Samsung Heavy Industries Co., Ltd. and Subsidiaries Consolidated Financial Statements December 31, 2019 and 2018

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Samsung Heavy Industries Co., Ltd. and Subsidiaries Index December 31, 2019 and 2018

Page(s) Independent Auditor’s Report ...... 1-6

Consolidated Financial Statements

Consolidated Statements of Financial Position ...... 7-8

Consolidated Statements of Profit or Loss ...... 9

Consolidated Statements of Comprehensive Income ...... 10

Consolidated Statements of Changes in Equity ...... 11-12

Consolidated Statements of Cash Flows ...... 13

Notes to the Consolidated Financial Statements ...... 14-78

Independent Auditor’s Report

(English Translation of a Report Originally Issued in Korean)

To the Board of Directors and Shareholders of Samsung Heavy Industries Co., Ltd.

Opinion We have audited the accompanying consolidated financial statements of Samsung Heavy Industries Co., Lt d. and its subsidiaries (collectively referred to as the "Group"), which comprise the consolidated statements of financial position as at December 31, 2019 and 2018, and the consolidated statements of profit or loss, the consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at December 31, 2019 and 2018, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards as adopted by the Republic of Korea (Korean IFRS).

Basis for Opinion We conducted our audits in accordance with Korean Standards on Auditing. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the ethical requirements of the Republic of Korea that are relevant to our audit of the consolidated financial statements and we have fulfilled our other ethical responsibilities in accordance with the ethical requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

(1) Revenue recognition based on the input method

Key Audit Matter As explained in the Note 2 (Significant Accounting Policies) to the consolidated financial statements, the Group recognizes contract revenue and costs associated with the construction contract as revenue and expense respectively based on the percentage of completion of the contract activity at the end of the reporting period when the percentage of completion of the performance obligation of the contract using the cost-based input method can be reasonably measured. The percentage of completion is measured by the proportion that costs incurred to date, excluding any contract cost that does not depict the Group’s performance, bear to the estimated total costs of the contract.

As explained in the Note 3 (Critical Accounting Estimates and Assumptions) to the consolidated financial statements, total contract revenue will be the amount agreed in the initial contract, however, it is affected by varieties of uncertainties that depend on the outcome of future event, and increased from variations in the original contract work, plus incentive payments and claims, and on the other hand, it is decreased by penalties attributable to the Group in the completion of the contract. A variation is included in contract revenue when it is probable that the amount of variation will be approved by the customer or the specified performance standards will be met or exceeded, and the amount of revenue can be reliably measured. The contract revenue is affected by the progress towards completion of contract that is measured by the proportion that costs incurred to date bear to the estimated total costs of the contract based on the future estimated cost of material and labor and construction period and others.

Also, as explained in the Note 6 (contracts using a cost-based input method) to the consolidated financial statements, the estimated total contract revenue and cost were changed due to variations in contract work, raw- material price and construction period.

Estimating total contract revenue and costs with respect to contract changes due to long-term contract, changes in designs, the variations in international oil and raw-material price and others of the Group’s major construction contracts are uncertain. The changes in estimated total contract revenue and costs may have negative impacts on the profit or loss for the year (or for the succeeding year); therefore, we identified revenue recognition based on the input method as a significant risk.

How our audit addressed the Key Audit Matter We obtained an understanding of the accounting policy for the Group’s revenue recognition based on the cost- based input method, and identified and assessed the relevant changes. We have performed test of controls and substantive audit procedures.

We obtained an understanding of the internal control for the revenue recognition of contracts using the cost- based input method and tested the design and operating effectiveness of the following main controls:

- Internal control on acceptance of new contracts and changes in contract amounts using a cost-based input method

- Internal control on changes in total contract revenue and its estimations

- Internal control on calculation method by its components of the total contract cost and its establishment and changes

- Internal control on cost allocation (direct and indirect cost allocations) by each construction

- Internal control on revenue recognition based on the percentage of completion by each construction

In addition, we have performed following substantive audit procedures for the contract revenue and costs that include significant estimates of revenue recognition:

- We checked significant contents of contracts.

- We performed analytical review procedures on major financial ratios such as rate of profit.

- We inquired and performed analytical review procedures on changes in the accumulated contract costs and total contract cost’s major components.

- We inspected the report about current progress of major contracts and any significant changes at the end of the reporting period submitted to the work-related personnel and the ordering company.

- We selected samples among new contracts and contracts with variations, and confirmed samples with the relevant evidences.

- We obtained an understanding of calculation method and significant assumption on the total contract cost and tested relevant evidences for the calculation by audit sampling.

- We compared each components of total contract cost to documents which the Group’s operating unit estimates.

- We tested samples on the occurrence and timing of cost recognition, which incurred during the year, for each construction contract.

- We determined the possibility of deferred penalties by comparing the construction completion date of the contract to that of construction schedule of the Group.

- We examined disclosures in relation to the contracts using a cost-based input method according to the contract revenue and costs and amended contract.

(2) Collectability of contract assets

Key Audit Matter As explained in the Note 3 (Critical Accounting Estimates and Assumptions) to the consolidated financial statements, the Group assesses at the end of each reporting period whether there is an objective evidence that a contract asset is impaired. The Group considers that there is an objective evidence of impairment if financial difficulties of a customer, an increase in possibility of contract cancellation due to delay in the construction or a decrease in ship price, or a delay in delivery or others, are indicated. After the assessment, the Group recognizes impairment losses only if there is an objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset and that loss event has an impact on the estimated future cash flows of the asset that can be reliably estimated.

As explained in the Note 6 (contracts using a cost-based input method) to the consolidated financial statements, the amount of contract assets is \ 2,481,660 million (2018: \ 3,206,444 million) representing 18.2% (2018: 22.4%) of the total assets as at December 31, 2019.

We identified collectability of contract assets as a significant risk because uncertainties in collectability of contract assets has been increased as due to the extended global oil price decline, contract termination and delay in contract completion have caused customers’ financial difficulties.

How our audit addressed the Key Audit Matter We obtained an understanding of the accounting policy for the Group’s recognition of impairment on contract assets and assessed the relevant changes. We have performed test of controls and substantive audit procedures.

We obtained an understanding of the internal control for the recognition of impairment on contract assets, and tested the design and operating effectiveness of the following main control:

- Internal control on review of an indication of impairment and collectability of contract assets

In addition, we have performed following substantive audit procedures for impairment of the contract assets:

- We inspected contents of changes in contracts regarding to payment term, time of delivery and other obligations.

- We assessed indication of an impairment for the financial soundness of the major ordering companies.

- We assessed management’s estimates for collectability of the contract assets that had indication of an impairment.

Other Matter Auditing standards and their application in practice vary among countries. The procedures and practices used in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries.

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with Korean IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations.

Those charged with governance are responsible for overseeing the Group’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Korean Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with Korean Standards on Auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

 Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

 Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.

 Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

 Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.

 Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

 Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditor’s report is Bong-Jun Baeg, Certified Public Accountant.

Seoul, Korea March 12, 2020

This report is effective as of March 12, 2020, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that

the above audit report may have to be revised to reflect the impact of such subsequent events or

circumstances, if any.

Samsung Heavy Industries Co., Ltd. and Subsidiaries Consolidated Statements of Financial Position December 31, 2019 and 2018

(In thousands of Korean won) Notes 2019 2018

Assets Current assets Cash and cash equivalents 4,8 \ 384,251,206 \ 945,975,871 Short-term financial instruments 5,8 472,930,512 419,096,173 Trade receivables 8,10 200,977,706 508,283,714 Contract assets 6,7,10 2,481,660,018 3,206,444,279 Other receivables 8,10 78,396,618 66,837,505 Advance payments 322,440,588 359,032,656 Prepaid expenses 74,123,609 65,404,318 Current derivative financial instruments 8,9,11,35 122,332,347 64,246,987 Current firm commitment assets 11 209,544,830 60,801,386 Inventories 12 2,339,638,675 1,481,796,425 Prepaid income tax 93,564,333 - Other current financial assets 8,13 79,277,694 74,254,213 Other current assets 70,335,396 153,322,593

6,929,473,532 7,405,496,120

Non-current assets Financial assets at fair value through profit or 8,9,14 12,836,464 12,844,113 loss Financial assets at fair value through other 8,9,15 16,158,580 20,412,129 comprehensive income

Investments in associates and joint ventures 16 2,553,080 -

Property, plant and equipment 17 5,727,332,104 5,882,273,908 Right-of-use assets 18,38 98,400,016 -

Investment properties 19 16,460,522 16,586,868

Intangible assets 20 46,214,741 58,754,223

Long-term prepaid expenses 24,529,298 69,264,872

Derivative financial instruments 8,9,11,35 80,319,835 34,270,993

Firm commitment assets 11 167,469,486 114,765,259

Non-current trade receivables 8,10 16,891,144 43,823,997 Deferred tax assets 32 455,232,041 616,915,627

Other financial assets 5,8,13 6,213,593 7,483,877

6,670,610,904 6,877,395,866

Total assets \ 13,600,084,436 \ 14,282,891,986

Samsung Heavy Industries Co., Ltd. and Subsidiaries Consolidated Statements of Financial Position December 31, 2019 and 2018

(In thousands of Korean won) Notes 2019 2018

Liabilities Current liabilities Trade payables 8,35 \ 651,155,518 \ 635,912,474 Short-term borrowings 8,21,35 1,692,270,283 1,448,083,572 Other payables 8,35 75,381,328 79,690,041 Contract liabilities 6,7 1,562,637,489 2,207,414,667 Accrued expenses 8,35 217,035,719 238,512,673 Current tax liabilities 32 1,674,446 1,742,491 Current derivative financial instruments 8,9,11,35 415,357,062 109,918,758 Current firm commitment liabilities 11 237,458,028 46,640,293 Current portion of long-term debts 8,21,35 1,413,621,316 835,647,330 Current portion of lease liabilities 18,35,38 29,481,167 - Provision for construction losses 6 120,226,944 181,396,640 Provision for warranty 6 242,741,131 - Provisions 23 389,660,839 433,184,653 Other current liabilities 40,366,497 48,975,649 7,089,067,767 6,267,119,241

Non-current liabilities Debentures 8,21,35 269,736,576 84,851,892 Long-term borrowings 8,21,35 431,802,000 546,096,000 Lease liabilities 18,35,38 29,743,211 - Net defined benefit liabilities 22 46,453,949 76,502,617 Provision for warranty 6 106,088,207 333,982,647 Other provisions 23 15,634,000 15,634,000 Non-current derivative financial 8,9,11,35 193,378,000 103,511,135 instruments Non-current firm commitment liabilities 11 112,749,786 36,682,440 Other financial liabilities 8,13,35 43,587,151 22,866,222 Deferred tax liabilities 32 12,915,216 49,366,235 1,262,088,096 1,269,493,188

Total liabilities 8,351,155,863 7,536,612,429

Equity attributable to owners of the

Parent Share capital 24 Ordinary shares 3,150,000,000 3,150,000,000 Preferred shares 574,225 574,225 Share premium 24 944,052,385 944,052,385 Accumulated other comprehensive income 25 612,307,069 807,579,538 Other components of equity 25 (963,896,146) (963,896,146) Retained earnings 26 1,502,203,910 2,800,081,281 5,245,241,443 6,738,391,283 Non-controlling interest 3,687,130 7,888,274 Total equity 5,248,928,573 6,746,279,557 Total liabilities and equity \ 13,600,084,436 \ 14,282,891,986

The above consolidated statements of financial position should be read in conjunction with the accompanying notes. 8

Samsung Heavy Industries Co., Ltd. and Subsidiaries Consolidated Statements of Profit or Loss Years Ended December 31, 2019 and 2018

(In thousands of Korean won, Notes 2019 2018 except per share amounts)

Revenue 6,27,36 \ 7,349,656,036 \ 5,265,119,547 Cost of sales 28 7,288,385,520 5,269,265,689 Gross profit (loss) 61,270,516 (4,146,142) Selling and administrative expenses 28,29 677,856,039 405,105,987 Operating loss (616,585,523) (409,252,129)

Other income 30 1,602,041,832 951,245,710 Other expenses 30 1,987,618,364 925,080,305 Finance income 31 301,271,131 192,591,693 Finance costs 31 438,355,014 307,008,522 Share of loss of associates and joint ventures 16 - (94,932)

Loss before income tax (1,139,245,938) (497,598,485) Income tax expense (benefit) 32 176,107,209 (109,409,616) Loss for the year \ (1,315,353,147) \ (388,188,869)

Loss is attributable to: Equity holders of the Parent Company (1,310,842,273) (387,850,719) Non-controlling interest (4,510,874) (338,150)

Loss per share for loss attributable to the equity holders of the Parent Company during the year

Basic loss per share Ordinary shares 33 \ (2,170) \ (729) Preferred shares 33 (2,170) (642) Diluted loss per share Ordinary shares 33 \ (2,170) \ (729) Preferred shares 33 (2,170) (642)

The above consolidated statements of profit or loss should be read in conjunction with the accompanying notes.

Samsung Heavy Industries Co., Ltd. and Subsidiaries Consolidated Statements of Comprehensive Income Years Ended December 31, 2019 and 2018

(In thousands of Korean won) Notes 2019 2018

Loss for the year \ (1,315,353,147) \ (388,188,869) Other comprehensive income (loss) Items that will not be reclassified to

profit or loss Gain on valuation of financial assets at fair 8 2,128,933 2,036,508 value through other comprehensive income Remeasurements of net defined benefit 22 9,683,706 (427,635) liabilities Items that may be subsequently reclassified

to profit or loss Loss on valuation of derivative instruments 11 (81,537,183) (30,893,355) Exchange differences on translations of foreign 25 (112,273,276) 3,629,548 operations (181,997,820) (25,654,934) Total comprehensive income (loss) for the \ (1,497,350,967) \ (413,843,803) year

Attributable to: Owners of the Parent Company (1,493,149,841) (413,843,977) Non-controlling interest (4,201,126) 174 Total comprehensive income (loss) for the \ (1,497,350,967) \ (413,843,803) year

The above consolidated statements of comprehensive income should be read in conjunction with the accompanying notes.

Samsung Heavy Industries Co., Ltd. and Subsidiaries Consolidated Statements of Changes in Equity Years Ended December 31, 2019 and 2018

(In thousands of Korean won) Attributable to owners of the Parent Company Accumulated Other other Retained Non-controlling Share capital Share premium components Total Total equity comprehensive earnings interest of equity income

Balance at January 1, 2018 \ 1,950,574,225 \ 752,018,096 \ 852,435,267 \ (963,896,146) \ 3,198,433,128 \ 5,789,564,570 \ 7,888,099 \ 5,797,452,669 Changes in accounting policy - - 398,238 - (29,761,837) (29,363,599) - (29,363,599) Restated total equity at the beginning of the financial year 1,950,574,225 752,018,096 852,833,505 (963,896,146) 3,168,671,291 5,760,200,971 7,888,099 5,768,089,070

Comprehensive income Loss for the year - - - - (387,850,719) (387,850,719) (338,150) (388,188,869) Gain on valuation of financial assets at fair value through other - - 2,036,508 - - 2,036,508 - 2,036,508 comprehensive income Disposal of financial assets at fair value through other comprehensive - - 209,661 - (209,661) - - - income Exchange differences on translations of foreign operations - - 3,291,224 - - 3,291,224 338,324 3,629,548 Remeasurement of net defined benefit liabilities - - - - (427,635) (427,635) - (427,635) Reevaluation reserves - - (19,898,004) - 19,898,004 - - - Loss on valuation of derivative instruments - - (30,893,355) - - (30,893,355) - (30,893,355) - - (45,253,966) - (368,590,011) (413,843,977) 174 (413,843,803)

Transactions with owners Capital increase 1,200,000,000 192,034,289 - - - 1,392,034,289 - 1,392,034,289 1,200,000,000 192,034,289 - - - 1,392,034,289 - 1,392,034,289 Balance at December 31, 2018 \ 3,150,574,225 \ 944,052,385 \ 807,579,539 \ (963,896,146) \ 2,800,081,280 \ 6,738,391,283 \ 7,888,273 \ 6,746,279,556

Samsung Heavy Industries Co., Ltd. and Subsidiaries Consolidated Statements of Changes in Equity Years Ended December 31, 2019 and 2018

Balance at January 1, 2019 \ 3,150,574,225 \ 944,052,385 \ 807,579,539 \ (963,896,146) \ 2,800,081,280 \ 6,738,391,283 \ 7,888,273 \ 6,746,279,556

Comprehensive income Loss for the year - - - - (1,310,842,273) (1,310,842,273) (4,510,874) (1,315,353,147) Gain (loss) on valuation of financial assets at fair value through other - - (955,526) - 3,084,459 2,128,933 - 2,128,933 comprehensive income Loss on valuation of derivative instruments - - (81,537,183) - - (81,537,183) - (81,537,183) Gain (loss) from revaluation of property, plant and equipment - - (196,737) - 196,737 - - - Remeasurement of net defined benefit liabilities - - - - 9,683,706 9,683,706 - 9,683,706 Exchange differences on translations of foreign operations - - (112,583,024) - - (112,583,024) 309,748 (112,273,276) - - (195,272,470) - (1,297,877,371) (1,493,149,841) (4,201,126) (1,497,350,967)

Transactions with owners Changes in subsidiaries ------(17) (17) ------(17) (17) Balance at December 31, 2019 \ 3,150,574,225 \ 944,052,385 \ 612,307,069 \ (963,896,146) \ 1,502,203,910 \ 5,245,241,442 \ 3,687,130 \ 5,248,928,572

The above consolidated statements of changes in equity should be read in conjunction with the accompanying notes.

