Samsung Heavy Industries Co., Ltd. Separate Financial Statements December 31, 2017 and 2016
Samsung Heavy Industries Co., Ltd. Index December 31, 2017 and 2016
Page(s) Independent Auditor’s Report ...... 1-6
Separate Financial Statements
Separate Statements of Financial Position ...... 7-8
Separate Statements of Profit or Loss ...... 9
Separate Statements of Comprehensive Income ...... 10
Separate Statements of Changes in Equity ...... 11
Separate Statements of Cash Flows ...... 12
Notes to the Separate Financial Statements...... 13-71
Report on Independent Accountants' Review of Internal Accounting Control System ...... 72
Report on the Operations of the Internal Accounting Control System ...... 73
Independent Auditor’s Report
(English Translation of a Report Originally Issued in Korean)
To the Board of Directors and Shareholders of Samsung Heavy Industries Co., Ltd.
We have audited the accompanying separate financial statements of Samsung Heavy Industries Co., Ltd. (the Company), which comprise the separate statements of financial position as at December 31, 2017 and 2016, and the separate statements of profit or loss, separate statements of comprehensive income, separate statements of changes in equity and separate statements of cash flows for the years then ended, and notes to the separate financial statements, including a summary of significant accounting policies and other explanatory information.
Management’s Responsibilities for the Financial Statements Management is responsible for the preparation and fair presentation of the separate financial statements in accordance with International Financial Reporting Standards as adopted by the Republic of Korea (Korean IFRS), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibilities Our responsibility is to express an opinion on the separate financial statements based on our audits. We conducted our audits in accordance with Korean Standards on Auditing. Those standards require that we comply with ethical requirements, and plan and perform the audit to obtain reasonable assurance about whether the separate financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the separate financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the separate financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the separate financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the separate financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion In our opinion, the accompanying separate financial statements present fairly, in all material respects, the separate financial position of Samsung Heavy Industries Co., Ltd. as at December 31, 2017 and 2016, and its separate financial performance and its separate cash flows for the years then ended in accordance with Korean IFRS.
Emphasis of Matter1
Without qualifying our opinion, we draw attention to the following area of focus.
1) The auditor’s emphasis on area of focus on construction contracts
Area of focus on construction contracts in accordance with the Practical Guidance of Auditing Standard 2016-1 are those matters that, in the auditor's professional judgment and communication with those charged with governance, were of most significance in the audit of the separate financial statements of the current period. These matters were addressed in the context of the audit of the separate financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
We have addressed the output of the audit process for the area of focus as below in forming an audit opinion on the separate financial statements of Samsung Heavy Industries Co., Ltd. and its subsidiaries as a whole.
A. General Information
Common information applied to the area of focus on construction contract described in this audit report are as follows:
As explained in the Note 2 to the separate financial statements (Critical Accounting Policies), the Company recognizes contract revenue and contract costs associated with the construction contract as revenue and expense respectively based on the percentage of completion of the contract activity at the end of the reporting period when the outcome of a construction contract can be estimated reliably. The percentage of completion of the contract activity is the proportion that costs incurred to date, excluding any contract cost that does not reflect the work performed, bear to the estimated total costs of the contract. The Company presents the gross amount due from customer for contract work as an asset for all contracts in progress for which costs incurred plus recognized profits (less recognized losses) exceed progress billings, and presents the gross amount due to customers for contract work as a liability for all contracts in progress for which progress billings exceed costs incurred plus recognized profits (less recognized losses).
B. Revenue recognition based on the input method
As explained in the Note 3 to the separate financial statements (Critical Accounting Estimates and Assumptions), total contract revenue is measured based on the initial amount of revenue agreed in the contract. However, the measurement of contract revenue is affected by a variety of uncertainties that depend on the outcome of future event; for example, the amount of contract revenue may increase as a result of variations in contract work, claims and inventive payments, on the other hand, the amount of contract revenue may decrease as a result of
1 This paragraph is being included in accordance with the Practical Guidance of Auditing Standard 2017-1, Practical Guidance for Special Consideration in Auditing Construction Contracts, prescribed by Korean Institute of Certified Public Accountants, and should not be considered as a communication of key audit matter described in the International Standards on Auditing 700 (Revised).
