No.09 Ship Investment Co., Ltd. Korea Pacific No.10 Ship Investment Co., Ltd. Korea Pacific No.11 Ship Investment Co., Ltd. Korea Pacific No.12 Ship Investment Co., Ltd. Korea Pacific No.13 Ship Investment Co., Ltd. Hyundai Wise Asset Management Co., Ltd. Osaka Kitahama 3 Undisclosed Association Equity investees Core-clean Tech Venture Investment 2 Association Investment Opportunity Limited.
101 (2) Significant balances with related parties as of March 31, 2010 and 2009 are as follows:
Korean won (In thousands) Description Related party Description 2010 2009 Hyundai Securities Asia Ltd. Accounts payable ＼ 194,000 ＼ 385,000 Hyundai Securities America Inc. Accounts payable 145,000 524,531 The subsidiaries Hyundai Securities Europe Ltd. Accounts payable 165,000 77,000 Hyundai Asset Management Co., Ltd. Bonds sold under reverse resale agreements 1,286,461 - Hyundai Merchant Marine Co., Ltd. Advanced payments 102,817 - Hyundai Ubiquous & Information Technology Co., Ltd. Advanced payments 3,890,127 363,825
〃 Bonds sold under reverse Others resale agreements 255,208 3,695,817 Hyundai Research Institute Bonds sold under reverse resale agreements 1,194,547 1,853,377 Hyundai Logiem Co., Ltd. Bonds sold under reverse resale agreements 94,495 79,030 Hyundai Asan Corporation Advanced payments 3,103,773 - The Company Employees Loans 80,541,921 98,283,145
102 (2) Significant transactions with related parties for the years ended March 31, 2010 and 2009 are as follows:
Korean won (In thousands) Description Related party Description 2010 2009 Hyundai Securities ASIA Ltd. Commissions expense ＼ 3,819,223 ＼ 3,913,106 Hyundai Securities America Inc. Commissions expense 986,669 2,056,227 The subsidiaries Hyundai Securities Europe Ltd. Commissions expense 1,684,750 1,545,834 Hyundai Asset Management Co., Ltd. Commissions expense 2,740 - Training 872,418 1,116,137 Rent 654,905 508,698 Benefits for employees 5,105 458 Entertainment - 198 Hyundai Research Institute Selling and administrative expense - other 19,168 13,900 Research 773,300 707,300 Rental income 994,334 900,000 Commissions expense 2,976,765 1,896,266 Rent 21,892 - Selling and administrative Hyundai Merchant Marine Co., Ltd. expense - other 6,148 6,600 Commissions received - other 4,796 9,316 Rental income 382,836 - Commissions expense 49,643 110,062 Advertising 1,394,141 - Hyundai Elevator Co., Ltd. Selling and administrative expense - other 184 5,656 Rental income 5,398 - Computer system Others operation expense 11,900,691 7,240,466 Hyundai Ubiquous & Selling and administrative Information Technology Co., Ltd. expense - other 2,401,653 2,650,903 Rental income 8,519 - Advertising 4,609,690 7,613,721 Selling and administrative expense - other 9 160 Hyundai Logiem Co., Ltd. Entertainment - 1,000 Rent income 13,123 - Commissions received - underwriting 30,000 - Rent 2,098 26,950 Entertainment - 116,876 Advertising 2,969,945 - Hyundai Asan Corporation Training 10,424 239,756 Selling and administrative expense - other 6,990 - Rental income 10,928 - Hyundai Investment Network Co., Ltd. Rental income 797 - The Company Employees Interest income 162,527 154,703
103 (4) The Company purchased property and equipment and intangible assets from Hyundai Ubiquous & Information Technology Co., Ltd. amounting to ＼ 8,003,671 thousand and ＼ 16,035,057 thousand in 2010 and 2009, respectively.
(5) For the year ended March 31, 2010, the Company recognized expenses for salaries of ＼7,370 million and severance benefits of ＼1,127 million as management compensation. Management consists of executive officers who have the authority and responsibility in the planning, directing and controlling of the Company’s operations.