Samsung Heavy Industries Co., Ltd. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 2019 and 2018

(In thousands of Korean won) Notes 2019 2018

Cash flows from operating activities Cash generated from operations 34 \ (566,236,846) \ 293,096,160 Interest received 37,240,668 28,879,163 Interest paid (128,660,616) (123,194,464) Dividends received 367,327 482,216 Income tax paid (23,919,844) (33,740,461) Net cash inflow (outflow) from operating activities (681,209,311) 165,522,614

Cash flows from investing activities Acquisition of short-term financial instruments (823,385,490) (509,819,472) Disposal of short-term financial instruments 774,427,618 865,133,382 Disposal of financial assets at fair value through 14 70,884 - profit or loss Disposal of financial assets at fair value through 15 4,509,088 - other comprehensive income Disposal of investments in associates and joint 16 - 5,896,400 ventures Acquisition of property, plant and equipment 17 (77,210,045) (69,037,505) Disposal of property, plant and equipment 17 2,354,522 72,353,974 Acquisition of intangible assets 20 (31,370) - Disposal of intangible assets 20 234,000 590,000 Decrease in other non-current financial assets 2,487,400 5,347,003 Increase in other non-current financial assets (1,159,243) (1,190,792) Net cash inflow (outflow) from investing activities (117,702,636) 369,272,990

Cash flows from financing activities Proceeds from short-term borrowings 21,34 1,596,520,331 2,764,236,668 Repayments of short-term borrowings 21,34 (1,811,616,247) (3,300,232,108) Repayments of short-term debentures 21,34 - (163,000,000) Repayments of current portion of long-term debts 21,34 (771,562,312) (1,426,874,577) Issuance of debentures 21,34 484,247,510 74,849,150 Proceeds from long-term borrowings 21,34 935,567,000 1,025,922,000 Repayments of long-term borrowings 21,34 (6,090,000) (316,529,000) Repayments of lease liabilities 18 (61,359,279) - Capital increase 24 - 1,392,034,289 Net cash inflow from financing activities 365,707,003 50,406,422

Net increase (decrease) in cash and cash (433,204,944) 585,202,026 equivalents Cash and cash equivalents at the beginning of the 945,975,871 353,530,365 year Effect of exchange rate changes on cash and cash (128,519,721) 7,243,480 equivalents Cash and cash equivalents at the end of the year \ 384,251,206 \ 945,975,871

The above consolidated statements of cash flows should be read in conjunction with the accompanying notes.

13 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

1. General information

1.1 The Parent Company

Samsung Heavy Industries Co., Ltd. (the Parent Company) was incorporated in 1974 to engage mainly in shipbuilding and off-shore plant manufacturing. The Parent Company listed its shares on the Korea Exchange on January 28, 1994.

Samsung Heavy Industries Co., Ltd., a controlling company in accordance with Korean IFRS 1110 Consolidated Financial Statements, have prepared the consolidated financial statements which include 9 consolidated subsidiaries (collectively referred to as the “Group”) listed in Note 1.2.

1.2 Consolidated Subsidiaries

Details of the consolidated subsidiaries as at December 31, 2019, are as follows:

2019 2018 Percentage Percentage Closing Name of entity of of Location Main business Month ownership ownership (%) (%)

Samsung Heavy Industries (Ningbo) Ship parts manufacturing, 100 100 China December Co., Ltd. construction Samsung Heavy Industries 100 100 China December Ship parts manufacturing (Rongcheng) Co., Ltd. Rongcheng Gaya Heavy Industries 100 100 China December Ship parts manufacturing Co., Ltd. Samsung Heavy Industries India Pvt. 100 100 India December Engineering Ltd. Camellia Consulting Corporation 100 100 USA December Engineering Samsung Heavy Industries (M) 100 100 Malaysia December Shipbuilding contracts SDN.BHD SVIC 13 New Technology Business - 99 Korea December Investment Investment SHI Brazil Construction - 100 Brazil December Construction Samsung Heavy Industries Nigeria Co. 100 100 Nigeria December Shipbuilding contracts Ltd SHI-MCI FZE 70 70 Nigeria December Shipbuilding contracts SHI Mozambique LDA 100 100 Mozambique December Shipbuilding contracts

14 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

1.3 Summarized Financial Information of Subsidiaries

Summary of the subsidiaries’ statements of financial position as at December 31, 2019 and 2018, and statements of comprehensive income for the years ended December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 Total Profit (loss) comprehensive Name of entity Assets Liabilities Equity Sales for the year income (loss) for the year Samsung Heavy Industries (Ningbo) Co., \ 225,205,249 \ 76,381,087 \ 148,824,162 \ 198,092,469 \ (7,679,486) \ (4,739,214) Ltd. Samsung Heavy Industries (Rongcheng) 309,410,146 128,471,519 180,938,627 144,540,738 3,162,903 3,144,366 Co., Ltd. Rongcheng Gaya Heavy Industries Co., Ltd. 47,048,951 24,798,408 22,250,543 19,351,705 1,307,845 1,662,877 Samsung Heavy Industries India Pvt. Ltd. 21,932,430 10,841,755 11,090,675 11,560,811 2,107,798 2,199,710 Samsung Heavy Industries(M) SDN.BHD 6,892,317 7,055,305 (162,988) 14,889,361 24,590 (309,186) Camellia Consulting Corporation 213,974 - 213,974 - (5,831) 1,743 SHI Mozambique LDA 129,095 - 129,095 - - (439) SHI-MCI FZE 198,998,829 186,708,395 12,290,434 33,421,255 (15,036,247) (14,003,752) Samsung Heavy Industries Nigeria Co. Ltd. 455,814,156 186,286,119 269,528,037 146,126,874 22,325,205 27,472,419 \ 1,265,645,147 \ 620,542,588 \ 645,102,559 \ 567,983,213 \ 6,206,777 \ 15,428,524

(In thousands of Korean won) 2018 Total Profit (loss) comprehensive Name of entity Assets Liabilities Equity Sales for the year income (loss) for the year Samsung Heavy Industries (Ningbo) Co., \ 308,384,786 \ 154,821,410 \ 153,563,376 \ 189,345,273 \ (24,648,500) \ (25,080,029) Ltd. Samsung Heavy Industries (Rongcheng) 337,999,954 163,368,596 174,631,358 125,672,628 4,505,821 3,476,290 Co., Ltd. Rongcheng Gaya Heavy Industries Co., Ltd. 49,434,784 28,847,118 20,587,666 4,700,044 (5,036,453) (5,065,626) Samsung Heavy Industries India Pvt. Ltd. 9,513,460 622,495 8,890,965 5,254,671 1,094,027 729,765 Samsung Heavy Industries(M) SDN.BHD 968,527 822,329 146,198 1,302,138 53,231 54,582 SHI Brazil Construction 328,645 697 327,948 - - (40,265) SVIC 13 New Technology Business 3,410 1,650 1,760 - (3,054) (3,054) investment Camellia Consulting Corporation 212,231 - 212,231 2,372,512 408 9,261 SHI Mozambique LDA 57,582 - 57,582 - - 2,406 SHI-MCI FZE 206,562,657 180,268,471 26,294,186 143,707,565 (1,127,065) 684 Samsung Heavy Industries Nigeria Co. Ltd. 556,529,794 314,474,175 242,055,619 670,971,520 57,658,339 62,376,053 \ 1,469,995,830 \ 843,226,941 \ 626,768,889 \ 1,143,326,351 \ 32,496,754 \ 36,460,067

15 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

1.4 Changes in Scope for Consolidation

SVIC 13 New Technology Business Investment and SHI Brazil Construction are excluded from the consolidation as they were liquidated during the year ended December 31, 2019. Samsung Heavy Industries Brazil is excluded from the consolidation as it was liquidated during the year ended December 31, 2018.

2. Significant Accounting Policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

2.1 Basis of Preparation

The Group maintains its accounting records in Korean won and prepares statutory financial statements in the Korean language (Hangul) in accordance with International Financial Reporting Standards as adopted by the Republic of Korea (Korean IFRS). The accompanying consolidated financial statements have been condensed, restructured and translated into English from the Korean language financial statements.

Certain information attached to the Korean language financial statements, but not required for a fair presentation of the Group's financial position, financial performance or cash flows, is not presented in the accompanying consolidated financial statements.

The consolidated financial statements of the Group have been prepared in accordance with Korean IFRS. These are the standards, subsequent amendments and related interpretations issued by the International Accounting Standards Board (IASB) that have been adopted by the Republic of Korea.

The preparation of financial statements requires the use of critical accounting estimates. Management also needs to exercise judgement in applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 3.

2.2 Changes in Accounting Policies and Disclosures

(a) New and amended standards and interpretations adopted by the Group

The Group has applied the following standards and amendments and interpretations for the first time for their annual reporting period commencing January 1, 2019.

- Enactment of Korean IFRS 1116 Leases

Under the new standard, with implementation of a single lease model, lessee is required to recognize assets and liabilities for all lease which lease term is over 12 months and underlying assets are not low value assets. A lessee is required to recognize a right-of-use asset and a lease liability representing its obligation to make lease payments.

With implementation of Korean IFRS 1116 Lease, the Group has changed accounting policy. The Group has adopted Korean IFRS 1116 retrospectively, as permitted under the specific transitional provisions in the standard, and recognized the cumulative impact of initially applying the standard as at January 1, 2019, the date

16 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018 of initial application. The Group has not restated comparatives for the 2018 reporting period. The impact of the adoption of the leasing standard and the new accounting policies are disclosed in Note 38.

- Korean IFRS 1109 Financial Instruments – Prepayment Features with Negative Compensation

The narrow-scope amendments made to Korean IFRS 1109 Financial Instruments enable entities to measure certain prepayable financial assets with negative compensation at amortized cost. When a modification of a financial liability measured at amortized cost that does not result in the derecognition, a modification gain or loss shall be recognized in profit or loss. The amendment does not have a significant impact on the consolidated financial statements.

- Amendments to Korean IFRS 1019 Employee Benefits–Amendment, Curtailment or Settlement of the Plan

The amendments require that an entity shall calculate current service cost and net interest for the remainder of the reporting period after a plan amendment, curtailment or settlement based on updated actuarial assumptions from the date of the change. The amendments also require that a reduction in a surplus must be recognized in profit or loss even if that surplus was not previously recognized because of the impact of the asset ceiling. The amendment does not have a significant impact on the consolidated financial statements.

- Amendments to Korean IFRS 1028 Investments in Associates and Joint Ventures– Long-term Interests in Associates and Joint Ventures

The amendments clarify that an entity shall apply Korean IFRS 1109 to financial instruments in an associate or joint venture to which the equity method is not applied. The amendments also clarify that Korean IFRS 1109 requirements are applied to long-term interests that form part of the entity’s net investment in an associate or joint venture before applying the impairment requirements of Korean IFRS 1028. The amendment does not have a significant impact on the consolidated financial statements.

- Enactment to Interpretation of Korean IFRS 2123 Uncertainty over Income Tax Treatments

The Interpretation explains how to recognize and measure deferred and current income tax assets and liabilities where there is uncertainty over a tax treatment, and includes guidance on how to determine whether each uncertain tax treatment is considered separately or together. It also presents examples of circumstances where a judgement or estimate is required to be reassessed. The enactment does not have a significant impact on the consolidated financial statements.

- Annual Improvements to Korean IFRS 2015 – 2017 Cycle:

 Korean IFRS 1103 Business Combination

The amendments clarify that when a party to a joint arrangement obtains control of a business that is a joint operation, and had rights to the assets and obligations for the liabilities relating to that joint operation immediately before the acquisition date, the transaction is a business combination achieved in stages. In such cases, the acquirer shall remeasure its entire previously held interest in the joint operation. The amendment does not have a significant impact on the consolidated financial statements.

 Korean IFRS 1111 Joint Agreements

The amendments clarify that when a party that participates in, but does not have joint control of, a joint operation

17 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018 might obtain joint control of the joint operation in which the activity of the joint operation constitutes a business. In such cases, previously held interests in the joint operation are not remeasured. The amendment does not have a significant impact on the consolidated financial statements.

 Paragraph 57A of Korean IFRS 1012 Income Tax

The amendment is applied to all the income tax consequences of dividends and requires an entity to recognize the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally recognized those past transactions or events. The amendment does not have a significant impact on the consolidated financial statements.

 Korean IFRS 1023 Borrowing Costs

The amendments clarify that if a specific borrowing remains outstanding after the related qualifying asset is ready for its intended use (or sale), it becomes part of general borrowings. The amendment does not have a significant impact on the consolidated financial statements.

(b) New standards and interpretations not yet adopted by the Group

The following new accounting standards and interpretations have been published that are not mandatory for December 31, 2019 reporting periods and have not been early adopted by the Group.

- Amendments to Korean IFRS 1001 Presentation of Financial Statements and Korean IFRS 1008 Accounting policies, changes in accounting estimates and errors – Definition of Material

The amendments clarify the explanation of the definition of material and amended Korean IFRS 1001 and Korean IFRS 1008 in accordance with the clarified definitions. Materiality is assessed by reference to omission or misstatement of material information as well as effects of immaterial information, and to the nature of the users when determining the information to be disclosed by the Group. These amendments should be applied for annual periods beginning on or after January 1, 2020, and earlier application of permitted. The Group does not expect that these amendments have a significant impact on the consolidated financial statements.

-Amendments to Korean IFRS 1103 Business Combination – Definition of a Business

To consider the integration of the required activities and assets as a business, the amended definition of a business requires an acquisition to include an input and a substantive process that together significantly contribute to the ability to create outputs and excludes economic benefits from the lower costs. An entity can apply a concentration test, an optional test, where substantially all of the fair value of gross assets acquired is concentrated in a single asset or a group of similar assets, the assets acquired would not represent a business. These amendments should be applied for annual periods beginning on or after January 1, 2020, and earlier application of permitted. The Group does not expect that these amendments have a significant impact on the consolidated financial statements.

18 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

2.3 Consolidation

The Group has prepared the consolidated financial statements in accordance with Korean IFRS 1110 Consolidated Financial Statements.

(a) Subsidiaries

Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

The acquisition method of accounting is used to account for business combinations by the Group. The consideration transferred is measured at the fair values of the assets transferred, and identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognizes any non-controlling interest in the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest’s proportionate share of the acquired entity’s net identifiable assets. All other non-controlling interests are measured at fair values, unless otherwise required by other standards. Acquisition-related costs are expensed as incurred.

The excess of consideration transferred, amount of any non-controlling interest in the acquired entity and acquisition-date fair value of any previous equity interest in the acquired entity over the fair value of the net identifiable assets acquired is recoded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the business acquired, the difference is recognized directly in the profit or loss as a bargain purchase.

Intercompany transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

The Group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Group. A changed in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interest to reflect their relative interest in the subsidiary. Any difference between the amount of the adjustment to non-controlling interest and any consideration paid or received is recognized in a separate reserve within equity attributable to owners of the Parent Company.

When the Group ceases to consolidate for a subsidiary because of a loss of control, any retained interest in the subsidiary is remeasured to its fair value with the changed in carrying amount recognized in profit or loss.

(b) Associates

Associates are entities over which the Group has significant influence but not control or joint control. Investments in associates are accounted for using the equity method of accounting, after initially being recognized at cost. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. If the Group’s share of losses of an associate equals or exceeds its interest in the associate (including long-term interests that, in substance, form part of the Group’s net investment in the associate), the Group discontinues recognizing its share of further losses. After the Group’s interest is reduced to zero, additional losses are provided for, and a liability is recognized, only to the extent that the Group has

19 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018 incurred legal or constructive obligations or made payments on behalf of the associate. If there is an objective evidence of impairment for the investment in the associate, the Group recognizes the difference between the recoverable amount of the associate and its book amount as impairment loss. If an associate uses accounting policies other than those of the Group for like transactions and events in similar circumstances, if necessary, adjustments shall be made to make the associate’s accounting policies conform to those of the Group when the associate’s financial statements are used by the entity in applying the equity method.

A joint arrangement, wherein two or more parties have joint control, is classified as either a joint operation or a joint venture. A joint operator recognizes its direct right to the assets, liabilities, revenues and expenses of joint operations and its share of any jointly held or incurred assets, liabilities, revenues and expenses. Interests in joint ventures are accounted for using the equity method, after initially being recognized at cost in the consolidated statement of financial position.

2.4 Operating Segment

Information of each operating segment is reported in a manner consistent with the internal business segment reporting provided to the chief operating decision-maker (Note 36). The chief operating decision-maker is responsible for allocating resources and assessing performance of the operating segments.

2.5 Foreign Currency Translation

(a) Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which each entity operates (the “functional currency"). The consolidated financial statements are presented in Korean won, which is the Parent Company’s functional and presentation currency.

(b) Transaction and balances

Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year end exchange rates are generally recognized in profit or loss. They are recognized in other comprehensive income if they relate to qualifying cash flow hedges and qualifying effective portion of net investment hedges, or are attributable to monetary part of the net investment in a foreign operation.

Foreign exchange gains and losses that relate to borrowings are presented in the statement of profit or loss, within finance costs. All other foreign exchange gains and losses are presented in the statement of profit or loss within ‘other income or other expenses’.

Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, translation differences on non-monetary assets and liabilities such as equity instruments at fair value through profit or loss are recognized in profit or loss as part of the fair value gain or loss and translation differences on non-monetary assets such as equity instruments at fair value through other comprehensive income are recognized in other comprehensive income.

20 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

The results and financial position of foreign operations that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

 assets and liabilities for each statement of financial position presented are translated at the closing rate at the end of the reporting period,

 income and expenses for each statement of profit or loss are translated at average exchange rates,

 equity is translated at the historical exchange rate, and

 all resulting exchange differences are recognized in other comprehensive income.

2.6 Financial Assets

(a) Classification

From January 1, 2019, the Group classifies its financial assets in the following measurement categories:

 those to be measured at fair value through profit or loss

 those to be measured at fair value through other comprehensive income, and

 those to be measured at amortized cost.

The classification depends on the Group’s business model for managing the financial assets and the contractual terms of the cash flows.

For financial assets measured at fair value, gains and losses will either be recorded in profit or loss or other comprehensive income. For investments in debt instruments, this will depend on the business model in which the investment is held. The Group reclassifies debt investments when, and only when its business model for managing those assets changes.

For investments in equity instruments that are not held for trading, this will depend on whether the Group has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income.

(b) Measurement

At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss.

Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.

21 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

A. Debt instruments

Subsequent measurement of debt instruments depends on the Group’s business model for managing the asset and the cash flow characteristics of the asset. The Group classifies its debt instruments into one of the following three measurement categories:

 Amortized cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortized cost. A gain or loss on a debt investment that is subsequently measured at amortized cost and is not part of a hedging relationship is recognized in profit or loss when the asset is derecognized or impaired. Interest income from these financial assets is included in ‘finance income’ using the effective interest rate method.

 Fair value through other comprehensive income: Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at fair value through other comprehensive income. Movements in the carrying amount are taken through other comprehensive income, except for the recognition of impairment loss (reversal of impairment loss), interest income and foreign exchange gains and losses which are recognized in profit or loss. When the financial asset is derecognized, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss. Interest income from these financial assets is included in ‘finance income’ using the effective interest rate method. Foreign exchange gains and losses are presented in ‘other income or expenses’ and impairment losses are presented in ‘other expenses’.

 Fair value through profit or loss: Assets that do not meet the criteria for amortized cost or fair value through other comprehensive income are measured at fair value through profit or loss. A gain or loss on a debt investment that is subsequently measured at fair value through profit or loss and is not part of a hedging relationship is recognized in profit or loss and presented net in the statement of profit or loss within ‘other income or expenses’ in the year in which it arises.

B. Equity instruments

The Group subsequently measures all equity investments at fair value. Where the Group’s management has elected to present fair value gains and losses on equity investments, which held for long-term investment or strategic purpose, in other comprehensive income, there is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment. Dividend income from such investments continue to be recognized in profit or loss as ‘finance income’ when the right to receive payments is established.