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penalties arising from delays caused by the Company in the completion of the contract. The measurement of contract revenue is also affected by the percentage of completion measured based on the aggregated amount costs incurred. Total contract costs are estimated based on future estimates of material costs, labor costs, construction period and others.
Also, as explained in the Note 6 to the separate financial statements (Construction Contracts), estimated total contract revenue and cost were changed due to variations in contract work and costs increases.
Estimating total contract revenue with respect to contract changes due to long-term duration of the contract, changes in designs, the down trend in international oil prices and others of the Company’s major construction contracts; such as, offshore plant and drilling rig etc., are uncertain. The changes in estimated total contract revenue and costs may have negative impacts on the profit or loss for the period (or for the succeeding year); therefore, we identified revenue recognition based on the input method as a significant risk.
In respect of the Company’s revenue recognition based on the input method, we have performed the following audit procedures.
- We obtained understanding of the accounting policy of revenue recognition, determined if there were any changes in the accounting policy, and assessed the accounting policy.
- We reviewed significant contents of contracts.
- We inquired about current progress of major contacts and identified any significant changes at the end of the reporting period, and performed analytical audit procedures on the significant changes.
- We performed analytical review procedures on major financial ratios such as rate of profit.
- We reviewed internal control in relation to reviewing and approval process of a contract by an appropriate approver when a new contract is engaged.
C. Uncertainty of estimated construction costs
As explained in the Note 3 to the financial statements (Critical Accounting Estimates and Assumptions), estimated construction costs are estimated based on future estimates of material costs, labor costs, construction period and others. Estimated construction costs can be changed due to changes in designs, raw-material price and construction period.
As the Company’s construction contracts related to offshore plant and drilling rig are usually long-term in nature, the measurement of estimated contract costs is affected by variety of uncertainties such as changes in the specifications or designs, changes in construction environment, fluctuation of material cost and others. Considering the impacts of changes in estimated construction costs on the profit or loss for the current period (or for the succeeding year); we identified uncertainty of estimated construction costs as a significant risk.
As of December 31, 2017, in respect of the Company’s uncertainty of estimated construction costs related to offshore plant and drilling rig, we have performed the following audit procedures.
- We inquired and performed analytical review procedures on changes in estimated construction cost’s major components.
- We inquired the causes for differences where the construction contracts contain significant differences in change of total estimated construction costs compared to prior year.
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- We obtained understanding of calculation method and significant assumption on estimated construction costs and confirmed its relevant evidences for the calculation.
- We reviewed internal controls in relation to establishing contents of initial estimated construction costs, and reviewing and approval process of estimated construction costs by an appropriate approver.
- We reviewed internal control in relation to reviewing and approval process of changing estimated construction costs by an appropriate approver.
D. Measurement of percentage of completion
As explained in the Note 6 to the separate financial statements (Construction Contracts), estimated total contract cost was changed due to costs increases.
In case of the Company’s major construction contracts; such as, offshore plant and drilling rig, it is highly probable that the changes in estimated total contract cost and unexpected cost may occur. According to these uncertainty of estimated total contract costs, we identified measurement of percentage of completion as a significant risk.
As of December 31, 2017, in respect of the Company’s estimated total contract costs and aggregated cost incurred that have impacts on the measurement of percentage of completion, we have performed the following audit procedures.
- We performed analytical review procedures on changes in accumulated cost incurred and estimated total contract costs.
- We determined if there were any contract costs that did not reflect the work performed and excluded from the costs incurred and estimated, and reviewed related accounting policies.
- We compared the percentage of completion in the report submitted to ordering company and percentage of completion based on input method, and inquired about the reason of the difference.