22. COMMITMENTS AND CONTINGENCIES
(1) The Company has entered into various agreements with various banks as of March 31, 2010 and the details are as follows (Korean won in thousands):
Description Financial Institution Contract amount Overdraft (including daily overdraft) Kookmin Bank and 6 banks ＼ 431,200,000 General loan Kookmin Bank and 1 bank ＼ 100,000,000 Short-term finance of borrowings Woori Bank ＼ 100,000,000 Securities underwriting loan KSFC ＼ 500,000,000 Working capital loan (general) KSFC ＼ 500,000,000 Working capital loan (trust) KSFC Limit of trust amount Note trading at a discount (general) KSFC ＼ 200,000,000 Note trading at a discount (trust) KSFC Limit of subscription deposits Bond dealer loan (general) KSFC ＼ 696,767,000 Bond dealer loan (trust) KSFC Limit of trust amount Bond dealer loan (deposit) KSFC Limit of deposit amount Bond dealer loan (national treasury) KSFC Limit of national treasury Bond dealer loan (government bonds) KSFC Limit of 10% of gross deposit amount
104 (2) The Company is involved in 13 lawsuits as a defendant claiming damages of ＼255,205,443 thousand and in 4 lawsuits as a plaintiff claiming damages of ＼118,441,911 thousand as of March 31, 2010. The Company’s management believes that the final loss of these litigations is uncertain and the ultimate outcome of these litigations will not have a significant impact on the financial position of the Company.
(3) The Company brokered the sale of stocks issued by Prudential Investment & Securities Co., Ltd. “( PIS”, formerly Kookmin Investment & Securities Co., Ltd.) from Hynix Semiconductor Inc. “( HYNIX”) to Canadian Imperial Bank of Commerce “( CIBC”) on June 4, 1997. In this regard, Hyundai Heavy Industries Co., Ltd. “( HHI”) entered into an agreement that CIBC had put options on the above stocks based on the memorandum provided by the Company and HYNIX. Pursuant to the agreement, HHI bought 13,000,000 shares issued by PIS at the price of US$220 million on July 24, 2000, as CIBC exercised its put option. With regard to compensation for the above trade, HHI filed a suit against the Company, HYNIX and an individual for the payment of ＼247,864 million on July 28, 2000. With regard to the above litigation, the Supreme Court ruled that the Company, jointly with HYNIX, had to compensate ＼192,941 million to HHI on March 26, 2009. With regard to the above litigation, the Company recorded the provisional payment of ＼99,172 million as expenses before the previous year. In addition, HHI demanded that the Company and HYNIX cover income tax expense and other expenses of the sale and filed a separate suit against the Company and HYNIX for ＼40,242 million on December 30, 2004. With regard to the above litigation, the Seoul District Court ruled that the Company, jointly with HYNIX, had to compensate ＼40,242 million to HHI on October 22, 2009. With regard to the verdict of the first trial, the Company recorded the provisional payment of ＼27,917 million as expenses. The second trial is still pending. The ultimate resolution of this case cannot presently be estimated.
(4) The Company entered into a contract on conditional purchase agreement of ABCP with Daewoo Gamsam Prugio-2 Co. ABCP backed by loans were issued by Daewoo Gamsam Prugio-2 Co. amounting to ＼50,000 million. The ABCP is converted every three months (the first issuance on December 21, 2006 and the last issuance on June 18, 2009), and the Company should purchase the remaining unsold ABCP in each issuance date on the condition that the effective credit rating of Daewoo Engineering & Construction Co., Ltd. CP is maintained at A3+.
(5) The Company entered into a contract to reimburse certain portions of losses when Hyundai II Securitization Specialty Co., Ltd. and Hyundai III Securitization Specialty Co., Ltd. go into liquidation, on certain collective investment securities sold before the previous year. With regard to the above contract, the Company recognized accounts payable of ＼20,125,315 thousand for estimated loss as of March 31, 2010 and ＼350,494 thousand as expenses in 2010.