Changes in the fair value of financial assets at fair value through profit or loss are recognized in ‘other income and expenses’ in the statement of profit or loss as applicable. Impairment loss (reversal of impairment loss) on equity investments measured at fair value through other comprehensive income are not reported separately from other changes in fair value.

The Group assesses on a forward looking basis the expected credit losses associated with its debt instruments carried at amortized cost and fair value through other comprehensive income. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For trade receivables and lease receivables, the Group applies the simplified approach, which requires expected lifetime credit losses to be recognized from initial recognition of the receivables.

22 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

(d) Recognition and Derecognition

Regular way purchases and sales of financial assets are recognized or derecognized on trade-date, the date on which the Group commits to purchase or sell the asset. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership.

If a transfer does not result in derecognition because the Group has retained substantially all the risks and rewards of ownership of the transferred asset, the Group continues to recognize the transferred asset in its entirety and recognizes a financial liability for the consideration received. The Group classified the financial liability as “borrowings” in the statement of financial position.

(e) Offsetting of financial instruments

Financial assets and liabilities are offset and the net amount reported in the consolidated statements of financial position where there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the assets and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the Group or the counterparty.

2.7 Derivative Instruments

Derivatives are initially recognized at fair value on the date when a derivative contract is entered into and are subsequently re-measured at their fair value. Changes in the fair value of the derivatives that are not qualified for hedge accounting are recognized in the statement of income within 'other income (expenses)' or 'finance income (costs)' according to the nature of transactions.

The Group applies hedge accounting for firm commitments and highly probable forecasted transactions.

The Group documents the economic relationship between hedging instruments and hedged items, as well as its expectation of whether hedging instruments offset changes in fair values or cash flows of hedged items.

The fair values of various derivative instruments used for hedging purposes are disclosed in Note 9. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining hedged item is more than 12 months and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. The fair value of trading derivatives is classified as a non-current asset or liability when the remaining maturity is more than 12 months and as a current asset or liability when the remaining maturity is less than 12 months.

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the statement of income, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The Group applies fair value hedge accounting for hedging exchange risk of firm commitments. The gain or loss relating to the effective portion of derivative instruments hedging exchange risk of a firm commitment is recognized in the statement of income within ‘other income (expenses)’. The gain or loss relating to the ineffective portion is recognized in the statement of income within ‘finance income (costs)’. Changes in the fair value of the firm commitments attributable to exchange risk are recognized in the statement of income within ‘other income (expenses)’.

When a derivative is designated to hedge the variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecasted transaction that could affect profit or loss, the 23 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018 effective portion of changes in the fair value of the derivative is recognized in other comprehensive income, net of tax, and presented in the hedging reserve in equity. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss on the hedging instrument that has been recognized in other comprehensive income is reclassified to profit or loss in the years during which the forecasted transaction occurs. If the forecasted transaction is no longer expected to occur, then the balance in other comprehensive income is recognized immediately in profit or loss. Also, if the risk management objectives which continue the hedge relationships designated before change although the Group’s risk management strategy is the same, the Group discontinues previous hedge accounting and applies hedge accounting according to the new risk management objectives prospectively.

2.8 Inventories

Inventories are stated at the lower of cost and net realizable value. Raw materials for shipbuilding & off-shore plants business are determined using individual method and moving weighted average method and individual method is applied for evaluating inventory of construction completed and materials in transit.

2.9 Property, Plant and Equipment

Land is shown at fair value based on valuations by external independent valuers. Valuations are performed with sufficient regularity to ensure that the fair value of a revalued asset does not differ materially from its carrying amount.

All other property, plant and equipment except land are stated at historical cost less accumulated depreciation and accumulated impairment losses. Historical cost includes expenditures that is directly attributable to the acquisition of the items.

Increases in the carrying amount arising on revaluation of land and buildings are credited to other comprehensive income and shown as other reserves in equity. Decreases that offset previous increases of the same asset are charged to other comprehensive income and debited against other reserves directly in equity; all other decreases are charged to the statement of profit or loss.

Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate the difference between their cost and their residual values over their estimated useful lives, as follows:

Estimated useful lives

Buildings 25 - 50 years Structures 25 - 50 years Machinery 10 - 30 years Vehicles 5 - 30 years Tools, furniture and fixtures 5 years

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset’s carrying amount is adjusted to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

24 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

When revalued assets are sold, the amounts included in revaluation reserves are transferred to retained earnings.

2.10 Borrowing Costs

General and specific borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized during the period of time that is required to complete and prepare the asset for its intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. Other borrowing costs are expensed in the period in which they are incurred.

2.11 Government Grants

Grants from the government are recognized at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants related to assets are presented in the statement of financial position by deducting the grant in arriving at the carrying amount of the asset, and government grants related to income are deferred and later deducted from the related expense.

2.12 Intangible Assets

Goodwill is measured as described in Note 2.3 (a), and carried at cost less accumulated impairment losses.

Intangible assets, except for goodwill, are initially recognized at its historical cost, and carried at cost less accumulated amortization and accumulated impairment losses.

Other intangible assets such as software which meet the definition of an intangible asset are amortized using the straight-line method over their estimated useful lives when the asset is available for use. Membership rights that have an indefinite useful life are not subject to amortization because there is no foreseeable limit to the period over which the assets are expected to be utilized.

The Group amortizes intangible assets with a limited useful life using the straight-line method over the following periods:

Estimated useful lives

Other intangible assets 5 years

2.13 Investment Property

Investment property is property held to earn rentals or for capital appreciation or both. An investment property is measured initially at its cost. An investment property is measured after initial measurement at depreciated cost (less any accumulated impairment losses). After recognition as an asset, investment property is carried at cost less accumulated depreciation and impairment losses. The Group depreciates investment properties, except for land, using the straight-line method over their useful lives of 50 years.

25 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

2.14 Impairment of Non-Financial Assets

Goodwill and intangible assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period.

2.15 Trade and Other Payables

These amounts represent liabilities for goods and services provided to the Group prior to the end of reporting period which are unpaid. Trade and other payables are presented as current liabilities, unless payment is not due within 12 months after the reporting period. They are recognized initially at their fair value and subsequently measured at amortized cost using the effective interest method.

2.16 Financial Liabilities

(a) Classification and measurement

The Group’s financial liabilities at fair value through profit or loss are financial instruments held for trading. A financial liability is held for trading if it is incurred principally for the purpose of repurchasing in the near term. A derivative that is not a designated as hedging instruments and an embedded derivative that is separated are also classified as held for trading.

The Group classifies non-derivative financial liabilities, except for financial liabilities at fair value through profit or loss, financial guarantee contracts and financial liabilities that arise when a transfer of financial assets does not qualify for derecognition, as financial liabilities carried at amortized cost and present as ‘trade payables’, ‘borrowings’, and ‘other financial liabilities’ in the statement of financial position.

Preferred shares that require mandatory redemption at a particular date are classified as liabilities. Interest expenses on these preferred shares using the effective interest method are recognized in the statement of profit or loss as ‘finance costs’, together with interest expenses recognized from other financial liabilities.

(b) Derecognition

Financial liabilities are removed from the statement of financial position when it is extinguished; for example, when the obligation specified in the contract is discharged or cancelled or expired or when the terms of an existing financial liability are substantially modified. The difference between the carrying amount of a financial liability extinguished or transferred to another party and the consideration paid (including any non-cash assets transferred or liabilities assumed) is recognized in profit or loss.

26 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

2.17 Provisions

Provisions for legal claims are recognized when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated.

2.18 Current and Deferred Tax

The tax expense for the period consists of current and deferred tax. Current and deferred tax is recognized in profit or loss, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively.

The current income tax expense is measured at the amount expected to be paid to the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. The Group recognizes current income tax on the basis of amounts expected to be paid to the tax authorities.

Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting profit nor taxable profit or loss.

Deferred tax assets are recognized only if it is probable that future taxable amounts will be available to utilize those temporary differences and losses.

The Group recognizes a deferred tax liability all taxable temporary differences associated with investments in subsidiaries, associates, and interests in joint arrangements, except to the extent that the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. In addition, The Group recognizes a deferred tax asset for all deductible temporary differences arising from such investments to the extent that it is probable the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset when the Group has a legally enforceable right to offset and intends either to settle on a net basis, or to realize the assets and settle the liability simultaneously.

27 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

2.19 Employee Benefits

(a) Post-employment benefits

The Group operates both defined contribution and defined benefit pension plans.

For defined contribution plans, the Group pays contribution to publicly or privately administered pension insurance plans on mandatory, contractual or voluntary basis. The Group has no further payment obligation once the contribution have been paid. The contribution are recognized as employee benefit expense when they are due.

A defined benefit plan is a pension plan that is not a defined contribution plan. Generally, post-employment benefits are payable after the completion of employment, and the benefit amount depended on the employee’s age, periods of service or salary levels. The liability recognized in the statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms approximating to the terms of the related obligation. Remeasurement gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized in the period in which they occur, directly in other comprehensive income.

Changes in the present value of the defined benefit obligation resulting from plan amendments or curtailments are recognized immediately in profit or loss as past service costs.

(b) Share-based payments

Equity-settled share-based payment is recognized at fair value of equity instruments granted, and employee benefit expense is recognized over the vesting period. At the end of each period, the Group revises its estimates of the number of options that are expected to vest based on the non-market vesting and service conditions. It recognizes the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity.

When the options are exercised, the Group issues new shares. The proceeds received, net of any directly attributable transaction costs, are recognized as share capital (nominal value) and share premium.

28 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

2.20 Revenue Recognition

(a) Contracts using Cost-based Input Method

(1) A performance obligation is satisfied over time

The Group builds and sells ships and off-shore plants, and it generally takes over one-year to build. The Group recognizes revenue in accordance with the percentage of completion of the contract activity calculated based on input costs. The percentage of completion of the contract activity is the proportion that aggregated costs incurred to date, excluding any contract cost that does not depict the Group’s performance, bear to the estimated total costs of the contract. However, the Group recognizes revenue only to the extent of the costs incurred until such time that it can reasonably measure the outcome of the performance obligation if the Group cannot reasonably measure its progress towards complete satisfaction of the performance obligation.

The revenue is recognized over time by measuring progress only if the Group’s performance does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date. Based on the analysis on contract terms and conditions, the Group recognizes revenue over time on the basis that the Group’s performance does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date.

(2) Variable consideration

The Group estimates an amount of variable consideration by using the expected value which the Group expects to better predict the amount of consideration. The Group recognize revenue with transaction price including variable consideration only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

(3) Presentation of contract assets and contract liabilities

The Group presents the contracts in the statement of financial position as contract assets or contract liabilities, depending on the relationship between the Group’s performance and the customer’s payment. Any unconditional rights to consideration are recognized as trade receivables separately from contract assets.

If a customer pays consideration, or the Group has a right to an amount of consideration that is unconditional (trade receivables), before the Group transfers a good or service to the customer, the Group presents the contract as a contract liability when the payment is made or the payment is due (whichever is earlier). A contract liability is the Group’s obligation to transfer goods or services to a customer for which the Group has received consideration (or an amount of consideration is due) from the customer.

If the Group performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, the Group presents the contract as a contract asset, excluding any amounts presented as trade receivables. A contract asset is the Group’s right to consideration in exchange for goods or services that the Group has transferred to a customer.

(b) Sales of goods

Sales are recognized when control of the products has transferred, being when the products are delivered to the wholesaler.

29 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

2.21 Leases

As explained in Note 2.2 above, the Group has changed its accounting policy for leases. The impact of the new accounting policies is disclosed in Note 38.

Accounting policy as a lessor

Lease income from operating leases where the Group is a lessor is recognized in income on a straight-line basis over the lease term. Initial direct costs incurred in obtaining an operating lease are added to the carrying amount of the underlying asset and recognized as expense over the lease term on the same basis as lease income. The respective leased assets are included in the statement of financial position based on their nature. The Group did not need to make any adjustments to the accounting for assets held as lessor as a result of adopting the new leasing standard.

Accounting policy as a lessee

The Group leases various lands, buildings, machinery, vehicles and equipment. Lease contracts are typically made for fix periods but may have extension options as described in (a) below. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes.

Until the 2018 financial year, leases of property, plant and equipment were classified as either finance or operating leases. Payments made under operating leases (net of any incentives received from the lessor) were charged to profit or loss on a straight-line basis over the period of the lease.

From January 1, 2019, leases are recognized as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group.

Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:

 Fixed payments (including in-substance fixed payments), less any lease incentives receivable

 Variable lease payment that are based on an index or a rate

 Amounts expected to be payable by the Group (the lessee) under residual value guarantees

 The exercise of a purchase option if the Group (the lessee) is reasonably certain to exercise that option, and

 Payments of penalties for terminating the lease, if the lease term reflects the Group (the lessee) exercising that option

Lease liability measurement also include payments to be made in option periods if the lessee is reasonably certain to exercise an option to extend the lease.

The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee’s incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. 30 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

The Group is exposed to potential future increases in variable lease payments based on an index or rate, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed and adjusted against the right-of-use asset.

Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

Right-of-use assets are measured at cost comprising the following:

 the amount of the initial measurement of lease liability

 any lease payments made at or before the commencement date less any lease incentives received

 any initial direct costs, and

 restoration costs

The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. If the Group is reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying asset’s useful life. Although the Group elected to apply the revaluation model to its land and buildings that are presented in property, plant and equipment, the Group elected not to apply that revaluation model to buildings held by the Group that are presented in the right-of-use assets.

Payments associated with leases of low-value assets are recognized on a straight-line basis as an expense in profit or loss. Low-value assets comprise IT-equipment and small items of office furniture.

(a) Extension and termination options

Extension and termination options are included in a number of property and equipment leases across the Group. These terms are used to maximize operational flexibility in terms of managing contracts. The majority of extension and termination options held are exercisable only by the Group and not by the respective lessor.

2.22 Approval of Issuance of the Financial Statements

The consolidated financial statements 2019 were approved for issue by the Board of Directors on March 12, 2020 and are subject to change with the approval of shareholders at their Annual General Meeting.

31 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

3. Critical Accounting Estimates and Assumptions

The preparation of financial statements requires the Group to make estimates and assumptions concerning the future. Management also needs to exercise judgement in applying the Group’s accounting policies. Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. As the resulting accounting estimates will, by definition, seldom equal the related actual results, it can contain a significant risk of causing a material adjustment.

The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Additional information of significant judgement and assumptions of certain items are included in relevant notes.

(a) Uncertainty of the estimated total contract revenue

Total contract revenue is measured based on contract amount initially agreed. However, the measurement of contract revenue is affected by a variety of uncertainties that depend on the outcome of future event; for example, the amount of contract revenue may increase as a result of variations in contract work, claims and incentive payments, on the other hand, the amount of contract revenue may decrease as a result of penalties arising from delays caused by the Group in the completion of the contract. Therefore, this measurement of contract revenue is affected by the uncertainty of the occurrence of future events. The change in contract revenue is recognized when it is probable that the customer will approve the increase in revenue due to the variations in contract work, or when it is probable that the Group will be able to satisfy the performance requirements, and the amount can be estimated reliably.

The contract revenue can be decreased by the claims of liquidated damages when the completion of contract is delayed due to the Group’s fault. Therefore, the damage claims for the delay are estimated based on historical experience in case the completion date is expected to be delayed. As at December 31, 2019, the maximum amount of damage claims from the delay as the Group was not able to meet the contracted completion date is expected to be \ 4,261 million. The \ 4,261 million of this amount is the best estimate of the damage claim the Group is likely to bear due to its fault and has been deducted from the contract revenue for the year ended December 31, 2019. The amount will be periodically revalued until the completion date. The Group is constantly putting an effort to minimize damage claims by requesting an extension of the completion date from the customer and to undertake measures in order to comply with the completion date.

(b) Estimated total contract costs

Construction revenue is recognized according to the percentage of completion, which is measured on the basis of the gross amount incurred to date. Total contract costs are estimated based on future estimates of material costs, labor costs, construction period and others. When the estimated total contract costs increase by 5%, profit before income tax and net assets before income tax effects decrease by \ 1,402,550 million.

The Group assesses at the end of each reporting period whether there is an objective evidence that a contract asset is impaired. The Group considers that there is an objective evidence of impairment if financial difficulties of a customer, increase in possibility of contract termination due to delay in the construction or a decrease in ship price, delay in delivery or others are indicated.

32 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

After the assessment, the Group recognizes impairment losses only if there is an objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the asset that can be reliably estimated.

As at December 31, 2019, uncertainties in collectability of contract assets have been increased because of contract termination that is caused by customers’ financial difficulties, delay in delivery schedule and others.

(d) Income taxes

The Group’s taxable income generated from these operations are subject to income taxes based on tax laws and interpretations of tax authorities in numerous jurisdictions. There are many transactions and calculations for which the ultimate tax determination is uncertain (Note 32).

If certain portion of the taxable income is not used for investments or increase in wages or dividends in accordance with the Tax System For Recirculation of Corporate Income, the Group is liable to pay additional income tax calculated based on the tax laws. The new tax system is effective for three years from 2015. Accordingly, the measurement of current and deferred income tax is affected by the tax effects from the new tax system. As the Group’s income tax is dependent on the investments, increase in wages and dividends, there is an uncertainty measuring the final tax effects.

(e) Fair value of financial instruments

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Group uses its judgment to select a variety of methods and make assumptions that are mainly based on market conditions existing at the end of each reporting period (Note 9).

(f) Impairment of financial assets

The provision for impairment for financial assets are based on assumptions about risk of default and expected loss rates. The Group uses judgement in making these assumptions and selecting the inputs to the impairment calculation based on the Group’s past history, existing market conditions as well as forward looking estimates at the end of each reporting period.

(g) Provision for warranty

The Group has accrued warranty provision for the estimated costs of future repair, based on historical experience and terms of guarantees. The warranty provision is offset when costs related to repair incurred, and the remaining balances are reversed upon termination of the terms of guarantees. Repairing costs in excess of the corresponding provision are recognized in profit of loss in the period in which they are incurred.

(h) Net defined benefit liability

The present value of net defined benefit liability depends on a number of factors that are determined on an actuarial basis using a number of assumptions including the discount rate (Note 22).

33 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

(i) Provisions

As at December 31, 2019, the Group recognizes provisions for litigations and others, and these provisions are estimated based on past experience (Note 23).

(j) Leases

In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated).

The lease term is reassessed if an option is actually exercised (or not exercised) or the Group becomes obliged to exercise (or not exercise) it. The assessment of reasonable certainty is only revised if a significant event or a significant change in circumstances occurs, which affects this assessment, and that is within the control of the lessee.

4. Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of less than three months. Cash and cash equivalents as at December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018

Cash on hand \ 113,431 \ 101,887 Ordinary deposits 68,291,457 65,713,330 Checking account 92 690 Other deposits 315,846,226 880,159,964

\ 384,251,206 \ 945,975,871

34 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

5. Restricted Financial instruments

As at December 31, 2019, \ 25 million of long-term financial instruments are restricted to maintain checking accounts (Note 13). Short-term financial instruments of \ 446,198 million are subject to withdrawal restrictions as collateral and others (Note 21).

6. Contracts Using Cost-based Input Method

A. Changes in contract balances and recognized construction revenue for the years ended December 31, 2019 and 2018, are as follows:

2019 (In thousands of Recognized Opening Korean won) Changes construction Ending Balance balance revenue Shipbuilding & offshore contracts \ 12,294,054,514 \ 9,126,973,885 \ 7,285,880,447 \ 14,135,147,952 Construction contracts 53,579,763 5,798,146 23,593,092 35,784,817 \ 12,347,634,277 \ 9,132,772,031 \ 7,309,473,539 \ 14,170,932,769

2018 (In thousands of Recognized Opening Korean won) Changes construction Ending Balance balance revenue Shipbuilding & offshore contracts \ 10,783,279,011 \ 6,692,170,314 \ 5,181,394,811 \ 12,294,054,514 Construction contracts 59,128,258 22,958,081 28,506,576 53,579,763 \ 10,842,407,269 \ 6,715,128,395 \ 5,209,901,387 \ 12,347,634,277

B. At the end of the reporting period, the Group is provided with performance guarantees and warranties of \ 1,376,219 million for the shipbuilding & offshore contracts from several financial institutions, including Korea Exim Bank. The Group is provided with performance guarantees and warranties of \ 127,912 million in relation to the construction contracts and others from several financial institutions including Construction Guarantee.

35 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

C. The following table presents the breakdown of in-progress construction contracts such as recognized construction profit or loss as at December 31, 2019 and 2018:

2019 Accumulative (In thousands of Korean Accumulative Contract Contract construction won) construction cost assets liabilities profit or loss Shipbuilding & offshore contracts \ 30,492,333,240 \ 39,586,511 \ 2,481,660,018 \ 1,510,329,786 Construction contracts 265,397,644 21,541,813 - 2,634,896

\ 30,757,730,884 \ 61,128,324 \ 2,481,660,018 \ 1,512,964,682

2018 Accumulative (In thousands of Korean Accumulative Contract Contract construction won) construction cost assets liabilities profit or loss Shipbuilding & offshore contracts \ 27,871,932,152 \ 280,114,406 \ 3,204,419,144 \ 2,182,920,042

Construction contracts 497,175,335 (58,853,168) 2,025,136 8,722,234

\ 28,369,107,487 \ 221,261,238 \ 3,206,444,280 \ 2,191,642,276

D. Due to the factors causing the rise in shipbuilding & offshore costs in 2019, the estimated total revenue and estimated total costs for contracts in progress have changed. Details of changes in estimated total contract revenue, estimated total contract costs, profits or loss for the year and the succeeding year, and the impact on contract assets (due from customers for contract work) are as follows:

(In thousands of 2019 Korean won) Impact on profit Changes in Changes in Impact on profit or loss for the Changes in estimated total estimated total or loss for the succeeding contract assets1 contract revenue contract costs period period Shipbuilding & offshore contracts \ 409,225,051 \ 448,619,796 \ (138,167,945) \ 98,773,199 \ (138,167,945) Construction contracts 4,055,818 (4,163,784) 8,195,521 24,082 8,195,521 \ 413,280,869 \ 444,456,012 \ (129,972,424) \ 98,797,281 \ (129,972,424)

1 Changes in contract liabilities and provision for construction losses are included.

(In thousands of 2018 Korean won) Impact on profit Changes in Changes in Impact on profit or loss for the Changes in estimated total estimated total or loss for the succeeding contract assets1 contract revenue contract costs period period Shipbuilding & offshore contracts \ 674,521,664 \ 619,066,609 \ (40,994,627) \ 96,449,682 \ (40,994,627) Construction contracts 18,978,986 17,050,378 5,312,150 (3,383,542) 5,312,150 \ 693,500,650 \ 636,116,987 \ (35,682,477) \ 93,066,140 \ (35,682,477)

1 Changes in contract liabilities and provision for construction losses are included.

36 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

The impact on profit or loss for the period and the succeeding period is determined based on total contract costs, which are estimated based on the circumstances present from the start of the contract to the end of current year, and the estimated contract revenue as at December 31, 2019. Contract costs and contract revenue may change in the future.

E. Contractual information that contract revenue for the years ended December 31, 2019 and 2018 is more than 5% of previous revenues, are as follows:

(In thousands of 2019 Korean won) Contract assets Trade receivables Percentage Accumulated Provision Ordering Construction of impairment for Location Contract Date Due Date completion Amount loss Amount impairment

Shipbuilding and offshore contracts 1 Drillship(SN2109) - - - - \ - \ - \ - \ - 1 Drillship(SN2119) ------

FSRU(SN2220) Europe Jan. 17, 2017 Aug 27, 2019 100% - - - -

FSRU(SN2255) Asia Oct. 30, 2018 Dec 31, 2020 63% 33,850,890 - - -

CPF(SN7108) Australia Feb 10, 2012 Aug 26, 2018 100% 130,714,596 (67,277,650) - - Jackup Europe Jun 11, 2013 Dec 31, 2016 99% - - - - Rig(SN7117) Jackup Europe Jun 11, 2013 Apr 30, 2017 99% - - - - Rig(SN7118)

FLNG(SN2030) Oceania May 30, 2011 Apr 4, 2018 99% 2,329,690 - - -

FPSO(SN2089) Africa Jun 12, 2013 May 23, 2019 99% 48,976,728 - - -

FLNG(SN2126) Asia Feb 14, 2014 Nov 15, 2020 95% - - - -

Platform(SN2191) Europe Jun 29, 2015 Feb 28, 2019 100% - - - -

FPU(SN2217) America Jan 4, 2017 Aug 31, 2020 81% - - 122,730,953 -

FLNG(SN2235) Africa Jun 1, 2017 Feb 28, 2023 47% - - - -

Platform(SN7115) Europe Dec 20, 2012 Mar 19, 2018 100% - - - - Semi- Europe Jan 27, 2018 Dec 31, 2018 99% 49,432,889 - - - Rig(SN2097)3

FPSO(SN2333) Asia Apr 22, 2019 Oct 14, 2022 3% - - - -

\ 265,304,793 \ (67,277,650) \ 122,730,953 \ -

1 On September 24, 2019, the Group received a notice of intention of cancellation of the contract due to customer’s situation. On October 29, 2019, the shipbuilding contract was terminated after the related compensation agreement was made with the customer. Accordingly, the advance from customers was confiscated and the Group acquired ownership of the ship. In addition, related contract assets were reclassified to inventories.

37 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

(In thousands of 2018 Korean won) Contract assets Trade receivables Percentage Accumulated Provision Ordering Construction of impairment for Location Contract Date Due Date completion Amount loss Amount impairment

Shipbuilding and offshore contracts

Drillship(SN2109) Europe Aug 30, 2013 Sep 30, 2019 97% \ 392,679,442 \ - \ - \ -

Drillship(SN2119) Europe Apr 8, 2014 Sep 30, 2020 93% 508,314,068 - - -

CPF(SN7108) Australia Feb 10, 2012 Aug 26, 2018 99% 188,002,399 - 58,738 - Jackup Europe Jun 11, 2013 Dec 31, 2016 99% - - - - Rig(SN7117) Jackup Europe Jun 11, 2013 Apr 30, 2017 99% - - - - Rig(SN7118)

FLNG(SN2030) Oceania May 30, 2011 Apr 4, 2018 99% 10,651,273 - - -

FPSO(SN2089) Africa Jun 12, 2013 May 23, 2019 98% 292,358,824 - 25,219,854 -

FLNG(SN2126) Asia Feb 14, 2014 Jul 15, 2020 88% - - - -

Platform(SN2190) Europe Jun 29, 2015 Apr 25, 2018 100% - - - -

Platform(SN2191) Europe Jun 29, 2015 Feb 28, 2019 98% - - - -

FPU(SN2217) America Jan 4, 2017 Sep 30, 2020 31% - - 257,648,639 -

FLNG(SN2235) Africa Jun 1, 2017 Jun 1, 2022 6% - - - -

Platform(SN7115) Europe Dec 20, 2012 Mar 19, 2018 99% - - 769,728 - 1 Drillship(SN2100) ------1 Drillship(SN2101) ------2 Drillship(SN2120) ------Semi- Europe Jan 27, 2018 Dec 31, 2018 98% 322,712,447 - - - Rig(SN2097)3

\ 1,714,718,453 \ - \ 283,696,959 \ -

1 On March 23, 2018, the shipbuilding contract with the customer was cancelled by the decision of a bankruptcy court and accordingly the advance from customers was confiscated and the Group acquired ownership of the ship. In addition, related contract assets were reclassified to inventories due to the notice of the cancellation of the contracts.

2 As the notice of resumption was not received due to customer’s situation, the shipbuilding contract was terminated on February 11, 2018, in accordance with the contract.

3 On January 27, 2018, the Group resumed the construction by entering into a shipbuilding contract with a new customer.

38 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

F. Changes in provision for construction losses for the years ended December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 Beginning Ending Changes balance balance Shipbuilding & offshore contracts \ 181,184,064 \ (60,957,120) \ 120,226,944 Construction contracts 212,575 (212,575) - \ 181,396,639 \ (61,169,695) \ 120,226,944

(In thousands of Korean won) 2018 Beginning Ending Changes balance balance Shipbuilding & offshore contracts \ 300,666,179 \ (119,482,115) \ 181,184,064 Construction contracts 11,330,209 (11,117,634) 212,575 \ 311,996,388 \ (130,599,749) \ 181,396,639

G. Changes in warranty provision for the years ended December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 Beginning Ending Changes balance balance Shipbuilding & offshore contracts \ 327,538,468 \ 15,089,790 \ 342,628,258 Construction contracts 6,444,179 (243,099) 6,210,080 \ 333,982,647 \ 14,846,691 \ 348,829,338

(In thousands of Korean won) 2018 Beginning Ending Changes balance balance Shipbuilding & offshore contracts \ 315,563,749 \ 11,974,719 \ 327,538,468 Construction contracts 6,969,571 (525,392) 6,444,179 \ 322,533,320 \ 11,449,327 \ 333,982,647

7. Contract Assets and Liabilities

Contract assets and liabilities recognized by the Group as at December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018

Contract assets – contracts using cost-based input method \ 2,481,660,018 \ 3,206,444,279 Contract liabilities – contracts using cost-based input method 1,512,964,682 2,191,642,275 Contract liabilities – others 49,672,807 15,772,391 Total contract liabilities \ 1,562,637,489 \ 2,207,414,666

39 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

(a) Significant changes in contract assets and liabilities

Contract assets have decreased due to the transfer to inventory according to the cancellation of contract (Note 6). The Group also recognized a loss allowance for contract assets following the adoption of Korean IFRS 1109 (Note 10). Contract liabilities have decreased due to revenue recognition in the current reporting period of the carried-forward contract liabilities.

(b) Revenue recognized in relation to contract liabilities

The following table shows how much of the revenue recognized in the current reporting period relates to carried- forward contract liabilities and no amount is related to performance obligations that were satisfied in a prior year.

(In thousands of Korean won) 2019 2018

Revenue recognized that was included in the contract liability balance at the beginning of the period Contract liability - contracts using cost-based input method \ 2,104,343,260 \ 661,781,296 Contract liability – others 10,061,795 19,377,377 \ 2,114,405,055 \ 681,158,673

8. Financial Instruments by Category

Categorizations of financial instruments as at December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 Assets at fair Financial assets Derivative Financial assets at fair value through at amortized instruments for value through other Total 1 1 profit and loss cost hedging purpose comprehensive income

Cash and cash equivalents \ - \ 384,251,206 \ - \ - \ 384,251,206 Short-term financial instruments - 472,930,512 - - 472,930,512 Financial assets at fair value through profit or loss 12,836,464 - - - 12,836,464

Trade receivables - 200,977,706 - - 200,977,706 Derivative financial instruments 35,875,232 - 166,776,950 - 202,652,182 Non-current trade receivables - 16,891,144 - - 16,891,144 Financial asset at fair value through other comprehensive income - - - 16,158,580 16,158,580

Other financial assets - 163,887,905 - - 163,887,905 \ 48,711,696 \ 1,238,938,473 \ 166,776,950 \ 16,158,580 \ 1,470,585,699

1 Financial assets at fair value through profit or loss of \ 11,954 million and other current financial assets of \ 59,000 million are provided as collateral for borrowings from Construction Guarantee and Industrial Bank of Korea (Notes 13 and 14).

40 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

(In thousands of Korean won) 2019 Liabilities at fair value Derivative Financial liabilities through profit and instruments for Total at amortized cost loss hedging purpose

Trade payables \ - \ 651,155,518 \ - \ 651,155,518

Borrowings - 2,124,072,283 - 2,124,072,283

Current portion of long-term debts - 1,413,621,316 - 1,413,621,316 Debentures - 269,736,576 - 269,736,576

Derivative financial instruments 34,197,826 - 574,537,236 608,735,062

Other financial liabilities - 336,004,198 - 336,004,198

\ 34,197,826 \ 4,794,589,891 \ 574,537,236 \ 5,403,324,953

(In thousands of Korean won) 2018 Assets at fair Financial assets Derivative Financial assets at fair value through at amortized instruments for value through other Total 1 1 profit and loss cost hedging purpose comprehensive income

Cash and cash equivalents \ - \ 945,975,871 \ - \ - \ 945,975,871 Short-term financial instruments - 419,096,173 - - 419,096,173 Financial assets at fair value

through profit or loss 12,844,113 - - - 12,844,113

Trade receivables - 508,283,714 - - 508,283,714

Derivative financial instruments 7,035,845 - 91,482,134 - 98,517,979 Non-current trade receivables - 43,823,997 - - 43,823,997 Financial asset at fair value through other comprehensive income - - - 20,412,129 20,412,129

Other financial assets - 148,575,595 - - 148,575,595 \ 19,879,958 \ 2,065,755,350 \ 91,482,134 \ 20,412,129 \ 2,197,529,571

1 Financial assets at fair value through profit or loss of \ 11,855 million and other current financial assets of \ 59,000 million are provided as collateral for borrowings from Construction Guarantee and Industrial Bank of Korea (Notes 13 and 14).

(In thousands of Korean won) 2018 Liabilities at fair Derivative Financial liabilities value through profit instruments for Total at amortized cost and loss hedging purpose

Trade payables \ - \ 635,912,474 \ - \ 635,912,474

Borrowings - 1,994,179,572 - 1,994,179,572

Current portion of long-term debts - 835,647,330 - 835,647,330 Debentures - 84,851,892 - 84,851,892

Derivative financial instruments 5,159,437 - 208,270,456 213,429,893

Other financial liabilities - 341,068,936 - 341,068,936

\ 5,159,437 \ 3,891,660,204 \ 208,270,456 \ 4,105,090,097

41 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

Net gains or net losses on each category of financial instruments for the years ended December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018

Financial assets at fair value through other comprehensive

income

Gain on valuation (other comprehensive income) \ 2,808,619 \ 2,686,686 Dividend income 367,327 482,216 Gain (loss) on disposal (adjustments for reclassification) 4,069,207 (276,598) Financial assets at amortized cost

Gain on foreign currency translation 886,378 7,033,837

Interest income 38,820,009 31,319,602

Impairment loss or reversal of loss (717,124) 2,342,526

Financial assets at fair value through the profit and loss

Gain on valuation 35,492,208 14,957,155

Gain on transaction 140,173,868 31,082,684

Derivative assets for hedging purpose

Gain on valuation (profit or loss) 212,764,960 45,914,335 Loss on valuation (other comprehensive income) (52,612,542) -

Gain on transaction 308,508,574 87,250,727

Financial liabilities at fair value through the profit and loss

Loss on valuation (33,964,485) (7,530,660)

Loss on transaction (187,836,067) (33,935,563)

Derivatives liabilities for hedging purpose

Loss on valuation (profit or loss) (393,659,448) (196,351,451) Loss on valuation (other comprehensive income) (54,956,301) (40,756,405)

Loss on transaction (459,725,481) (286,649,782)

Financial liabilities measured at amortized cost

Interest expenses (119,801,356) (122,645,192)

Loss on foreign currency translation (4,337,490) (10,065,024)

42 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

9. Fair Value

A. Fair Value of Financial Instruments by Category

Carrying amount and fair value of financial instruments by category as at December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018 Carrying amount Fair value Carrying amount Fair value Financial assets1 Financial assets at fair value through profit or loss \ 12,836,464 \ 12,836,464 \ 12,844,113 \ 12,844,113 Financial assets at fair value through other comprehensive income 16,158,580 16,158,580 20,412,129 20,412,129 Derivative instruments 202,652,182 202,652,182 98,517,979 98,517,979 Financial liabilities1 Derivative instruments 608,735,062 608,735,062 213,429,893 213,429,893

1 Financial instruments including trade receivables and payables whose carrying amount is a reasonable approximation of fair value are excluded from fair value disclosures.

B. Fair Value Hierarchy

Financial instruments measured at fair value or for which the fair value is disclosed, are categorized as the fair value hierarchy, and the defined levels are as follows:

 Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1).  All inputs other than quoted prices included in level 1 that are observable (either directly that is, prices, or indirectly that is, derived from prices) for the asset or liability (Level 2).  Unobservable inputs for the asset or liability (Level 3).

Fair value hierarchy classifications of the financial instruments that are measured at fair value as at December 31, 2019 and 2018, are as follows:

2019 (In thousands of Korean won) Level 1 Level 2 Level 3 Total

Financial assets Financial assets at fair value

through profit or loss \ - \ - \ 12,836,464 \ 12,836,464 Financial assets at fair value through other comprehensive income - 1,071,000 15,087,580 16,158,580 Derivative financial instruments - 202,652,182 - 202,652,182 Financial liabilities Derivative financial instruments - 608,735,062 - 608,735,062

43 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

2018 (In thousands of Korean won) Level 1 Level 2 Level 3 Total

Financial assets Financial assets at fair value

through profit or loss \ - \ - \ 12,844,113 \ 12,844,113 Financial assets at fair value through other comprehensive income 3,064,889 1,224,000 16,123,240 20,412,129 Derivative financial instruments - 98,517,979 - 98,517,979 Financial liabilities Derivative financial instruments - 213,429,893 - 213,429,893

C. Valuation Technique and the Inputs

Valuation techniques and inputs used in the fair value of financial instruments categorized as Level 3 of the fair value hierarchy as at December 31, 2019, are as follows:

(In thousands of Korean won) Fair value level Valuation techniques Inputs Financial assets at fair value - \12,836,464 3 Cost approach through profit or loss - Financial assets at fair value Perpetual growth rate Discounted cash flow through other comprehensive 15,087,580 3 Ratio of operating profit model income before tax

D. Valuation Processes for Fair Value Measurements Categorized as Level 3

The Group assesses fair value by obtaining a valuation report from Korean Asset Pricing Co., Ltd and Construction Guarantee Cooperative. The finance team of the Group reports directly to the chief financial officer (CFO) and the audit committee (AC), and discusses valuation processes and results with the CFO and AC at least once every quarter in line with the Group’s quarterly reporting dates.