- We obtained understanding of direct cost allocation policy and tested internal control of cost allocation and transfer for each construction.
- We obtained understanding of indirect expense allocation policy and tested internal control of indirect expense allocation.
- We independently tested the occurrence and timing of cost recognition, which incurred during the year, for each construction contract.
E. Collectability of the gross amount due from customer for contract work
As explained in the Note 6 to the separate financial statements (Construction Contracts), the amount of due from customer is significant in level of overall financial statements as at December 31, 2017.
In case of the Company's major construction contracts; such as, drillship and drilling rig, most of contracts are based on tail-heavy payment term, and it is probable that the payment may delay due to the customer’s financial status caused by the prolonged decline in the global oil price, and may results an unavoidable payment term extension. Therefore, we identified collectability of the gross amount due from customer for contract work as a significant risk.
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As of December 31, 2017, in respect of the contact that has a significant increase in the gross amount due from customer for contract work, we have performed the following audit procedures.
- We reviewed changes in contracts regarding to payment term, deferred penalties, time of delivery and other obligations.
- We reviewed date of maturity in contracts and financial soundness of ordering company.
- We reviewed the management’s estimates for collectability of the gross amounts due from customers for contract works.
F. Accounting treatment for changes in construction
As explained in the Note 3 to the separate financial statements (Critical accounting estimates and assumptions), the Company measures total contract revenue at the initial amount of revenue agreed in the contract; however, the measurement of contract revenue is affected by a variety of uncertainties that depend on the outcome of future events such as increase contract revenue due to variations in contract work, claims and inventive payment; or decrease contract revenue as a result of penalties arising from delay caused by the Company in the completion of the contract. A variation is included in contract revenue when it is probable that the customer will approve the variation and the amount of revenue arising from the variation or the contract is sufficiently advanced that it is probable that the specified performance standards will be met or exceeded and the amount of revenue can be reliably measured.
Especially, it is probable that a variation may occur in offshore plant contracts, and there is uncertainty in the measurement of contract revenue due to frequent change in specification or design, change in construction environment and others; therefore, we identified accounting treatment regarding variations in offshore plant contract work as a significant risk.
As of December 31, 2017, in respect of accounting treatment regarding variations in contract work, we have performed the following audit procedures.
- We inquired about the Company’s accounting policy for accounting treatment regarding variations in contract work and penalties.
- We tested internal control of the Company in relation to reviewing and approval process of a construction contract by an appropriate approver when there is a variation in the contract amount.
- We independently tested and confirmed with the ordering company if the variation in the contract amount has obtained an appropriate approval of the ordering company.
- We compared the construction completion date of the contract and that of construction schedule of the Company.
- We confirmed appropriate disclosures were disclosed for the variation made in the contract based on amended contract.
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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.
Seoul, Korea March 14, 2018
This report is effective as of March 14, 2018, 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 separate financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that the above
audit report may have to be revised to reflect the impact of such subsequent events or circumstances,
if any.