(6) The Company has been provided ＼19,625,698 thousand of guarantee related to provisional attachment and others by Seoul Guarantee Insurance as of March 31, 2010.
105 23. COMPREHENSIVE INCOME STATEMENTS
Comprehensive income for the years ended March 31, 2010 and 2009 is as follows:
Korean won (In thousands)
Description 2010 2009 Net income ＼ 178,861,170 ＼ 149,189,223 Other comprehensive income (loss): Gain on valuation of available-for-sales securities 57,969,633 (36,149,512) Loss on valuation of available-for-sales securities (22,372,774) (5,298,032) Capital variation of equity method (11,195,762) 16,356,046 Negative capital variation of equity method (2,676,819) 5,648,053 Overseas operation translation income (748,033) 2,690,407 Comprehensive income ＼ 199,837,415 ＼ 132,436,185
The tax effect of other comprehensive income (loss) for the years ended March 31, 2010 and 2009 is as follows:
Korean won (In thousands)
Description 2010 2009 Gain on valuation of available-for-sales securities ＼ (16,350,409) ＼ 18,369,318 Loss on valuation of available-for-sales securities 6,310,269 1,407,958 Capital variation of equity method 352,462 (417,911) Negative capital variation of equity method 244,482 181,090 Overseas operation translation income 340,281 (340,283) ＼ (9,102,915) ＼ 19,200,172
106 24. DERIVATIVES
(1) Derivative contracts held by the Company as of March 31, 2010 are as follows:
Korean won (In thousands)
Unsettled amount Gain (loss) on valuation Descriptions Stock and stock index: Option purchased ＼ 455,127 ＼ (165,724) For arbitrage purposes and hedging Option sold 596,174 111,824 For arbitrage purposes and hedging Futures purchased 93,786,612 977,395 For arbitrage purposes and hedging Futures sold 12,027,146 (262,868) For arbitrage purposes and hedging 106,865,059 660,627 Interest rate: Futures sold 1,922,258,000 896,003 For hedging Currency: Futures sold 1,449,856 (128) For hedging ＼ 2,030,572,915 ＼ 1,556,502
(2) OTC derivative contracts held by the Company as of March 31, 2010 are as follows:
Korean won (In thousands)
Unsettled amount Gain (loss) on valuation Descriptions Stock and stock index: Stock swap ＼ 437,625,084 ＼ 208,020,415 For derivatives linked securities sold Option purchased 8,281,233 4,389,302 For derivatives linked securities sold Option sold 3,409,831 (1,547,770) For arbitrage purposes 449,316,148 210,861,947 Interest rate: Interest rate swap 982,954,526 1,475,544 For derivatives linked securities sold and hedging Currency: Currency forwards sold 34,498,432 2,568,104 For hedging Others: Option purchased 2,642,579 2,014,849 For derivatives linked securities sold Option sold 39,920,185 (2,520,464) For derivatives linked securities sold and hedging 42,562,764 (505,615) ＼ 1,509,331,870 ＼ 214,399,980
107 The options purchased for derivatives linked securities sold are purchased for hedging derivatives linked securities sold, of which maturity value and fair value are dependent upon stock index, interest rate and others. As of March 31, 2010, the fair value of options sold of derivatives linked securities sold, which is opposite side of options purchased of derivatives linked securities sold, is reflected at fair value of derivatives linked securities sold (see Note 5).
25. STATEMENTS OF CASH FLOWS
(1) Cash in the statements of cash flows consists of cash and cash equivalents in the statements of financial position.