10. Trade (Contract Assets) and Other Receivables

Trade and other receivables, and their provisions for impairment of receivables as at December 31, 2019 and 2018, consist of the following:

(In thousands of Korean won) 2019 2018 Trade Other Trade Other receivables Contract assets receivables receivables Contract assets receivables

Regular receivables \ 303,874,548 \2,548,937,668 \ 79,294,720 \ 636,379,220 \3,206,444,279 \ 67,888,664 Less: Provision for impairment (86,005,697) (67,277,650) (898,102) (84,271,510) - (1,051,159) Trade and other receivables, net 217,868,851 2,481,660,018 78,396,618 552,107,710 3,206,444,279 66,837,505 Less: Non-current receivables (16,891,145) - - (43,823,997) - -

\ 200,977,706 \2,481,660,018 \ 78,396,618 \ 508,283,713 \3,206,444,279 \ 66,837,505

44 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

Movements in provisions for impairment of receivables for the years ended December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018 Trade Other Trade Other receivables Contract assets receivables receivables Contract assets receivables

Beginning \ 84,271,510 \ - \ 1,051,159 \ 82,953,868 \ - \ 2,704,717 Impairment loss 7,557,413 269,240,482 189,209 183,250 - 162,813 Receivables written-off during the year as uncollectible and others 864,006 (201,962,832) - 2,610,073 - (603,463) Unused amounts reversed (6,687,232) - (342,266) (1,475,681) - (1,212,908) Ending \ 86,005,697 \ 67,277,650 \ 898,102 \ 84,271,510 \ - \ 1,051,159

11. Derivatives

As at December 31, 2019, the Group has forward exchange contracts with KEB Hana Bank and 9 other banks to hedge foreign exchange fluctuation risk associated with the foreign advance receipts and foreign payables. Details of derivative valuations are as follows:

(In thousands of Korean won and other currencies)

2019 Gain (loss) Hedging purpose on derivative Gain (loss) on Firm valuation for Gain (loss) on firm commitment Gain (loss) on Derivative trading derivative commitment assets cash flow assets Short position Long position purpose valuation valuation (liabilities) hedges (liabilities)

USD 8,858,123 KRW 9,624,879,169 \ (14,282,992) \ (424,046,219) \430,690,406 \363,056,188 - (521,442,691) USD 5,763,490 KRW 6,727,404,404 30,418,308 72,722,625 (115,128,934) (67,391,089) - 107,868,032 USD 23,020 CNY 157,269 - (533,066) 533,066 40,006 - (524,136) KRW 4,376,735,756 USD 3,745,314 (17,240,927) 26,276,918 (26,276,918) (115,097,031) (77,213,334) (72,817,033) KRW 2,170,664,146 USD 1,976,809 2,832,822 138,322,730 (138,322,730) (152,755,293) (59,920,642) 92,300,937 CNY 328,643 USD 49,000 2,121,460 - - - - 2,085,919 USD 101 NOK 922 - - - 55,848 4,480 4,480 KRW 12,222,516 NOK 90,124 - 158,743 (158,743) 344,710 (70,709) (413,376) KRW 4,932,883 NOK 38,222 5,339 - - 141,883 29,810 78,097 USD 8 JPY 892 - - - 1,182 149 149 KRW 341,916 JPY 30,967 (8,663) 1,324 (1,324) (1,324) (3,793) (11,132) KRW 288,463 JPY 27,558 96 15,465 (15,465) (17,757) (13,004) 5,583 KRW 214,918 GBP 140 (2,797) - - - - (2,797) KRW 1,667,848 GBP 1,119 20,519 (2,633) 2,633 2,633 21,959 39,845 USD 305,716 EUR 264,095 - - - 498,321 1,593,994 1,593,994 KRW 814,035,160 EUR 611,615 (2,429,105) 4,845,756 (4,845,756) (736,149) (10,406,038) (12,609,189) KRW 156,020,074 EUR 119,876 31,872 1,706,772 (1,706,772) (1,531,832) (1,652,716) 368,745 USD 6 DKK 39 - - - 672 103 103 KRW 53,863,346 CNY 321,451 - (362,904) 362,904 333,110 (551,804) (914,708) KRW 11,409,309 CNY 69,453 - - - (137,575) 51,715 51,715 \ 1,465,932 \ (180,894,489) \145,132,367 \ 26,806,503 \(148,129,830) \ (404,337,463) 45 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

(In thousands of Korean won and other currencies)

2018 Gain (loss) Hedging purpose on derivative Gain (loss) on Firm valuation for Gain (loss) on firm commitment Gain (loss) on Derivative trading derivative commitment assets cash flow assets Short position Long position purpose valuation valuation (liabilities) hedges (liabilities)

USD 7,921,147 KRW 8,532,598,532 \ (2,733,900) \ (191,942,995) \201,289,179 \132,487,376 \(42,882,352) \ (162,451,126) USD 4,171,077 KRW 4,653,846,830 9,657,478 (24,704,576) (47,873,261) (24,990,671) 2,125,948 37,891,830 KRW 2,241,908,288 USD 2,009,175 (2,529,842) 13,371,742 (13,371,742) 6,172,752 - (27,420,193) KRW 2,561,922,113 USD 2,378,780 5,025,092 68,943,453 (68,943,453) (42,715,314) - 58,929,277 USD - SGD - - - - 29 - - KRW 62,561 SEK 499 - (120) 120 - - (120) USD 128 NOK 1,086 - (1,690) 1,690 51,249 - (1,690) KRW 29,890,571 NOK 219,421 - (1,123,567) 1,123,567 1,874,836 - (1,652,683) USD 9 JPY 1,034 - 403 (403) 1,168 - 403 KRW 1,279,575 JPY 123,954 (851) 36,443 (36,443) 13,325 - (14,694) KRW 4,213,622 JPY 414,118 14,958 81,253 (81,253) (17,525) - 47,830 KRW 1,896,379 GBP 1,264 (93,587) (316) 316 296 - (93,903) USD 20,155 EUR 17,167 (390,568) (16,159) 16,159 883,945 - (406,727) USD 1,945 EUR 1,664 5,484 2,335 (2,335) 189,391 - 7,819 KRW 714,256,960 EUR 537,620 (1,474,642) (11,649,866) 11,649,866 15,877,077 - (15,996,285) KRW 133,501,402 EUR 103,014 53,913 904,926 (904,926) (751,086) - 962,947 USD 6 DKK 39 - 43 (43) 161 - 43 KRW 32,574 DKK 184 - (704) 704 1,027 - (704) USD 106,876 CNY 705,483 - (4,475,365) 4,475,365 2,064,040 - (4,543,516) USD 26,356 CNY 183,043 - 396,112 (396,112) 1,228,215 - 387,444 KRW 9,450,527 CNY 57,763 - (75,137) 75,137 75,137 - (75,137) KRW 48,610,422 CNY 301,917 - 290,387 (290,387) (257,458) - 290,387 KRW 15,502,189 AUD 19,205 - (421,701) 421,701 421,701 - (421,701) CNY 524,577 USD 76,079 (307,269) (52,018) 52,018 (365,757) - (351,415) \ 7,226,266 \ (150,437,117) \ 87,205,464 \ 92,243,914 \(40,756,404) \ (114,911,914)

The Group applies the fair value hedge accounting and is exposed to fluctuations in fair value until December 29, 2023. The realized gain and loss on derivative transactions upon the expiration of contracts for the year ended December 31, 2019, amounted to \ 327,057 million and \ 478,274 million, respectively (2018: \ 137,675 million and \ 337,074 million, respectively). The realized gain and loss on firm commitments recognized for the year ended December 31, 2019, amounted to \ 357,120 million and \ 327,055 million, respectively (2018: \ 307,897 million and \ 132,158 million, respectively).

The Group is exposed to foreign exchange rate and interest rate risk since it has borrowings in foreign currency issued at floating rates. The Group performs various analysis through currency swap contract to manage foreign exchange rate and interest rate risk. As at December 31, 2019, the Group entered in an agreement to swap floating rate long-term borrowings amounting to USD 140 million (maturity: August 30, 2022) with long-term borrowings amounting to \ 163,730 million with fixed rate of 1.53 ~ 3.61% with Woori Bank. The Group recognized loss on derivative valuation (equity) amounting to \ 195 million and derivative liabilities amounting to \ 1,745 million as at December 31, 2019.

46 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

As at December 31, 2019, the Group has recognized loss on valuation of derivatives with cash flow hedge accounting amounting to \ 112,431 million after deducing income tax amounting to \ 35,894 million as other comprehensive income. In relation to cash flow hedges, the expected maximum period of exposure to cash flow risk from the hedged item transactions is less than 31 months from the end of the reporting period excluding interest rate swaps.

12. Inventories

Inventories as at December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018 Work-in-process \ 46,052,939 \ 23,518,707 Raw materials 457,315,470 386,216,874

Materials in-transit 71,602,158 52,804,351 Inventory of construction completed 1,764,668,108 1,019,256,493

\ 2,339,638,675 \ 1,481,796,425

The cost of inventories recognized as expense and included in ‘cost of sales’ amounts to \ 4,126,884 million (2018: \ 2,498,458 million).

13. Other Financial Assets and Liabilities

Details of other financial assets and liabilities as at December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018 Current Non-current Current Non-current Other financial assets Loans \ 1,263,444 \ 4,491,037 \ 1,320,368 \ 5,489,556

Accrued income 6,431,614 - 1,837,217 -

Guarantee deposits provided 12,582,636 1,673,426 12,096,628 1,951,003 Small and medium industry finance 59,000,000 - debentures 59,000,000 -

Long-term financial instruments - 24,600 - 24,600 Other receivables - 24,530 - 18,717

\ 79,277,694 \ 6,213,593 \ 74,254,213 \ 7,483,876 Other financial liabilities Guarantee deposits received \ - \ 9,634,199 \ - \ 9,998,261 Long-term accrued expenses - 33,952,952 - 12,867,961 \ - \ 43,587,151 \ - \ 22,866,222

As at December 31, 2019, \59,000 million of other current financial assets are pledged as securities for borrowings of Industrial Bank of Korea (Note 21). \25 million of long-term financial instruments are restricted to maintain checking accounts (Note 5).

47 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

14. Financial Assets at Fair Value through Profit or Loss

Details of financial assets at fair value through profit or loss as at December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018

Non-current portion Equity investments \ 12,593,896 \ 12,494,363 Beneficiary securities 242,568 349,750 \ 12,836,464 \ 12,844,113

Equity investments in Construction Guarantee amounting to \ 11,954 million are provided as collateral in relation to the borrowings (Note 21).

15. Financial Assets at Fair Value through Other Comprehensive Income

Details of equity instruments at fair value through other comprehensive income as at December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018

Non-current portion Listed equity securities iMarketKorea Inc. \ - \ 3,064,889 EB TECH CO.,LTD. 1,071,000 1,224,000 Unlisted equity securities Samsung Venture Investment Corp. and others 15,087,580 16,123,240 \ 16,158,580 \ 20,412,129

Upon disposal of the above equity instruments, the related accumulated other comprehensive income is reclassified to retained earnings and not reclassified to profit or loss.

During the year ended December 31, 2019, the Group disposed of listed shares, iMarketKorea Inc. and others and fair values of the disposed shares are \ 4,508 million and \ 1 million respectively. \ 4,069 million recognized in other comprehensive income was reclassified as retained earnings after disposal. During the year ended December 31, 2018, the Group disposed of unlisted shares, Hyunjin Co., Ltd., and there is no fair value of the disposed shares. \ 277 million recognized in other comprehensive income was reclassified as retained earnings after disposal.

48 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

16. Investments in Associates and Joint Ventures

Details of investments in associates as at December 31, 2019, are as follows:

(In thousands of Korean won)

Percentage of 2019 Investee Location ownership Closing month Acquisition cost Book amount interest (%)

KC LNG Tech Co., Ltd Korea 16.6 December 31 \ 2,553,080 \ 2,553,080

Changes in investments in associates and joint ventures as at December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018

Opening balance \ - \ 2,980,802 Share of loss of associates and joint ventures - (94,932) Disposal - (2,885,870) Other 2,553,080 - Ending balance \ 2,553,080 \ -

17. Property, Plant and Equipment

Changes in property, plant and equipment for the years ended December 31, 2019 and 2018, are as follows:

2019 Tools, Construction- (In thousands of Land Building Structures Machinery Vehicles furniture and Total in- progress Korean won) fixtures Beginning net book amount \1,896,624,766 \1,185,253,117 \1,575,284,484 \ 811,334,140 \285,644,838 \ 95,359,059 \ 32,773,503 \5,882,273,907

Acquisition - - - - 261,095 448,500 76,677,024 77,386,619

Disposal (687,200) (563,494) (62,657) (5,358,181) (170,664) (460,105) - (7,302,301)

Depreciation - (34,240,773) (49,546,605) (82,003,911) (18,673,745) (48,495,454) - (232,960,488)

Transfer1 373,309 959,802 21,968,328 8,659,934 1,327,736 19,587,825 (59,981,971) (7,105,037) Exchange differences - 4,981,784 6,101,842 3,682,371 16,785 254,451 2,171 15,039,404 Ending net book amount \1,896,310,875 \1,156,390,436 \1,553,745,392 \ 736,314,353 \268,406,045 \ 66,694,276 \ 49,470,727 \5,727,332,104

Acquisition cost \1,896,310,875 \1,633,171,989 \2,191,424,641 \2,006,282,572 \510,153,019 \704,686,689 \ 49,470,727 \8,991,500,512 Accumulated depreciation - (476,781,553) (637,679,249) (1,268,659,180) (241,719,287) (637,978,906) - (3,262,818,175) Accumulated impairment loss - - - (1,309,039) (27,687) (13,507) - (1,350,233)

Net book amount \1,896,310,875 \1,156,390,436 \1,553,745,392 \ 736,314,353 \268,406,045 \ 66,694,276 \ 49,470,727 \5,727,332,104

2018 Tools, Construction- (In thousands of Land Building Structures Machinery Vehicles furniture and Total in- progress Korean won) fixtures Beginning net book amount \1,922,474,932 \1,254,739,171 \1,599,189,259 \ 895,563,897 \305,692,841 \150,717,424 \ 34,527,240 \6,162,904,764

Acquisition 2,549,000 452,181 6,998,769 710,533 - 1,576,509 39,951,131 52,238,123

Disposal (30,709,175) (36,778,909) (2,233,375) (2,726,347) (749,994) (1,760,120) - (74,957,920)

Depreciation - (34,665,285) (48,969,900) (85,036,094) (20,585,028) (66,736,832) - (255,993,139) 49 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

Transfer1 2,310,009 474,217 16,891,089 2,648,477 1,279,339 11,597,190 (41,839,704) (6,639,383) Exchange differences - 1,031,742 3,408,642 173,674 7,680 (35,112) 134,836 4,721,462 Ending net book amount \1,896,624,766 \1,185,253,117 \1,575,284,484 \ 811,334,140 \285,644,838 \ 95,359,059 \ 32,773,503 \5,882,273,907

Acquisition cost \1,896,624,766 \1,626,038,934 \2,161,735,578 \2,008,396,676 \510,498,941 \692,040,705 \ 32,773,503 \8,928,109,103 Accumulated depreciation - (440,785,817) (586,451,094) (1,195,753,497) (224,826,416) (596,668,139) - (3,044,484,963) Accumulated impairment loss - - - (1,309,039) (27,687) (13,507) - (1,350,233)

Net book amount \1,896,624,766 \1,185,253,117 \1,575,284,484 \ 811,334,140 \285,644,838 \ 95,359,059 \ 32,773,503 \5,882,273,907

1 \ 7,105 million (2018: \ 6,639 million) was transferred to intangible assets (Notes 20).

If land was stated on the historical cost basis, the amounts as at December 31, 2019 and 2018, would be as follows:

(In thousands of Korean won) 2019 2018

Cost \ 779,665,075 \ 779,719,418

Depreciation expense of \ 198,554 million (2018: \ 220,185 million) and \ 34,406 million (2018: \ 35,809 million) has been charged to ‘cost of sales’ and ‘selling and administrative expenses’, respectively.

For the year ended December 31, 2019, increase in construction-in-progress includes capitalized borrowing costs amounting to \ 1,453 million (2018: \ 526 million) on construction-in-progress. The capitalization rate of borrowings used to determine the amount of borrowing costs eligible for capitalization is 3.39% (2018: 3.87%).

Details of property, plant and equipment provided as collateral in relation to borrowings and advance receipt refund guarantee as at December 31, 2019, and 2018, are as follows:

(In millions of Korean won)

2019 Collateral Book amount Secured amount Related item Related amount Secured party Land \ 484,334 Borrowings \ 79,962 (Note 21) Building 168,022 Structures \ 1,214,600 Korea Exim Bank 480,701 Advance receipt Machinery 150,399 refund guarantee 584,189 (Note 23) Vehicles 120,888 Land 1,004,319 Borrowings 420,000 (Note 21) Building 26,140 Korea 900,000 Advance receipt Development Bank Structures 57,872 refund guarantee 313,702 Machinery 22,622 (Note 23) Land 38,519 Borrowings Korea Investment 110,500 85,000 (Note 21) Capital Building 81,510

50 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

(In millions of Korean won)

2018 Collateral Book amount Secured amount Related item Related amount Secured party Land \ 484,334 Borrowings \ 179,988 (Note 21) Building 172,712 Structures 495,443 \ 1,214,600 Korea Exim Bank Advance receipt Machinery 168,786 refund guarantee 314,045 (Note 23) Vehicles 126,812

Land 1,004,319 Borrowings 420,000 (Note 21) Building 27,507 Korea 900,000 Advance receipt Development Bank Structures 59,639 refund guarantee 115,723 Machinery 26,611 (Note 23) Land 38,519 Borrowings Korea Investment 110,500 85,000 (Note 21) Capital Building 83,331

18. Leases

Set out below is information for leases when the Group is a lessee.