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Samsung Heavy Industries Co., Ltd. Separate Statements of Financial Position December 31, 2017 and 2016
(In thousands of Korean won) Notes 2017 2016
Assets
Current assets Cash and cash equivalents 4,7,9 \ 315,008,775 \ 929,561,607
Short-term financial instruments 5,7,9 633,515,521 648,598,224
Trade receivables 7,9,10 249,092,686 297,668,715
Due from customers for contract work 6,7,9,10 3,155,094,850 5,054,636,277
Other receivables 7,9,10 126,629,111 117,545,500
Advance payments 191,869,321 352,290,121
Prepaid expenses 39,094,478 52,581,464 Current portion of derivative financial 7,8,9,11,32 instruments 328,088,495 203,020,422
Current portion of firm commitment assets 11 87,848,572 472,886,625
Inventories 12 1,172,721,384 1,192,482,845
Other current financial assets 7,13 76,704,496 94,591,737
Other current assets 47,725,442 71,994,591
6,423,393,131 9,487,858,128
Non-current assets Long-term available-for-sale financial 7,8,14 assets 26,805,060 26,288,658 Investments in subsidiaries, associates 15 and joint ventures 486,766,286 487,341,482
Property, plant and equipment 16 5,514,590,374 5,739,412,579
Investment properties 17 16,713,214 16,839,561
Intangible assets 18 89,192,935 93,594,448
Long-term prepaid expenses 31,119,855 15,202,898
Derivative financial instruments 7,8,9,11,32 96,002,441 80,232,164
Firm commitment assets 11 54,554,875 91,793,428
Non-current trade receivables 7,9,10 43,527,216 24,500,208
Deferred tax assets 29 455,464,053 378,452,563 Other financial assets 5,7,13 11,311,375 21,015,649
6,826,047,684 6,974,673,638
Total assets \ 13,249,440,815 \ 16,462,531,766
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Samsung Heavy Industries Co., Ltd. Separate Statements of Financial Position December 31, 2017 and 2016
(In thousands of Korean won) Notes 2017 2016
Liabilities Current liabilities
Trade payables 7,32 \ 613,320,350 \ 1,266,189,731
Short-term borrowings 7,19,32 1,825,357,339 2,570,248,128 Debentures 7,19,32 162,705,311 -
Other payables 7,32 106,074,013 100,872,917
Advance received 73,334,581 287,956,179
Due to customers for contract work 6 1,429,206,043 1,699,720,584
Accrued expenses 7,32 489,486,877 497,006,946 Current portion of derivative financial 7,8,11,32 146,666,498 768,487,498 instruments Current portion of firm commitment 11 141,798,001 205,373,835 liabilities
Current portion of long-term debts 7,19,32 1,389,053,356 1,099,828,242
Provisions 21 419,064,225 325,215,361
Other current liabilities 30,492,841 32,396,952
6,826,559,435 8,853,296,373
Non-current liabilities
Debentures 7,19,32 91,812,458 499,347,207
Long-term debts 7,19,32 451,529,000 843,825,000
Post-employment benefit obligations 20 40,511,053 101,304,891
Other provisions 21 24,072,508 24,072,508 Non-current derivative financial 7,8,11,32 66,092,796 102,731,807 instruments
Non-current firm commitment liabilities 11 62,066,582 32,109,401
Other financial liabilities 7,13,32 18,942,062 16,176,000
755,026,459 1,619,566,814 Total liabilities 7,581,585,894 10,472,863,187
Equity
Share capital
Ordinary shares 22 1,950,000,000 1,950,000,000
Preferred shares 574,225 574,225
Share premium 22 752,018,096 752,018,096
Accumulated other comprehensive income 23 871,586,238 873,434,438
Other components of equity 23 (963,896,146) (963,896,146)
Retained earnings 24 3,057,572,508 3,377,537,967 Total equity 5,667,854,921 5,989,668,580 Total liabilities and equity \ 13,249,440,815 \ 16,462,531,767
The above separate statements of financial position should be read in conjunction with the accompanying notes.
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Samsung Heavy Industries Co., Ltd. Separate Statements of Profit or Loss Years Ended December 31, 2017 and 2016
(In thousands of Korean won, except per share amounts) Notes 2017 2016
Revenue 6,33 \ 7,396,888,950 \ 9,883,581,890
Cost of sales 25 7,584,514,959 9,511,766,878
Gross profit (loss) (187,626,009) 371,815,012
Selling and administrative expenses 25,26 304,743,909 553,536,185
Operating loss (492,369,918) (181,721,173)
Other income 27 1,994,045,005 1,551,474,301 Other expenses 27 1,976,843,314 1,435,137,775
Finance income 28 229,246,925 145,681,055
Finance costs 28 183,546,819 192,193,385
Loss before income tax (429,468,121) (111,896,977)
Income tax expense (benefit) 29 (91,861,630) 22,837,561
Loss for the period \ (337,606,491) \ (134,734,538)
Losses per share
Basic losses per share Ordinary shares 30 \ (927) \ (539) Preferred shares 30 (927) (370)
Diluted losses per share Ordinary shares 30 \ (927) \ (539) Preferred shares 30 (927) (370)
The above separate statements of profit or loss should be read in conjunction with the accompanying notes.