(2) Significant transactions not involving cash flows for the years ended March 31, 2010 and 2009 are as follows:
Korean won (In thousands)
Description 2010 2009 Transfer of trading securities to available-for-sale securities ＼ 38,420,818 ＼ 94,199,707 Transfer of available-for-sale securities to privately placed bonds 4,770,760 - Transfer of investment securities using the equity method to available-for-sale securities 4,793,804 - Retirement of advances for customers 139,468 2,298,071 Recovery of bad debts 15,712 - Increase in accounts payable due to purchase of intangible assets 18,225,285 - Fluctuation of gain on valuation of available-for-sale securities 57,969,633 (36,149,512) Fluctuation of loss on valuation of available-for-sale securities (22,372,774) 5,298,032 Fluctuation of capital variation of equity method (11,195,762) 16,356,046 Fluctuation of negative capital variation of equity method (2,676,819) 5,648,053 Fluctuation of overseas operation translation income (40,314) -
26. SECURITIES IN CUSTODY
The securities in custody as of March 31, 2010 and 2009 are as follows:
Korean won (In millions) Account Valuation method 2010 2009
Securities in custody: Trustor securities in custody ＼ 45,751,519 ＼ 36,082,191 Fair value Saver securities in custody 88,690 80,041 Fair value Beneficiary securities in custody 6,449,430 5,345,871 Standard sold price ＼ 52,289,640 ＼ 41,508,103
108 27. TRUST ACCOUNTS:
As of March 31, 2010, financial information for trust-type is as follows:
Korean won (In thousands) Defined Personal Specific Treasury Defined benefit Description contribution retirement Total money trust stock trust retirement pension retirement pension account Cash and deposits ＼1,051,197,371 ＼82,963,488 ＼10,199,071 ＼11,973,082 ＼37,253 ＼1,156,370,265 Securities 1,489,081,820 343,366,947 59,604,960 27,783,545 21,439,291 1,941,276,563 Call loans 70,000,000 - - - - 70,000,000 Securities purchased under reverse repurchase agreements 480,000,000 - - 247,278 245,175 480,492,453 Other assets 118,084,354 36,077,084 2,220,445 2,780,802 49,277 159,211,962 Total assets ＼3,208,363,545 ＼462,407,519 72,024,476 42,784,707 21,770,996 3,807,351,243 Other liabilities 21,854,382 657,781 2,233,479 2,986,647 24,466 27,756,755 Total liabilities 21,854,382 657,781 2,233,479 2,986,647 24,466 27,756,755 Trust principal 3,186,509,163 461,749,738 69,790,997 39,798,060 21,746,530 3,779,594,488 Total equity 3,186,509,163 461,749,738 69,790,997 39,798,060 21,746,530 3,779,594,488 Total liabilities and equity ＼3,208,363,545 ＼462,407,519 ＼72,024,476 ＼42,784,707 ＼21,770,996 ＼3,807,351,243
The Company reflected the trust fees received from trust accounts of ＼2,646,850 thousand as operating income (commissions received) in 2010.
28. SELLING & ADMINISTRATIVE EXPENSES:
Selling and administrative expenses for the years ended March 31, 2010 and 2009 are as follows:
Korean won (In thousands)
Description 2010 2009 Salaries ＼ 210,199,406 ＼ 162,824,032 Provision for severance benefits 19,360,889 24,004,312 Benefits for employees 49,526,266 52,486,783 Rent 14,733,711 14,720,434 Entertainment 5,616,119 5,317,374 Advertising 23,676,598 24,124,083 Depreciation 19,108,778 18,886,840 Amortization 12,882,825 3,241,938 Tax and dues 21,902,689 11,788,846 Others 67,212,837 68,905,698 ＼ 444,220,118 ＼ 386,300,340
109 29. MAJOR INDICATORS FOR THE FINAL INTERIM PEIORD (UNAUDITED)
The major indicators of management performance for the final interim period, which are not audited, are as follows:
Korean won(In thousands, except for share amounts)
Description 2010 2009 Operating revenues ＼ 449,036,299 ＼ 277,516,995 Operating expense 380,189,128 202,189,356 Operating income 68,847,171 75,327,639 Net income 50,057,176 66,894,257 Income per share 309 413
30. ADOPTION OF KOREAN INTERNATIONAL FINANCIAL REPORTING STANDARDS
(1) In accordance with the amendment to the Act on External Audit for Stock Companies, the Company is required to comply with Korean financial reporting standard (K-IFRS) from 2011. The Company initiated the transition process toward K-IFRS, and turned to with the project with the task force from January 2009. The details of K-IFRS preparation are 3 steps as follows:
A. Step 1: Evaluating the impact of K-IFRS adoption
From January 2009, the Company turned to with the project with the task force and analyzed the IFRS impact on current accounting, financial reporting policies and system. In addition, the Company analyzed the existing accounting system for efficient adoption of K-IFRS and development of financial infrastructure.