(a) Amounts recognized in the consolidated statement of financial position

The consolidated statement of financial position shows the following amounts relating to leases:

(in thousands of Korean won) December 31, 2019 January 1, 2019

Right-of-use assets Land \ 45,863,377 \ 64,569,411 Building 2,409,601 2,550,882 Equipment 31,522 131,495 Vehicles 50,095,516 89,692,162 \ 98,400,016 \ 156,943,950

(in thousands of Korean won) December 31, 2019 January 1, 2019

Lease liabilities Current \ 29,481,167 \ 72,833,785 Non-current 29,743,211 42,486,341 \ 59,224,378 \ 115,320,126

Additions to the right-of-use assets during the 2019 financial year were \ 22,842 million.

51 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

(b) Amounts recognized in the consolidated statement of profit or loss

The consolidated statement of profit or loss shows the following amounts relating to leases:

(in thousands of Korean won) 2019

Depreciation of right-of-use assets Land \ 10,626,339 Building 1,453,757 Equipment 762,887 Vehicles 51,738,277 \ 64,581,260 Interest expense relating to lease liabilities (included in finance cost) \ 3,388,962 Expense relating to leases of low-value assets that are not short-term leases (included in administrative expenses) 747,751

The total cash outflow for leases in 2019 was \ 65,496 million.

19. Investment Properties

Details of investment properties as at December 31, 2019 and 2018, are as follows:

(In thousands of 2019 2018 Korean won) Accumulated Accumulated Cost Book amount Cost Book amount depreciation depreciation

Land \ 10,613,124 \ - \ 10,613,124 \ 10,613,124 \ - \ 10,613,124

Buildings 6,323,113 (475,715) 5,847,398 6,323,113 (349,369) 5,973,744

\ 16,936,237 \ (475,715) \ 16,460,522 \ 16,936,237 \ (349,369) \ 16,586,868

Changes in investment properties for the years ended December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018 Land Building Total Land Building Total Beginning balance \ 10,613,124 \ 5,973,744 \ 16,586,868 \ 10,613,124 \ 6,100,091 \ 16,713,215 Depreciation - (126,346) (126,346) - (126,347) (126,347) Ending balance \ 10,613,124 \ 5,847,398 \ 16,460,522 \ 10,613,124 \ 5,973,744 \ 16,586,868

There is no rental income from investment properties during the year ended December 31, 2019, and operating expenses (including repairs and maintenance) of \ 115 million (2018: \ 104 million) were incurred on properties of which no rental income was generated.

The fair value cannot be reasonably assessed, because the above investment property has low probability of occurrence of comparable market transactions, and there is no alternative measuring method.

52 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

20. Intangible Assets

Changes in intangible assets for the years ended December 31, 2019 and 2018, are as follows:

2019 (In thousands of Korean won) Other

Memberships intangible assets Total Beginning net book amount \ 21,880,537 \ 36,873,686 \ 58,754,223 Acquisition1 - 7,136,407 7,136,407 Amortization and impairment loss - (19,417,774) (19,417,774) Exchange difference - 41,885 41,885 Disposal (300,000) - (300,000) Ending net book amount \ 21,580,537 \ 24,634,204 \ 46,214,741 Acquisition cost 24,667,907 284,895,157 \ 309,563,064 Accumulated depreciation and impairment loss (3,087,370) (260,260,953) (263,348,323) Net book amount \ 21,580,537 \ 24,634,204 \ 46,214,741

2018 (In thousands of Korean won) Other

Memberships intangible assets Total Beginning net book amount \ 22,483,517 \ 69,096,397 \ 91,579,914 Acquisition1 - 6,639,384 6,639,384 Amortization and impairment loss - (38,857,090) (38,857,090) Exchange difference - (5,005) (5,005) Disposal (602,980) - (602,980) Ending net book amount \ 21,880,537 \ 36,873,686 \ 58,754,223 Acquisition cost \ 24,967,907 \ 277,716,865 \ 302,684,772 Accumulated depreciation and impairment loss (3,087,370) (240,843,179) (243,930,549) Net book amount \ 21,880,537 \ 36,873,686 \ 58,754,223

1 The amount includes \ 7,105 million (2018: \ 6,639 million) transferred from construction-in-progress (Note 17).

Amortization of \ 19,418 million (2018: \ 38,856 million) is included in the ‘selling and administrative expenses’.

The Group recognized research and development expenses totaling of \ 49,919 million (2018: \ 48,567 million) for the year ended December 31, 2019.

53 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

21. Borrowings and Debentures

Details of book amount of borrowings as at December 31, 2019 and 2018, are as follows:

Annual interest (In thousands of Korean won) rate (%) December 31, 2019 2019 2018

Debentures

Unsecured debenture 3.55~4.60 \ 569,476,358 \ 166,815,080 Less : current portion (299,739,782) (81,963,188)

269,736,576 84,851,892

Long-term borrowings Facility loans1 4.20 85,000,000 85,000,000 General loans1 4.10~5.10 320,000,000 340,000,000

Production finance1 3.27~3.99 797,075,000 735,922,000 FRN2 1.53~5.10 162,092,000 - CP 3.78 100,000,000 - Borrowings of foreign corporation 4.85~5.40 81,593,200 138,858,142

Less : current portion (1,113,958,200) (753,684,142)

431,802,000 546,096,000

Short-term borrowings

General loans1,3 3.2~4.31 237,000,000 337,000,000

Operation loans of Housing Construction4 1.4 8,593,000 8,593,000 Banker’s usance 1.36~2.19 462,839,370 349,189,934 Shared growth loan1 2.61~3.00 379,962,000 170,985,000 CP - - 28,000,000 Electronic short-term debenture 2.8 100,000,000 - Invoice loan 4.46~4.69 200,958,792 69,617,613 Production Finance1 3.23~3.75 245,573,000 340,205,000

Borrowings of foreign corporation5 4.20~4.79 57,344,121 144,493,024

1,692,270,283 1,448,083,571

Current maturities of long-term debts Current portion of debentures 299,739,782 81,963,188

Current portion of long-term borrowings 1,113,958,200 753,684,142 1,413,697,982 835,647,330 Total Borrowings \ 3,807,506,841 \ 2,914,678,793

1 Certain property, plant and equipment, ships under construction and raw-materials for construction are provided as collateral for borrowings from Korea Exim Bank and others (Note 17). 2 Woori Bank Korea Branch provides payment guarantees on FRN issued by Woori Bank Hong Kong Branch. 3 Other current financial assets amounting to \ 59,000 million are provided as collateral for borrowings from Industrial Bank of Korea (Notes 8 and 13). 4 Financial assets at fair value through profit or loss are provided as collateral for borrowings from Construction Guarantee (Notes 8 and 14). 5 Short-term financial instruments are provided as collateral for borrowings from DGB Daegu Bank and others (Note 5).

54 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

Details of debentures as at December 31, 2019 and 2018, are as follows:

Annual interest rate (%) (In thousands of Korean won) 2019 2018 December 31, 2019 The 93-1st unsecured debenture 4.2 \ - \ 61,983,212 The 93-2nd unsecured debenture 4.4 - 9,991,494 The 93-3rd unsecured debenture 4.6 9,998,332 9,988,006 The 96-2nd unsecured debenture 4.6 - 9,988,483 The 97th unsecured debenture 4.2 19,996,108 19,969,171 The 98-1st unsecured debenture 4.2 9,995,222 9,981,866 The 98-2nd unsecured debenture 4.5 9,991,249 9,981,350 The 99th unsecured debenture 4.2 9,994,593 9,981,263 The 100th unsecured debenture 4.2 24,987,184 24,950,235 The 101st unsecured debenture 4.2 9,992,598 - The 102nd unsecured debenture 4.2 49,956,615 - The 103rd unsecured debenture 4.2 14,986,621 - The 104th unsecured debenture 4.2 29,973,087 - The 105th unsecured debenture 3.9 59,934,271 - The 106-1st unsecured debenture 3.75 19,973,954 - The 106-2nd unsecured debenture 4.0 29,955,443 - The 106-3rd unsecured debenture 4.17 19,968,089 - The 107th unsecured debenture 4.0 19,969,855 - The 108-1st unsecured debenture 3.75 29,959,949 - The 108-2nd unsecured debenture 4.0 9,984,893 - The 109th unsecured debenture 3.69 30,000,000 - The 110th unsecured debenture 3.69 30,000,000 - The 111-1st unsecured debenture 3.55 29,950,920 - The 111-2nd unsecured debenture 3.8 19,964,980 - The 112nd unsecured debenture 4.2 9,980,490 - The 113rd unsecured debenture 3.71 29,990,952 - The 114th unsecured debenture 3.71 29,990,833 - The 115th unsecured debenture 3.95 9,980,120 -

569,476,358 166,815,080 Less : current portion (299,739,782) (81,963,188) \ 269,736,576 \ 84,851,892

Details of issue of debentures as at December 31, 2019, are as follows:

The 93-3rd unsecured debenture The 97th unsecured debenture The 98-1st unsecured debenture

Face amount \ 10,000 million \ 20,000 million \ 10,000 million

Issuing cost \ 25 million \ 40 million \ 20 million

Interest rate 4.6% 4.2% 4.2% Payment of credit every three months Payment of credit every three months Payment of credit every three months

Interest payment after issued date after issued date after issued date

Issued date August 28, 2017 August 22, 2018 November 6, 2018

Maturity date February 28, 2020 August 22, 2020 May 6, 2020

The 98-2nd unsecured debenture The 99th unsecured debenture The 100th unsecured debenture

Face amount \ 10,000 million \ 10,000 million \ 25,000 million

Issuing cost \ 20 million \ 20 million \ 50 million

Interest rate 4.5% 4.2% 4.2% Payment of credit every three months Payment of credit every three months Payment of credit every three months

Interest payment after issued date after issued date after issued date

Issued date November 6, 2018 November 23, 2018 December 27, 2018

55 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

Maturity date November 6, 2020 May 23, 2020 June 27, 2020

The 101st unsecured debenture The 102nd unsecured debenture The 103rd unsecured debenture

Face amount \ 10,000 million \ 50,000 million \ 15,000 million

Issuing cost \ 20 million \ 101 million \ 30 million

Interest rate 4.2% 4.2% 4.2% Payment of credit every three months Payment of credit every three months Payment of credit every three months

Interest payment after issued date after issued date after issued date

Issued date January 16, 2019 February 20, 2019 February 27, 2019

Maturity date July 16, 2020 August 20, 2020 August 27, 2020

The 104th unsecured debenture The 105th unsecured debenture The 106-1st unsecured debenture

Face amount \ 30,000 million \ 60,000 million \ 20,000 million

Issuing cost \ 60 million \ 121 million \ 40 million

Interest rate 4.2% 3.9% 3.75% Payment of credit every three months Payment of credit every three months Payment of credit every three months

Interest payment after issued date after issued date after issued date

Issued date February 28, 2019 April 22, 2019 June 18, 2019

Maturity date August 28, 2020 October 22, 2020 December 18, 2020

The 106-2nd unsecured debenture The 106-3rd unsecured debenture The 107th unsecured debenture

Face amount \ 30,000 million \ 20,000 million \ 20,000 million

Issuing cost \ 60 million \ 40 million \ 40 million

Interest rate 4.0% 4.17% 4.0% Payment of credit every three months Payment of credit every three months Payment of credit every three months

Interest payment after issued date after issued date after issued date

Issued date June 18, 2019 June 18, 2019 June 26, 2019

Maturity date June 18, 2021 December 18, 2021 June 26, 2021

The 108-1st unsecured debenture The 108-2nd unsecured debenture The 109th unsecured debenture

Face amount \ 30,000 million \ 10,000 million \ 30,000 million

Issuing cost \ 60 million \ 20 million \ -

Interest rate 3.75% 4.0% 3.69% Payment of credit every three months Payment of credit every three months Payment of credit every three months

Interest payment after issued date after issued date after issued date

Issued date June 27, 2019 June 27, 2019 August 28, 2019

Maturity date December 28, 2020 June 27, 2021 February 26, 2021

The 110th unsecured debenture The 111-1st unsecured debenture The 111-2nd unsecured debenture

Face amount \ 30,000 million \ 30,000 million \ 20,000 million

Issuing cost \ - \ 60 million \ 40 million

Interest rate 3.69% 3.55% 3.8% Payment of credit every three months Payment of credit every three months Payment of credit every three months

Interest payment after issued date after issued date after issued date

Issued date September 06, 2019 September 19, 2019 September 19, 2019

Maturity date March 04, 2021 March 19, 2021 September 17, 2021

The 112nd unsecured debenture The 113rd unsecured debenture

Face amount \ 10,000 million \ 30,000 million

Issuing cost \ 20 million \ 9 million

Interest rate 4.2% 3.71%

56 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

Interest payment Payment of credit every three months after issued date Payment of credit every three months after issued date

Issued date November 26, 2019 December 16, 2019

Maturity date November 25, 2022 June 16, 2021

The 114th unsecured debenture The 115th unsecured debenture

Face amount \ 30,000 million \ 10,000 million

Issuing cost \ 9 million \ 20 million

Interest rate 3.71% 3.95%

Interest payment Payment of credit every three months after issued date Payment of credit every three months after issued date

Issued date December 23, 2019 December 23, 2019

Maturity date June 23, 2021 December 23, 2021

22. Net Defined Benefit Liabilities

The defined benefit pension plan that the Group operates is final salary pension plan, which provide benefits to employees in the form of a guaranteed level of pension payable for life. The level of benefits provided depends on employees’ length of service and their salaries in the final years leading up to retirement. The majority of benefit payments are from trustee administered funds; however, there are also a number of unfunded plans.

Details of net defined benefit liabilities recognized in the consolidated statements of financial position as at December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018 Present value of funded defined benefit obligations \ 481,593,257 \ 475,674,292 Present value of unfunded defined benefit obligations 12,976,449 13,048,909 494,569,706 488,723,201 Fair value of plan assets1 (448,115,757) (412,220,584) Liability in the consolidated statement of financial position \ 46,453,949 \ 76,502,617

1 The contributions to the National Pension Fund of \ 581 million are included in the fair value of plan assets as at December 31, 2019 (2018: \ 583 million).

Changes in the defined benefit obligations for the years ended December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018 Beginning balance \ 488,723,201 \ 473,290,797 Current service cost 56,958,424 58,515,570 Interest expense 13,672,577 15,368,729 Remeasurements: Actuarial gain from change in demographic assumptions (2,878,010) - Actuarial gain and loss from change in financial assumptions (36,545,735) 16,530,483 Actuarial gain and loss from experience adjustments 22,096,895 (21,832,242) Payments from plans: Benefit payments (47,457,646) (53,636,636) Transfer from and to related companies - 486,500 Ending balance \ 494,569,706 \ 488,723,201

57 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

Changes in the fair value of plan assets for the years ended December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018 Beginning balance \ 412,220,584 \ 432,779,744 Interest income 11,424,278 14,030,766 Remeasurements: Return on plan assets (excluding amounts included in interest income) (4,551,513) (6,062,139) Contributions: Employers 71,780,900 18,057,886 Payments from plans: Benefit payments (42,758,492) (46,585,673) Ending balance \ 448,115,757 \ 412,220,584

Plan assets as at December 31, 2019 and 2018, consist of as follows:

2019 2018 (In thousands of Korean won) Composition Composition Quoted price Quoted price (%) (%)

Cash and cash equivalents \ 447,534,344 99.9 \ 411,637,994 99.9

Others (National Pension Fund) 581,413 0.1 582,590 0.1

\ 448,115,757 100.0 \ 412,220,584 100.0

The significant actuarial assumptions as at December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018 Discount rate 2.9% 3.0% Salary growth rate 2.8% 3.7%

The sensitivity of the defined benefit obligations as at December 31, 2019, to changes in the weighted significant assumptions is:

(In percentage, %) Effect on defined benefit obligation Decrease in Changes in assumption Increase in assumption assumption

Discount rate 1.0% 5.5% decrease 6.1% increase Salary growth rate 1.0% 6.2% increase 5.6% decrease

The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. The sensitivity of the defined benefit obligation to changes in principal actuarial assumptions is calculated using the projected unit credit method, the same method applied when calculating the defined benefit obligations recognized on the consolidated statement of financial position. The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to the previous period.

The Group reviews the funding level on an annual basis and has a policy of preserving deficit from the fund. Expected contributions to post-employment benefit plans for the year ending December 31, 2020, are \ 66,742

58 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018 million and the weighted average duration of the defined benefit obligations is 5.96 years.

Expected maturity analysis of undiscounted pension benefits as at December 31, 2019, is as follows:

(In thousands of Korean Less than 1 Between 1 and Between 2 and won) year 2 years 5 years Over 5 years Total Pension benefits \ 67,022,465 \ 79,816,165 \ 192,964,178 \ 302,159,038 \ 641,961,846

23. Provisions, Contingent Liabilities and Commitments

A. Provisions

Details and changes in provisions for liabilities for the years ended December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) January 1, 2019 Increase (decrease) December 31, 2019

Litigations and others \ 432,983,802 \ (43,563,788) \ 389,420,014

Others 15,834,852 39,973 15,874,825

\ 448,818,654 \ (43,523,815) \ 405,294,839

(In thousands of Korean won) January 1, 2018 Increase (decrease) December 31, 2018

Litigations and others \ 418,836,175 \ 14,147,627 \ 432,983,802

Others 24,300,558 (8,465,706) 15,834,852

\ 443,136,733 \ 5,681,921 \ 448,818,654

As at December 31, 2019, the Group recognizes the best estimate which is expected to be paid in relation to pending lawsuits as provisions. The final liability of the Group is subject to change from the estimated amount depending on the outcome of this case. In addition, the Group has accrued provision for the estimated costs with regard to the result of arbitration caused by cancellation and compensation for damages of shipbuilding contract.

B. Contingent liabilities

(A) As at December 31, 2019, the Group is named as a defendant in 43 legal cases, excluding the case and the arbitration on which the Group recognized provision. The aggregate amounts of claims as a defendant amounted to approximately \ 559,042 million. The said case is still pending in court and as at December 31, 2019, the outcome of these cases is uncertain. Accordingly, the ultimate effect of these matters on the financial position of the Group cannot be determined.

(B) As at December 31, 2019, the Group provides guarantees to the ship-owners vessels finance amounting to USD 109 million.

C. Commitments

(A) As at December 31, 2019, the Group has technical assistance agreements with three foreign companies for manufacturing machines, shipbuilding and others.

59 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

(B) As at December 31, 2019, the Group is provided with refund guarantee of USD 3,107 million from Korea Exim bank and others. The ships under construction are pledged as collaterals for the guarantees provided by the financial institutions (Note 17).

(In millions of Korean won) Financial institution Contract limit Overdrawn account Shinhan Bank and 2 others \ 21,000 Trade finance Woori Bank and 7 others 932,458 General loan Korea Exim Bank and 11 others 3,927,920 IBK Industrial Bank of Korea Purchase card and others and 5 others 121,000

24. Share Capital and Share Premium

The Parent Company’s total number of authorized shares is 800 million shares and the par value per share is \ 5,000. As at December 31, 2019, total number of shares issued is 630,114,845 shares, including 114,845 shares of preferred share, and share capital is \ 3,150,574 million.