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Samsung Heavy Industries Co., Ltd. Separate Statements of Comprehensive Income Years Ended December 31, 2017 and 2016
(In thousands of Korean won) Notes 2017 2016
Loss for the period \ (337,606,491) \ (134,734,539)
Other comprehensive income 15,792,832 883,986,515 Items that will not be reclassified to
profit or loss Remeasurements of net defined benefit 20 20,626,628 45,057,854 liabilities Gain on revaluation of property and - 1,145,802,515 equipment Income tax relating to these items (4,991,644) (288,188,209) Items that may be subsequently
reclassified to profit or loss Changes in the fair value of available-for- 7,14,23 208,243 (24,651,247) sale financial assets Income tax relating to these items 23 (50,395) 5,965,602 Total comprehensive income (loss) for the \ (321,813,659) \ 749,251,976 period
The above separate statements of comprehensive income should be read in conjunction with the accompanying notes.
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Samsung Heavy Industries Co., Ltd. Separate Statements of Changes in Equity Years Ended December 31, 2017 and 2016
Accumulated Other Other Components (In thousands of Korean won) Share Capital Share Premium Comprehensive Retained Earnings Total of Equity Income
Balance at January 1, 2016 ￦ 1,154,951,155 ￦ 417,172,244 ￦ 23,601,777 ￦ (963,896,146) ￦ 3,464,994,404 ￦ 4,096,823,434
Comprehensive income
Loss for the period - - - - (134,734,539) (134,734,539) Change in the fair value of available-
for-sale financial assets - - (18,685,645) - - (18,685,645) Reevaluation reserves - - 868,518,307 - 13,124,249 881,642,556 Remeasurement of net defined benefit
liabilities - - - - 34,153,853 34,153,853 Transactions with owners
Issuance of share capital 795,623,070 334,845,851 - - - 1,130,468,921 Balance at December 31, 2016 ￦ 1,950,574,225 ￦ 752,018,095 ￦ 873,434,439 ￦ (963,896,146) ￦ 3,377,537,967 ￦ 5,989,668,580
Balance at January 1, 2017 ￦ 1,950,574,225 ￦ 752,018,096 ￦ 873,434,438 ￦ (963,896,146) ￦ 3,377,537,967 ￦ 5,989,668,580 Comprehensive income Loss for the period - - - - (337,606,491) (337,606,491) Change in the fair value of available-
for-sale financial assets - - 157,848 - - 157,848 Reevaluation reserves - - (2,006,048) - 2,006,048 - Remeasurement of net defined benefit
liabilities - - - - 15,634,984 15,634,984 Balance at December 31, 2017 ￦ 1,950,574,225 ￦ 752,018,096 ￦ 871,586,238 ￦ (963,896,146) ￦ 3,057,572,508 ￦ 5,667,854,921
The above separate statements of changes in equity should be read in conjunction with the accompanying notes.