B. Step 2: Designing and implementing the financial infrastructure
From August 2009, the Company started the transition plans toward K-IFRS and establishing accounting system. The Company started to improve financial infrastructure and the Company’s competency on carrying out IFRS conversion process.
C. Step 3: Preparing and stabilizing financial information by K-IFRS
During the first half of 2010, the Company plans to prepare the first reliable financial information by K-IFRS and complete the designation of process for presenting consolidated financial statements through the designed financial infrastructure.
110 (2) The Company is in the process of designing and implementing the financial infrastructure (Step 2). After designing the new accounting framework and financial reporting system, the Company plans to examine the system from April to May 2010. The Company shall prepare its financial statements under K-IFRS from 2011.
(3) The expected important issues on differences between the current accounting standards and the adoption of K-IFRS.
The expected important issues on differences between the current accounting standards and the adoption of K-IFRS as of March 31, 2010 are summarized below. Such divergence does not include every single difference that would vary with the result of a supplementary analysis. Moreover, the detailed effects of the important differences may not figure out in business practice.
Classification K-IFRS Current Accounting Standards
The amount of benefits for employees with The amount of actuarial present value of more than one year of service, Accrued severance benefits benefits for employees, incorporating presuming all employees are to retire as discount rate and assumptions. of the end of the reporting date.
In accordance with Article 1-3 of the Act on External Audit for Stock Companies, Exceeding 50% of shares, decision-making over 30% of shares owned and the biggest capability and holding benefits and risks Consolidation scope shareholder decision making are subject are conditional on the alternatives of the to the alternation. Companies that have a consolidation scope. special purpose, of which only some factors are satisfied, are excluded.
Financial instruments classify financial Securities are classified by trading assets at fair value through profit or loss, Classification of securities, available-for-sale securities and available-for-sale financial assets, held- financial instruments held-to-maturity securities. Deposits and to-maturity investments, loan and derivatives are separately categorized. receivables.
111 Independent Accountants’ Review Report on Internal Accounting Control System “( IACS”)
Deloitte Anjin LLC 14Fl., Hanwha Securities Bldg., 23-5 Yoido-dong, Youngdeungpo-gu, Seoul 150-717, Korea Tel +82 (2) 6676 1000 ㅣ Fax +82 (2) 6674 2114 www.deloitteanjin.co.kr
English Translation of a Report Originally Issued in Korean
To the Representative Director of Hyundai Securities Co., Ltd.
We have reviewed the accompanying Report on the Managemant’s Assessment of IACS (the “Management’s Report) of Hyundai Securities Co., Ltd. (the “Company”) as of March 31, 2010. The management’s Report, and the design and operation of IACS are the responsibility of the Company’s management. Our responsibility is to review the Management’s Report and issue a review report based on our procedures. The Company’s management stated in the accompanying Management’s Report that “based on the assessment of the IACS as of March 31, 2010, in all material respects, in accordance with the standards of the IACS of the Republic of Korea.”
We conducted our review in accordance with the IACS Rewiew Standards established by the korean Institute of Certified Public Accountants. Those standards require that we plan and perform a review, objective of which is to obtain a lower level of assurance than an audit, of the Management’s Report in all material respects. A review includes obtaining an understanding of a Company’s IACS and making inquiries regarding the Management’s Report and, when deemed necessary, performing a limited inspection of underlying documents and other limited procedures.