Number of shares outstanding Share capital and premium (In thousands of (in shares) (in thousands of Korean won) Ordinary Preferred Share Share Korean won) Total1 Total shares shares capital premium

January 1, 2018 364,035,571 114,845 364,150,416 \1,950,574,225 \ 752,018,095 \ 2,702,592,320 Capital increase2 240,000,000 - 240,000,000 1,200,000,000 192,034,290 1,392,034,290

December 31, 2018 604,035,571 114,845 604,150,416 3,150,574,225 944,052,385 4,094,626,610 December 31, 2019 604,035,571 114,845 604,150,416 \3,150,574,225 \ 944,052,385 \4,094,626,610

1 The Parent Company holds 25,964,429 shares of its ordinary shares (Note 25).

2 The Parent Company carried out capital increase of 240,000,000 ordinary shares at a price of \ 5,870 per share on April 23, 2018.

25. Accumulated Other Comprehensive Income and Other Components of Equity

Changes in accumulated other comprehensive income for the years ended December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019

Beginning Decrease Ending

Financial assets at fair value through other comprehensive income \ 7,718,387 \ (955,526) \ 6,762,861 Loss on valuation of derivatives (30,893,355) (81,537,183) (112,430,538) Reevaluation reserves 846,614,254 (196,737) 846,417,517 Changes in equity method investees with accumulated comprehensive income (15,859,747) (112,583,024) (128,442,771)

\ 807,579,539 \ (195,272,470) \ 612,307,069 60 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

(In thousands of Korean won) 2018 Changes in Increase Beginning accounting Ending (decrease) policy Financial assets at fair value through other comprehensive income \ - \ 5,472,218 \ 2,246,169 \ 7,718,387

Loss on valuation of derivatives - - (30,893,355) (30,893,355) Change in the fair value of available-

for-sale financial assets 5,073,980 (5,073,980) - - Reevaluation reserves 866,512,258 - (19,898,004) 846,614,254 Changes in equity method investees with accumulated comprehensive income (19,150,971) - 3,291,224 (15,859,747)

\ 852,435,267 \ 398,238 \ (45,253,966) \ 807,579,539

Changes in accumulated other comprehensive income represent net of tax effect amounts.

Other components of equity as at December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018 Treasury share \ (970,268,048) \ (970,268,048) Gain on disposal of treasury share 6,360,652 6,360,652 Stock options 11,250 11,250 \ (963,896,146) \ (963,896,146)

As at December 31, 2019, the Parent Company holds 25,964 thousand shares of its ordinary shares amounting to \ 970,268 million. The treasury share is presented as the deduction from equity.

26. Retained Earnings

Retained earnings as at December 31, 2019 and 2018, consist of:

(In thousands of Korean won) 2019 2018 Legal reserves1 \ 103,354,251 \ 103,100,000 Discretionary reserves2 2,507,782,093 2,954,472,508 Undisposed accumulated deficit (1,108,932,434) (257,491,227) \ 1,502,203,910 \ 2,800,081,281

1 The Commercial Code of the Republic of Korea requires the Parent Company to appropriate for each financial period, as a legal reserve, an amount equal to a minimum of 10% of cash dividends paid until such reserve equals 50% of its issued share capital. The reserve is not available for cash dividends payment, but may be transferred to share capital or used to reduce accumulated deficit. When the accumulated legal reserves (the sum of capital reserves and earned profit reserves) are greater than 1.5 times the share premium, the excess legal reserves may be distributed (in accordance with a resolution of the shareholders’ meeting).

61 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

2 The Parent Company appropriates a certain portion of its retained earnings as reserves for research and development which are provided in order to obtain tax benefits under the Special Tax Treatment Control Law. Among these reserves, the reversed amount according to the terms of related tax laws may be distributed.

27. Revenue from Contracts with Customers

The Group has recognized the following amounts relating to revenue in the consolidated statement of profit or loss:

(in thousands of Korean won) 2019 2018

Revenue from contracts with customers \ 7,349,656,036 \ 5,265,119,547 Revenue from other sources - - Total revenue \ 7,349,656,036 \ 5,265,119,547

Disaggregation of Revenue from Contracts with Customers

The Group derives revenue from the transfer of goods and services over time and at a point in time in the following business segments and locations of external customers:

(In thousands of Korean won) Shipbuilding & offshore E&I

2019 Domestic Overseas Domestic Total

Segment revenue \ 597,911,048 \ 7,048,781,528 \ 28,787,920 \ 7,675,480,496

Inter-segment revenue - (320,629,632) (5,194,828) (325,824,460) Revenue from external customers 597,911,048 6,728,151,896 23,593,092 7,349,656,036 Timing of revenue recognition At a point in time 28,441,504 11,740,992 - 40,182,496 Over time 569,469,544 6,716,410,904 23,593,092 7,309,473,540

\ 597,911,048 \ 6,728,151,896 \ 23,593,092 \ 7,349,656,036

(In thousands of Korean won) Shipbuilding & offshore E&I

2018 Domestic Overseas Domestic Total

Segment revenue \ 28,285,736 \ 5,909,709,733 \ 41,142,892 \ 5,979,138,361

Inter-segment revenue - (701,382,498) (12,636,316) (714,018,814) Revenue from external customers 28,285,736 5,208,327,235 28,506,576 5,265,119,547 Timing of revenue recognition At a point in time 25,740,695 29,477,465 - 55,218,160 Over time 2,545,041 5,178,849,770 28,506,576 5,209,901,387

\ 28,285,736 \ 5,208,327,235 \ 28,506,576 \ 5,265,119,547

Revenues from external customers are derived from shipbuilding contracts and off-shore plants.

62 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

28. Breakdown of Expenses by Nature

Breakdown of expenses by nature for the years ended December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018

Changes in inventories \ (88,351,920) \ 202,151,772

Raw-materials and supplies used 4,215,235,939 2,296,306,238

Employee benefit expense 954,297,807 1,004,537,363

Depreciation and amortization 316,959,521 294,850,229

Service fees 280,224,070 294,481,026

Outsource expenses 1,369,608,444 1,456,906,122

Others 918,267,697 125,138,927

\ 7,966,241,558 \ 5,674,371,677

29. Selling, General and Administrative Expenses

Details of selling, general and administrative expenses for the years ended December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018

Employee benefit expense \ 74,458,853 \ 100,456,798

Service fees 120,612,637 90,022,475

Warranty expense 24,918,079 11,289,011

Impairment loss 270,110,662 (1,292,431)

Depreciation and amortization 53,443,239 71,920,807

Research and development expenses 49,684,850 47,937,030

Taxes and dues 19,474,464 25,307,667

Others 65,153,255 59,464,630

\ 677,856,039 \ 405,105,987

30. Other Income and Expenses

Details of other income and expenses for the years ended December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018 Other income

Gain on foreign currency transaction \ 118,317,843 \ 90,591,736

Gain on foreign currency translation 92,711,134 36,810,846

Gain on valuation of derivatives 251,281,627 104,052,312

Gain on derivative transactions 327,057,343 137,675,369

Gain on firm commitment valuation 384,995,441 171,700,474

Gain on firm commitment transactions 357,119,993 307,896,935

Others 70,558,451 102,518,038

\ 1,602,041,832 \ 951,245,710

Other expenses

Loss on foreign currency transaction \ 67,924,824 \ 59,704,519

Loss on foreign currency translation 75,080,161 33,811,789 63 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

Loss on valuation of derivatives 432,176,115 254,489,428

Loss on derivative transactions 478,274,250 337,074,425

Loss on firm commitment valuation 239,863,074 84,495,011

Loss on firm commitment transactions 327,054,735 132,157,541

Others 367,245,205 23,347,592

\ 1,987,618,364 \ 925,080,305

31. Finance Income and Costs

Details of finance income and costs for the years ended December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018

Finance income Interest income \ 25,517,640 \ 20,732,144 Gain on foreign currency transactions 13,899,477 15,032,571 Gain on foreign currency translation 20,348,640 3,728,304 Gain from derivative valuation 35,430,416 14,560,640 Gain from derivative transactions 206,074,959 138,538,034 \ 301,271,132 \ 192,591,693 Finance costs Interest expense \ 123,190,318 \ 122,645,192 Loss on foreign currency transactions 18,208,683 25,879,496 Loss on foreign currency translation 9,252,928 9,758,547 Loss from derivative valuation 33,964,485 7,334,374 Loss from derivative transactions 253,738,600 141,390,913 \ 438,355,014 \ 307,008,522

32. Income Tax Expense (Benefit)

Income tax expense (benefit) for the years ended December 31, 2019 and 2018, consists of:

(In thousands of Korean won) 2019 2018 Current tax on profits for the year \ 27,566,742 \ 23,383,601 Origination and reversal of temporary differences 146,482,523 (143,117,812) Deferred tax due to tax loss carryforwards 2,057,944 331,650 Changes in accounting policy - 9,992,945 Income tax expense (benefit) \ 176,107,209 \ (109,409,616)

Reconciliation between profit (loss) before tax and income tax expense (benefit) for the years ended December 31, 2019 and 2018, is as follows:

(In thousands of Korean won) 2019 2018 Loss before tax \ (1,139,245,938) \ (497,598,484) Income tax based on statutory tax rate \ (274,700,407) \ (121,574,691) Adjustments 450,807,616 12,165,075 Tax deduction 2,057,944 331,650 64 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

Permanent differences and others (11,311,149) (1,034,266) Unrecognized deferred tax assets 481,028,485 - Impact of income tax from subsidiaries (20,967,664) 12,867,691 Income tax expense (benefit) \ 176,107,209 \ (109,409,616) Effective tax rate1 - - 1 Income tax expense / profit or loss before income tax

Changes in the temporary differences and related deferred tax assets and liabilities are as follows:

2019 Temporary differences Deferred tax assets (liabilities) (In thousands of Korean won) Increase Beginning Ending Beginning Ending (decrease)

Post-employment benefit obligation \ 65,327,588 \ (25,957,153) \ 39,370,435 \ 15,809,276 \ 9,527,645

Accrued interest (3,461,097) (3,681,999) (7,143,096) (837,586) (1,728,629)

Inventories 75,857,114 65,517,076 141,374,190 18,357,422 34,212,554

Property, plant and equipment (203,407,212) 21,804,915 (181,602,297) (49,224,545) (43,947,756) Subsidiaries, associates and joint ventures (273,557,560) 33,888,099 (239,669,461) (59,140,228) (18,208,745) Right-of-use asset - (53,007,727) (53,007,727) - (12,827,870) Lease liabilities - 54,411,366 54,411,366 - 13,167,551

Impairment loss on investment 1,024,910 4,149 1,029,059 248,028 249,032 Provision for impairment of receivables 135,478,130 246,458,496 381,936,626 31,002,228 90,645,184 Gain on foreign currency translation 24,449,819 7,232,746 31,682,565 5,916,856 6,031,567

Accrued expenses 130,640,833 25,161,745 155,802,578 31,615,082 30,687,417 Provision for construction losses 181,396,640 (61,169,696) 120,226,944 43,897,987 27,972,635 Provision for warranty 333,982,647 14,846,691 348,829,338 80,823,801 74,499,534 Provisions 448,818,653 (47,676,512) 401,142,141 108,614,114 37,621,761

Derivatives 10,525,759 335,542,333 346,068,092 2,547,234 23,184,849 Unused tax losses 2,635,864,198 649,963,381 3,285,827,579 637,879,136 431,888,105

Others 231,928,728 7,245,894 239,174,622 (28,896,403) (10,844,955)

\ 3,794,869,150 \ 1,270,583,804 \ 5,065,452,954 \ 838,612,402 \ 692,129,879

Deferred tax charged directly to (deducted from) shareholders' equity \(1,134,684,214) \ 96,313,641 \(1,038,370,573) \ (274,593,579) \ (251,285,679)

Tax deduction 13,323,955 171,021 13,494,976 3,530,569 1,472,625 \ 567,549,392 \ 442,316,825

2018 Temporary differences Deferred tax assets (liabilities) (In thousands of Korean won) Increase Beginning Ending Beginning Ending (decrease)

Post-employment benefit obligation \ 22,163,922 \ 43,163,666 \ 65,327,588 \ 5,363,669 \ 15,809,276

Accrued interest (2,360,531) (1,100,566) (3,461,097) (571,248) (837,586)

Inventories 4,393,114 71,464,000 75,857,114 1,063,133 18,357,422

Property, plant and equipment (225,497,886) 22,090,674 (203,407,212) (54,570,488) (49,224,545) 65 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

Subsidiaries, associates and joint ventures (266,356,496) (7,201,064) (273,557,560) (60,201,906) (59,140,228)

Impairment loss on investment 1,020,760 4,150 1,024,910 247,024 248,028 Provision for impairment of receivables 137,469,974 (1,991,844) 135,478,130 31,484,254 31,002,228 Gain (loss) on foreign currency translation 106,753,962 (82,304,143) 24,449,819 25,834,459 5,916,856

Accrued expenses 426,802,581 (296,161,748) 130,640,833 28,266,225 31,615,082 Due to customers for contract work and others 594,000,338 (594,000,338) - 143,748,082 - Provision for warranty - 333,982,647 333,982,647 - 80,823,801 Provision for construction losses - 181,396,640 181,396,640 - 43,897,987 Provisions 443,136,733 5,681,920 448,818,653 107,239,089 108,614,114

Derivatives (155,156,965) 165,682,724 10,525,759 (37,547,985) 2,547,234 Reserve for research and human resource development (20,000,000) 20,000,000 - (4,840,000) - Unused tax losses 2,047,715,744 588,148,454 2,635,864,198 495,547,210 637,879,136

Others 81,639,606 150,289,122 231,928,728 14,433,073 (28,896,403)

\ 3,195,724,856 \ 599,144,294 \ 3,794,869,150 \ 695,494,591 \ 838,612,402

Deferred tax charged directly to (deducted from) shareholders' equity \(1,199,577,602) \ 64,893,387 \(1,134,684,214) \ (290,297,779) \ (274,593,579)

Tax deduction 13,655,605 (331,650) 13,323,955 3,862,219 3,530,569 \ 409,059,031 \ 567,549,392

Income tax related to components of other comprehensive income for the years ended December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018 Loss on valuation of financial assets at fair value through other comprehensive income \ (2,159,119) \ (2,464,181) Remeasurements (14,792,986) (11,701,354) Derivative financial instruments 35,894,710 9,863,050 Revaluation of land (270,228,284) (270,291,094) \ (251,285,679) \ (274,593,579)

Details of unrecognized deductible (taxable) temporary differences as deferred tax assets (liabilities) as at December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018 Remark

Interests in subsidiary \ 16,901,169 \ 10,950,275 No plan for disposal Donation and others 332,388,353 317,369,750 Uncertainty of future taxable profit Unused tax losses1 1,501,165,988 - Uncertainty of future taxable profit Provisions 246,647,727 - Uncertainty of future taxable profit Derivatives and others 224,888,691 - Uncertainty of future taxable profit Tax credit carry forwards2 12,022,351 9,793,386 Uncertainty of future taxable profit

66 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

1 The maturity of unused tax losses is as follows:

(In thousands of Korean won) 2019 2018

2025 \ 782,301,380 \ - 2027 141,250,079 - 2028 234,232,214 - 2029 343,382,315 -

2 The maturity of tax credit carryforwards is as follows:

(In thousands of Korean won) 2019 2018

2020 \ 11,974,920 \ 9,793,386 2022 47,431 -

The analysis of deferred tax assets and liabilities as at December 31, 2019 and 2018, is as follows:

2019 2018 (In thousands of Korean won) Within 1 year After 1 year Within 1 year After 1 year Deferred tax assets \ 18,785,059 \ 919,993,144 \ 23,074,803 \ 972,999,931 Deferred tax liabilities (1,728,629) (494,732,749) (837,586) (427,687,756) \ 17,056,430 \ 425,260,395 \ 22,237,217 \ 545,312,175

33. Loss per Share

Loss per ordinary share

A. Basic loss per ordinary share

Basic loss per ordinary share is calculated by dividing the loss attributable to equity holders of the Group by the weighted average number of ordinary shares in issue during the year excluding ordinary shares purchased by the Group and held as treasury shares.

Basic loss per ordinary share for the years ended December 31, 2019 and 2018, is as follows:

(In millions of Korean won except per share amount) 2019 2018

Loss attributable to ordinary equity holders of the Parent Company1 \ (1,310,593) \ (387,777) Weighted average number of ordinary shares in issue (in thousands of shares)2 604,036 531,707

Basic loss per share (in Korean won) \ (2,170) \ (729)

67 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

B. Diluted loss per ordinary share

Diluted loss per ordinary share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. There is no dilutive potential ordinary shares the Parent Company is holding at December 31, 2019.

Diluted loss per ordinary share for the years ended December 31, 2019 and 2018, is as follows:

(In millions of Korean won except per share amount) 2019 2018

Loss used to determine diluted loss per ordinary share1 \ (1,310,593) \ (387,777) Weighted average number of ordinary shares for diluted loss per share (in thousands of shares)2 604,036 531,707

Diluted loss per share (in Korean won) \ (2,170) \ (729)

Loss per preferred share

A. Basic loss per preferred share

Basic loss per preferred share is calculated by dividing the loss attributable to equity holders of the Parent Company by the weighted average number of preferred shares in issue during the year excluding preferred shares purchased by the Group and held as treasury shares.

Basic loss per preferred share for the years ended December 31, 2019 and 2018, is as follows:

(In millions of Korean won except per share amount) 2019 2018

Loss attributable to preferred equity holders of the Parent Company1 \ (249) \ (74) Weighted average number of preferred shares in issue (in thousands of shares)2 115 115

Basic loss per preferred share (in Korean won) \ (2,170) \ (642)

B. Diluted loss per preferred share

Diluted loss per preferred share is calculated by adjusting the weighted average number of preferred shares outstanding to assume conversion of all dilutive potential preferred shares. There is no dilutive potential preferred shares the Group is holding at December 31, 2019.