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Samsung Heavy Industries Co., Ltd. Separate Statements of Cash Flows Years Ended December 31, 2017 and 2016
(In thousands of Korean won) Notes 2017 2016
Cash flows from operating activities Cash generated from (used in) operations 31 \ 517,889,537 \ (1,562,077,116) Interest received 23,921,224 50,424,049 Interest paid (140,170,140) (143,702,018) Dividends received 392,955 307,027 Income tax received 11,613,435 39,209,563 Cash inflow (outflow) from operating activities 413,647,011 (1,615,838,495)
Cash flows from investing activities Acquisition of short-term financial instruments (814,903,206) (1,812,166,138) Disposal of short-term financial instruments 827,609,814 2,070,364,215 Acquisition of available-for-sale financial assets 14 (766,222) (803,657) Acquisition of held-to-maturity instruments - (59,000,000) Disposal of available-for-sale financial assets 14 203,656 38,040,036 Acquisition of subsidiaries, associates and joint ventures 15 (256,282) (524,845) Disposal of subsidiaries, associates and joint ventures 15 393,913 1,343,622 Acquisition of property, plant and equipment 16 (68,689,425) (152,338,436) Disposal of property, plant and equipment 16 15,784,950 89,876,657 Acquisition of investment properties 17 - (737,023) Disposal of investment properties 17 - 17,305,634 Acquisition of intangible assets 18 - (51,744) Disposal of intangible assets 18 - 3,060,583 Disposal of other current financial assets 9,650,000 7,641,957 Disposal of other non-current financial assets 13,241,170 8,347,698 Acquisition of other non-current financial assets (3,137,645) (2,494,178) Net cash inflow (outflow) from investing activities (20,869,277) 207,864,381
Cash flows from financing activities Proceeds from short-term borrowings 19,31 2,501,789,757 2,084,212,640 Repayments of short-term borrowings 19,31 (3,220,312,873) (1,304,092,909) Issuance of short-term debentures 19,31 162,590,930 - Repayments of current portion of long-term debts 19,31 (1,218,813,000) (510,000,000) Proceeds from long-term borrowings 19,31 759,668,000 - Repayments of long-term borrowings 19,31 (84,022,500) - Issuance of debentures 19,31 91,769,120 - Issuance of share capital 22 - 1,130,468,921 Net cash inflow (outflow) from financing activities (1,007,330,566) 1,400,588,652
Net decrease in cash and cash equivalents (614,552,832) (7,385,462) Cash and cash equivalents at the beginning of the 929,561,607 929,537,097 year Effect of exchange rate changes on cash and cash - 7,409,971 equivalents Cash and cash equivalents at the end of the year \ 315,008,775 \ 929,561,606
The above separate statements of cash flows should be read in conjunction with the accompanying notes.
12 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
1. General information
Samsung Heavy Industries Co., Ltd. (the Company) was incorporated in 1974 under the Commercial Code of the Republic of Korea to build ships and off-shore plants. The Company listed its shares on the Korea Exchange on January 28, 1994.
2. Significant Accounting Policies
The principal accounting policies applied in the preparation of these separate 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 Company 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 separate 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 Company's financial position, financial performance or cash flows, is not presented in the accompanying separate financial statements.
The separate financial statements of the Company 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 Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the separate financial statements are disclosed in Note 3.
2.2 Changes in Accounting Policies and Disclosures
(a) New and amended standards adopted by the Company
The Company has applied the following standards and amendments for the first time for their annual reporting period commencing January 1, 2017. The adoption of these amendments did not have any material impact on the financial statements.
- Amendments to Korean IFRS 1007 Statement of Cash Flows
Amendments to Korean IFRS 1007 Statement of Cash flows require to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash flows (Note 31).
- Amendments to Korean IFRS 1012 Income Tax
Amendments to Korean IFRS 1012 clarify how to account for deferred tax assets related to debt instruments measured at fair value. Korean IFRS 1012 provides requirements on the recognition and measurement of
13 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016 current or deferred tax liabilities or assets. The amendments issued clarify the requirements on recognition of deferred tax assets for unrealized losses, to address diversity in practice.
- Amendments to Korean IFRS 1112 Disclosures of Interests in Other Entities
Amendments to Korean IFRS 1112 clarify when an entity’s interest in a subsidiary, a joint venture or an associate is classified as held for sales in accordance with Korean IFRS 1105, the entity is required to disclose other information except for summarized financial information in accordance with Korean IFRS 1112.
(b) New standards and interpretations not yet adopted by the Company
Certain new accounting standards and interpretations that have been published that are not mandatory for annual reporting period commencing January 1, 2017 and have not been early adopted by the Company are set out below.