The Company’s IACS represents internal accounting policies and a system to manage and operate such policies to provide reasonable assureance regarding the reliability of financial statements prepared, in accrdance with accounting principles generally accepted in the Republic of Korea, for the purpose of preparing and disclosing reliable accounting information. Because of its inherent limitations, IACS may not prevent or detect a material misstatement of the financial statements. Also, projections of any evaluation of effectiveness of IACS to future degree of compliance with the polcies or procedures may deteriorate.
Based on our review, nothing has come to our attention that cause us to believe that the Management’s Report referred to above is not fairly stated, in all material respects, in accordance with the IACS Framework established by the Korea Listed Companies Association.
Our review is based on the Company’s IACS as of March 31, 2010, and we did not review its IACS subsequent to March 31, 2010. This report has been prepared pursuan to Atcs on External Audit for Stock Companies in the Rpublic of Korea and may not be appropriate for other purposes or for other users.
May 18, 2010
Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/kr/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms. Member of Deloitte Touche Tohmatsu
112 Report on the Assessment of Internal Accounting Control System “( IACS”)
To the Board of Directors and Auditor of Hyundai Securities Co., Ltd.
I, as the Internal Accounting Control Officer “( IACO”) of Hyundai Securities Co., Ltd. “( the Company”), assessed the status of the design and operation of the Company’s IACS for the year ended March 31, 2010.
The Company’s management including IACO is responsible for designing and operating IACS. I, as the IACO, assessed whether the IACS has been appropriately designed and is effectively operating to prevent and detect any error or fraud which may cause any misstatement of the financial statements, for the purpose of preparing and disclosing reliable financial statements. I, as the IACO, applied the IACS standard for the assessment of design and operations of the IACS.
Based on the assessment of the IACS, the Company’s IACS has been appropriately designed and is operating effectively as of March 31, 2010, in all material respects, in accordance with the IACS Framework.
May 7, 2010
Chung, Hang Ki, Internal Accounting Control Officer
Choi, Kyung Su, Chief Executive Officer
113 Organization Structure
GENERAL MEETING OF SHAREHOLDERS
AUDIT COMMITTEE BOARD OF DIRECTORS
NOMINATING COMMITTEE FOR NON-EMPLOYEE COMMITTEE
PERSONNEL COMMITTEE
RISK MANAGEMENT COMMITTEE
COMMITMENTS COMMITTEE
CHAIRMAN PRESIDENT & CEO
AUDIT MANAGEMENT
RISK PUBLIC STRATEGY & HUMAN INFORMATION CUSTOMERS RESEARCH INVESTMENT COMPLIANCE RESOURCES & ASSETS MANAGEMENT RELATIONS PLANNING GENERAL AFFAIRS TECHNOLOGY DEALING CENTER BANKING
Auditing Dept. Public Human Compliance Risk Review Relations Strategy & Resources I T Planning Trust Dept. Equlty M&A Dept. Dept. Dept. Dept. Planning Dept. Dept. Dept. Analysls Dept.
Financial HR Systems Legal Affairs Risk Wrap Dealing Economlcs Management Management Development Management Dept. Analysls Dept. IPO Dept. Dept. Dept. Dept. Dept. Dept.
Tranding Coporate Settlement General Systems Quantltatlve Flnance Dept. Affairs Dept. Dept. Analysls Dept. Dept. 1
Operations Businesses Coporate Development Systems Research Flnance Dept. Dept. Support Team Dept. 2
Strategic Planning Infrastructure Dept. Systems Dept.
114 RISK MANAGEMENT COUNCIL
DISCIPLINARY COMMITTEE
CAPITAL MARKET INSTITUTIONAL SECURITIES RETAIL
DOMESTIC INVESTMENT FLXED INCOME TRADING GLOBAL INSTITUTIONAL INSTITUTIONAL RETIREMENT MARKETING 8 DIVISIONS & RETAIL SECURITIES SECURITIES PENSION 141 BRANCHES MANAGEMENT
Principal FICC Global Hyundai Institutional Customers Retail Investment Derivatives Equity Dealing Securities Securities Seucirites RP Consulting Marketing Planning Dept. Dept. Dept. Dept. (Europe) Inc. Dept. 1 Dept. 1 Dept. Dept.