Diluted loss per preferred share for the years ended December 31, 2019 and 2018, is as follows:

(In millions of Korean won except per share amount) 2019 2018

Loss used to determine diluted loss per preferred share1 \ (249) \ (74) Weighted average number of preferred shares for diluted loss per share (in thousands of shares)2 115 115

Diluted loss per preferred share (in Korean won) \ (2,170) \ (642)

68 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

1 Profit (loss) attributable to ordinary equity holders of the Parent Company and profit (loss) attributable to preferred equity holders of the Parent Company for the years ended December 31, 2019 and 2018, are as follows:

(In millions of Korean won) 2019 2018

Loss attributable to equity holders of the Parent Company \ (1,310,842) \ (387,851)

Adjustments 249 74

Loss attributable to ordinary equity holders of the Parent Company \ (1,310,593) \ (387,777) Loss attributable to preferred equity holders of the Parent Company \ (249) \ (74)

2 Weighted average number of ordinary shares and preferred shares in issue and those for diluted earnings (loss) for the years ended December 31, 2019 and 2018, are as follows:

(In thousands of share) 2019 2018 Ordinary shares

Beginning 604,036 364,036

Issue of share capital - 167,671

Weighted average number of ordinary shares in issue 604,036 531,707 Preferred shares Beginning 115 115 Weighted average number of preferred shares in issue 115 115

34. Cash Generated from Operations

Details of cash generated from (used in) operations for the years ended December 31, 2019 and 2018, consist of the following:

(In thousands of Korean won) 2019 2018 Loss before income tax \ (1,139,245,938) \ (497,598,484) Adjustments for: Post-employment benefit obligations 59,206,724 59,853,532 Impairment loss (reversal of impairment loss) 269,957,605 (2,342,527) Loss on valuation of inventories 66,246,076 - Gain on valuation of inventories (729,000) - Gain on disposal of subsidiaries, associates, and joint ventures - (3,010,530) Loss on valuation of financial assets at fair value through profit or loss 37,741 835 Gain on valuation of financial assets at fair value through profit or loss (99,532) (201,065) Miscellaneous expenses 59,870,152 - Miscellaneous revenues - (26,990,634) Gain on foreign currency translation (113,059,774) (40,539,150) Loss on foreign currency translation 84,333,089 43,570,336 Depreciation 232,960,488 255,993,139 Depreciation of right-of-use asset 64,581,260 - Gain on disposal of property, plant and equipment (548,898) (4,217,506) Loss on disposal of property, plant and equipment 5,496,676 6,812,874 Amortization 19,417,774 38,857,090 69 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

Loss on disposal of intangible assets 66,000 12,980 Loss from derivative transaction and valuation 378,309,105 345,462,785 Gain from firm commitment transaction and valuation (175,197,625) (262,944,857) Interest income (38,820,009) (31,319,602) Interest expense 123,190,318 122,645,192 Dividend income (367,327) (482,216) Loss of valuation of investment accounted for using the equity method - 94,932 Other expense 116,642 196,348 Donation - 9,751 1,034,967,485 501,461,707 Changes in assets and liabilities: Trade receivables 330,022,109 (176,706,068) Contract assets (317,700,420) 28,567,178 Other receivables (24,678,310) 59,606,751 Advance payments 37,194,189 (188,835,954) Prepaid expenses 39,325,712 35,002,376 Inventories (124,226,131) (54,178,731) Other financial assets (2,794,889) 4,796,336 Other current assets (8,319,087) (7,123,995) Long-term prepaid expenses (36,984,400) (27,553,615) Trade payables 480,524,922 (16,975,788) Other payables (5,746,190) (77,169,052) Contract liabilities (640,398,404) 1,094,383,855 Accrued expenses (28,198,430) (236,746,162) Other current liabilities (8,906,139) 12,332,214 Provision for construction losses (52,143,500) (203,971,083) Provision for warranty 13,594,294 10,757,826 Net defined benefit liabilities (76,480,054) (24,622,349) Provisions (101,048,028) 5,681,921 Derivative financial instruments (196,444,344) (61,710,807) Firm commitment 240,738,716 110,458,809 Other non-current financial liabilities 20,709,992 3,239,276 (461,958,392) 289,232,938 Cash generated from (used in) operations \ (566,236,845) \ 293,096,160

The Group’s consolidated statements of cash flows are prepared using the indirect method. The significant non- cash transactions for the years ended December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018

Transfer of current portion of long-term borrowings \ 1,043,771,000 \ 687,750,766 Transfer of current portion of debentures 299,362,826 81,809,716 Transfer of inventories of contract assets 810,928,691 672,645,493 Transfer of contract assets of inventories - 530,624,980 Transfer of construction in-progress to other property, plant

and equipment 59,981,971 41,839,705

70 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

Changes in liabilities arising from financial activities for the years ended December 31, 2019 and 2018, are as follows:

Net cash inflow (outflow) from (in thousands of Korean At January 1, financing Non-cash inflow At December 31, won) 2019 activities (outflow) 2019

Short-term borrowings \ 1,448,083,572 \ (215,095,916) \ 459,282,627 \ 1,692,270,283 Current-portion of long- term debts 835,647,330 (771,562,312) 1,349,536,297 1,413,621,315 Debentures 84,851,892 484,247,510 (299,362,826) 269,736,576 Long-term borrowings 546,096,000 929,477,000 (1,043,771,000) 431,802,000 Lease liabilities - (61,359,279) 120,583,657 59,224,378 \ 2,914,678,794 \ 365,707,003 \ 586,268,755 \ 3,866,654,552

Net cash inflow (outflow) from (in thousands of Korean At January 1, financing Non-cash inflow At December 31, won) 2018 activities (outflow) 2018

Short-term borrowings \ 1,979,009,098 \ (535,995,440) \ 5,069,914 \ 1,448,083,572 Short-term debentures 162,705,311 (163,000,000) 294,689 - Current-portion of long- term debts 1,488,090,375 (1,426,874,577) 774,431,532 835,647,330 Debentures 91,812,458 74,849,150 (81,809,716) 84,851,892 Long-term borrowings 524,453,766 709,393,000 (687,750,766) 546,096,000 \ 4,246,071,008 \ (1,341,627,867) \ 10,235,653 \ 2,914,678,794

35. Financial Risk Management

The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to hedge certain risk exposures.

Risk management is carried out by a central treasury department under policies approved by the board of directors. The Group treasury identifies, evaluates and hedges financial risks in close co-operation with the Group’s operating units. The board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity.

35.1 Market risk

(a) Foreign exchange risk

The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar and Euro. Foreign exchange risk arises from firm commitment and future commercial transactions, recognized assets and liabilities.

71 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

Management has set up a policy to require Group companies to manage their foreign exchange risk against their functional currency.

The Group’s risk management policy is to hedge of anticipated cash flows in foreign currencies related to firm commitment and highly probable forecasted transactions, and they qualify as firm commitment and highly probable forecasted transactions for hedge accounting purposes.

The Group uses forward contracts and currency swaps to hedge its foreign exchange risk arising from all anticipated cash flows in foreign currencies. Therefore, the fluctuation in value of major foreign currencies has almost no impact on profit and loss.

(b) Price risk

The Group is exposed to equity securities price risk because of investments held by the Group and classified on the consolidated statement of financial position as financial assets at fair value through other comprehensive income. The market values for the Group’s listed equity investments as at December 31, 2019 and 2018, are \ 1,071 million and \ 4,289 million, respectively.

If there is change in price of equity investment by 30%, the amount of other comprehensive income changes for the years ended December 31, 2019 and 2018, would be \ 244 million and \ 976 million, respectively.

The Group’s cash flow interest rate risk arises from borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk which is partially offset by cash equivalents held at variable rates. Also, borrowings and debentures issued at fixed rates expose the Group to fair value interest rate risk.

The Group analyzes its interest rate exposure on a dynamic basis. Various scenarios are simulated taking into consideration refinancing, renewal of existing positions, alternative financing and hedging. Based on these scenarios, the Group calculates the impact on profit and loss of a defined interest rate shift. For each simulation, the same interest rate shift is used for all currencies. The scenarios are run only for liabilities that represent the major interest-bearing positions.

Based on the simulations performed, 0.1% of interest rate fluctuation will have \ 3,808 million (2018: \ 2,915 million) of increase or decrease impact on the profit or loss.

35.2 Credit risk

Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables, contract assets and committed transactions.

(a) Risk management

Credit risk is managed on a group basis. For banks and financial institutions, only independently rated parties with a minimum rating of ‘A’ are accepted.

72 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

If customers are independently rated, these ratings are used. If there is no independent rating, the credit quality of the customer is evaluated taking into account its financial position, past experience and other factors. The management regularly reviews the credit assessment of the customers.

Accordingly, credit exposure to the Group is expected to be restricted.

(b) Impairment of financial assets

While cash and cash equivalents and short-term and long-term financial instruments including deposits and others are also subject to the impairment requirement, the identified impairment loss was immaterial.

The Group identifies independently the credit information of the customers. For the significant trade receivables and contract assets, the Group assesses them on an individual basis, and the Group applies the simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for customers with small amount. Trade receivables and contract assets subject to the collective assessment applying expected credit losses not individual assessment are less than 1%.

Other financial assets measured at amortized cost include loans and other receivables and others. For trade receivables and contract assets that are equally significant, the Group assesses them on an individual basis. Other items are considered to have low credit risk, and the 12 months expected losses were recognized as loss allowance.

The maximum exposure to credit risk at the end of the reporting date is the carrying value of the financial assets and includes guaranteed amounts of \ 23,535 million (2018: \ 49,254 million) and \ 120,015 million (2018: \ 272,043 million) relating to the financial guarantee contract and performance guarantees provided, respectively.

35.3 Liquidity risk

The Group monitors rolling forecasts of the Group’s liquidity requirements to ensure it has sufficient cash to meet operational needs while maintaining sufficient headroom on its undrawn committed borrowing facilities at all times so that the Group does not breach borrowing limits or covenants (where applicable) on any of its borrowing facilities. Such forecasting takes into consideration the Group’s debt financing plans, covenant compliance, compliance with internal financial ratio targets and, if applicable external regulatory or legal requirements – for example, currency restrictions.

The analysis of the Group’s liquidity risk as at December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 Less than More than 1-2 years 1 year 2 years Derivative financial assets \ 122,332,347 \ 68,792,187 \ 11,527,648 Borrowings 1,725,686,673 347,102,480 116,563,371 Current portion of long-term debts 1,419,796,325 - - Debentures 10,303,723 264,675,617 10,359,475 Lease liabilities 30,209,522 14,337,763 18,280,707 Trade payables and other financial liabilities 943,572,565 43,587,151 - Derivative financial liabilities 415,357,062 169,216,792 24,161,208 Payment guarantee contracts and others1 23,534,776 - - 73 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

(In thousands of Korean won) 2018 Less than More than 1-2 years 1 year 2 years Derivative financial assets \ 64,246,986 \ 31,231,617 \ 3,039,376 Borrowings 1,490,273,107 557,299,530 - Current portion of long-term debts 853,078,788 - - Debentures 3,640,000 86,258,412 - Trade payables and other financial liabilities 954,115,188 22,866,222 - Derivative financial liabilities 109,918,758 89,525,028 13,986,107 Payment guarantee contracts and others 49,253,917 - -

1 Payment guarantee contracts present maximum amount to be paid upon principal debtor’s claim (Note 23).

Details of the Group’s recognized financial assets and liabilities subject to enforceable master netting arrangements as at December 31, 2019, are as follows:

Presented in the (In thousands of Korean won) Amounts not consolidated statement of Net amount offset financial position Derivative financial assets \ 112,997,679 \ 110,538,500 \ 2,459,179 Derivative financial liabilities 423,804,094 110,538,500 313,265,594

35.4 Capital risk management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

The Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including ‘current and non-current borrowings’ as shown in the consolidated statements of financial position) less cash and cash equivalents. Total capital is calculated as ‘equity’ as shown in the consolidated statement of financial position plus net debt.

The gearing ratios as at December 31, 2019 and 2018, are as follows:

(In thousands of Korean won) 2019 2018 Total borrowings (Note 21) \ 3,807,506,841 \ 2,914,678,794 Less: cash and cash equivalents (Note 4) 384,251,206 945,975,871 Net debts 3,423,255,635 1,968,702,923 Total equity 5,248,928,572 6,746,279,557 Total capital \ 8,672,184,207 \ 8,714,982,480

Gearing ratio 39.47% 22.6%

74 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

36. Segment Information

The strategic steering management has determined the operating segments, and reviewed the operating information of segments for the purposes of allocating resources and assessing performance.

A. General information by business segments

Main Segment Sales Type Products and Services Sales ratio (%) Customer Foreign ship- Shipbuilding Product Drillship, LNG, off-shore platform and others owners, 99.7 & offshore others Construction E&I Product Engineering works, construction and others business 0.3 owners, others 100.0

B. Financial information by business segments

(In thousands of Korean won) 2019 Shipbuilding & offshore E&I Total Sales Gross sales \ 7,646,692,576 \ 28,787,920 \ 7,675,480,496 Inter-segment sales (320,629,632) (5,194,828) (325,824,460) Net sales \ 7,326,062,944 \ 23,593,092 \ 7,349,656,036

Operating loss \ (561,325,807) \ (6,573,371) \ (567,899,178)

Property, plant and equipment & intangible assets

and others 5,861,671,933 10,274,928 5,871,946,861 Depreciation & amortization and others 316,733,256 226,265 316,959,521

(In thousands of Korean won) 2018 Shipbuilding & offshore E&I Total Sales Gross sales \ 5,937,995,469 \ 41,142,892 \ 5,979,138,361 Inter-segment sales (701,382,498) (12,636,316) (714,018,814) Net sales \ 5,236,612,971 \ 28,506,576 \ 5,265,119,547

Operating loss \ (369,944,908) \ (3,608,321) \ (373,553,229)

Property, plant and equipment & intangible assets

and others 5,931,012,607 10,015,524 5,941,028,131 Depreciation & amortization and others 292,752,628 2,097,601 294,850,229

Since most of the debts are jointly utilized debt, the Group's management does not separately report with segment liabilities.

75 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

C. Reconciliation between segment operating profit and operating profit

(In thousands of Korean won) 2019 2018

Total segment operating loss \ (567,899,178) \ (373,553,229) Internal income/expense and other operating income/expense due to inter transactions - - Undistributed selling and administrative income/expenses (48,686,345) (35,698,901) Operating loss per statement of profit or loss \ (616,585,523) \ (409,252,130)

Undistributed selling and administrative expenses are not distributed to segments since they are centrally incurred costs.

D. Geographical breakdown of operations

(In thousands of Korean won) 2019 Korea Nigeria China and others Total

Gross sales \ 7,104,000,390 \ 183,045,021 \ 388,435,085 \ 7,675,480,496 Inter-segment sales (4,256,748) (45,584,432) (275,983,280) (325,824,460) Net sales 7,099,743,642 137,460,589 112,451,805 7,349,656,036 Non-current assets 5,250,456,658 188,234,855 474,245,168 5,912,936,681

(In thousands of Korean won) 2018 Korea Nigeria China and others Total

Gross sales \ 4,831,712,046 \ 818,779,049 \ 328,647,266 \ 5,979,138,361 Inter-segment sales (341,786,701) (178,707,972) (193,524,141) (714,018,814) Net sales 4,489,925,345 640,071,077 135,123,125 5,265,119,547 Non-current assets 5,356,663,042 183,277,940 486,938,889 6,026,879,871

37. Related Party Transactions

Sales and purchases with related parties for the years ended December 31, 2019 and 2018, and outstanding balances arising from sales/purchases of goods and services as at December 31, 2019 and 2018, are as follows:

(In thousands 2019 of Korean won) Company Sales, others Purchase, others Receivables, others Payables, others Samsung Fire & Marine Insurance Co., Ltd \ 26,786,019 \ 16,472,672 \ 223,206,863 \ 1,924,378 Samsung Life Others1 Insurance Co., Ltd 18,103,461 993,603 228,989,380 2,604,974 Samsung C&T Corporation and others 1,886,024 325,221,575 4,963,967 25,825,395 \ 46,775,504 \ 342,687,850 \ 457,160,210 \ 30,354,747

76 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

(In thousands 2018 of Korean won) Company Sales, others Purchase, others Receivables, others Payables, others Samsung Fire & Marine Insurance Co., Ltd \ 27,825,556 \ 32,823,023 \ 201,188,904 \ 3,902,845 Samsung Life Others1 Insurance Co., Ltd 28,540,923 580,068 216,489,168 3,956,631 Samsung C&T Corporation and others 3,169,986 138,976,993 5,137,824 31,657,371 \ 59,536,465 \ 172,380,084 \ 422,815,896 \ 39,516,847

1 Although the entity is not the related party of the Group in accordance with Korean IFRS 1024, the entity belongs to a large enterprise group in accordance with the Monopoly Regulation and Fair Trade Act. The effect of due to contract liabilities amount to \ 2,605 million (2018: \ 3,957 million) is included due to applying proceeds sales. Related to defined benefit plan, trade receivables and others are included defined benefit pension asset which is paid in Samsung Life Insurance Co., Ltd. and etc.

Key Management Compensation

For the year ended December 31, 2019, key management compensation consists of \ 1,477 million (2018: \ 1,139 million) in short-term benefits and \ 261 million (2018: \ 268 million) in long-term benefits and retirement benefits, which are highly probable to be paid in the future. Key management consists of registered executive officers who have authorities and responsibilities for planning, directing and controlling of operations of the Group.

38. Changes in Accounting Policies - Application of Korean IFRS 1116 Lease

As explained in Note 2.2, the Group has adopted Korean IFRS 1116, retrospectively, from January 1, 2019, but has not restated comparatives for the 2018 reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are, therefore, recognized in the consolidated statement of financial position on January 1, 2019.

Details of adjustments recognized on adoption of Korean IFRS 1116 Lease are as follows:

On adoption of Korean IFRS 1116, the Group recognized lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of Korean IFRS 1017. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as at January 1, 2019. The lessee’s weighted average incremental borrowing rate applied to the lease liabilities on January 1, 2019 was 4.08%.

(a) Practical expedients applied

In applying Korean IFRS 1116 for the first time, the Group has used the following practical expedients permitted by the standard:

 the use of a single discount rate to a portfolio of leases with reasonably similar characteristics  reliance on previous assessments on whether leases are onerous

77 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2019 and 2018

 the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application, and  the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease

The Group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date, the Group relied on its assessment made applying Korean IFRS 1017 and Interpretation 2104 Determining whether an Arrangement contains a Lease.

(b) Measurement of lease liabilities

(in thousands of Korean won) 2019

Operating lease commitments \ 120,815,928 Discounted using the lessee’s incremental borrowing rate of at the date of

initial application 98,076,025 Add: adjustments as a result of a different treatment of extension and

termination options 18,031,772 Less: low-value leases recognized on a straight-line basis as expense (787,671) Lease liability recognized as at January 1, 2019 115,320,126 Of which are: Current lease liabilities 72,833,785 Non-current lease liabilities 42,486,341 \ 115,320,126

Right-of use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognized in the consolidated statement of financial position as at December 31, 2018.

The change in accounting policy affected the following items in the consolidated statement of financial position on January 1, 2019:

 right-of-use assets: increase by \ 156,944 million  long-term prepaid expense: decrease by \ 41,624 million  lease liabilities: increase by \ 115,320 million

(d) Lessor accounting

The Group did not need to make any adjustments to the accounting for assets held as lessor as a result of the adoption of Korean IFRS 1116.