Project Equity Hyundai Institutional Customers Flnance Fixed Income Derivatives Futures Securities Securities RP Consulting Satisfaction WM Planning Dept. Sales Dept. Dept. Sales Dept. (America) Inc. Dept. 2 Dept. 2 Center Dept.
Hyundai WM Fixed Income Structured Global Securities Financial RP Operations Consulting e-Business Dealing Dept. Products Dept. Trading Dept. (Asia) Inc. Products Dept. Dept. Center Dept.
Hyundai Financial Futures & Global Securities Inst. Securities Products Options Dept. Support Dept. Tokyo Planning Team Planning Dept.
HDS Shanghai Rep. Office
HDS Hochiminh Rep. Office
HDS Almaty Rep. Office
115 International Locations
Kazakhstan HYUNDAI SECURITIES Almaty Representative Office Nurly Tau Complex , Buildding 2A, 4th Fl. 5 Al-Farabi. Av., Almaty, Kazakhstan 050059 Phone: 7-727-277-7711 Fax: 7-727-277-7712
London HYUNDAI SECURITIES (EUROPE) Inc. Neptune House, Triton Court 14 Finsbury Square, London, EC2A 1BR, U.K. Phone: 44-20-7786-8601(General), 44-20-7786-8600(Dealer) Fax: 44-20-7786-8620 Telex: 887418
Vietnam HYUNDAI SECURITIES Hochiminh Representative Office 701B, PetroVietnam Tower, 1-5 Le Duan, District 1, Hochiminh City, Vietnam Phone: 84-8-3910-7560 Fax: 84-8-3910-7561
Corporate headquarters Stock Issued 170,000,000 (Common stock) Hyundai Securities Shareholders' equity 2,439 billion won #34-4, Youido-dong, Youngdeungpo-ku, Seoul, Korea, 150-735 Major shareholders Hyundai Merchant Marine 23.17% Tel : 822-768-0114 Fax : 822-783-9746 http://www.youfirst.co.kr Hyundai Merchant Marine 23.17% Established June 1, 1962 Others 57.22%
Stock listing Korea Stock Exchange, 003450 Foreigners 11.50% Network 140 domestics and 7 overseas
Number of Employees Employees Stock 3.28% Treasury Stock 4.83% 2,496 (as of March 31, 2009) (as of March, 2010) Hong Kong HYUNDAI SECURITIES (ASIA) Inc. Suite 2301-04, Citic Tower 1 Tim Mei Avenue, Central, Hong Kong, China Phone: 852-2869-0559 Fax: 852-2521-5215
Japan HYUNDAI SECURITIES Tokyo Branch 7th Floor, L Ningyoucho Building, 2-7-10, Nohonbashi, Ningyoucho Chuo-ku, Tokyo, 103-0013, Japan Phone: 81-3-3661-3711 Fax: 81-3-3661-9622
New York Shanghai HYUNDAI SECURITIES (AMERICA) Inc. 1370 Avenue of the Americas, Suite 2200, HYUNDAI SECURITIES NY, NY10019, U.S.A Shanghai Representative Office Phone: 1-212-265-2333 Rm. 1405 North Stock Exchange Fax:1-212-265-2676 Mansion 528 South Pudong Rd., South Shanghai, China, 200120 Phone: 86-21-6881-7007~8 Fax: 86-21-6881-7778
Seoul, 51 Kangwon, 3 Incheon, 4 Kyung-gi, 22 (2 office) Choongbuk, 2 Choongnam, 6 Kyungbuk, 8 Daejeon, 5
JeonbukJeonbuk, 4 4 Daegue, 4
Ulsan, 10 Kyungnam, 5 Gwang-ju, 4 (1 office) Busan, 5
Jeonnam, 2
Jaeju, 1 (1 office) Investor Relations #34-4, Youido-dong, Youngdeungpo-ku, Seoul, Korea, 150-735 Tel : 82-2-768-0152 | Fax : 82-2-783-9746 e-mail: [email protected]