- Amendments to Korean IFRS 1028 Investments in Associates and Joint Ventures
When an investment in an associate or a joint venture is held by, or it held indirectly through, an entity that is a venture capital organization, or a mutual fund, unit trust and similar entities including investment-linked insurance funds, the entity may elect to measure that investment at fair value through profit or loss in accordance with Korean IFRS 1109. The amendments clarify that an entity shall make this election separately for each associate of joint venture, at initial recognition of the associate or joint venture. The amendments will be effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The Company does not expect the amendments to have a significant impact on the financial statements because the Company is not a venture capital organization.
- Amendment to Korean IFRS 1040 Transfers of Investment Property
Paragraph 57 of Korean IFRS 1040 clarifies that a transfer to, or from, investment property, including property under construction, can only be made if there has been a change in use that is supported by evidence, and provides a list of circumstances as examples. The amendment will be effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The Company does not expect the amendment to have a significant impact on the financial statements.
- Amendments to Korean IFRS 1102 Share-based Payment
Amendments to Korean IFRS 1102 clarify accounting for a modification to the terms and conditions of a share- based payment that changes the classification of the transaction from cash-settled to equity-settled. Amendments also clarify that the measurement approach should treat the terms and conditions of a cash-settled award in the same way as for an equity-settled award. The amendments will be effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The Company does not expect the amendments to have a significant impact on the financial statements.
- Enactments to Interpretation 2122 Foreign Currency Transaction and Advance Consideration
According to these enactments, the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. If there are multiple payments or receipts in advance, the entity shall determine a date
14 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016 of the transaction for each payment or receipt of advance consideration. These enactments will be effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The Company does not expect the enactments to have a significant impact on the financial statements.
- Enactment of Korean IFRS 1116 Leases
Korean IFRS 1116 Leases issued on May 22, 2017 is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted. This standard will replace Korean IFRS 1017 Leases, Interpretation 2104 Determining whether an Arrangement contains a Lease, Interpretation 2015 Operating Leases-Incentives, and Interpretation 2027 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. At inception of a contract, the entity shall assess whether the contract is, or contains, a lease. Also, at the date of initial application, the entity shall assess whether the contract is, or contains, a lease in accordance with the standard. However, the entity will not need to reassess all contracts with applying the practical expedient because the entity elected to apply the practical expedient only to contracts entered before the date of initial application.
For a contract that is, or contains, a lease, the entity shall account for each lease component within the contract as a lease separately from non-lease components of the contract. A lessee is required to recognize a right-of- use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. The lessee may elect not to apply the requirements to short-term lease (a lease term of 12 months or less at the commencement date) and low value assets (e.g. underlying assets below $ 5,000). In addition, as a practical expedient, the lessee may elect, by class of underlying asset, not to separate non- lease components from lease components, and instead account for each lease component and any associated non-lease components as a single lease component.
Lessee accounting
A lessee shall apply this standard to its leases either:
· retrospectively to each prior reporting period presented applying Korean IFRS 1008 Accounting Policies, Changes in Accounting Estimates and Errors (Full retrospective application); or
· retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application.
The Company has not yet elected the application method.
The Company is analyzing to identify potential financial effects of applying Korean IFRS 1116; however, it is difficult to provide reasonable estimates of financial effects until the analyses is complete.
Lessor accounting
The Company expects the effect on the financial statements applying the new standard will not be significant as accounting for the Company, as a lessor, will not significantly change.
- Korean IFRS 1109 Financial Instruments
The new standard for financial instruments issued on September 25, 2015 is effective for annual periods beginning on or after January 1, 2018 with early application permitted. This standard will replace Korean IFRS 1039 Financial Instruments: Recognition and Measurement. The Company will apply the standards for annual
15 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016 periods beginning on or after January 1, 2018.
The standard requires retrospective application with some exceptions. For example, an entity is not required to restate prior period in relation to classification and measurement (including impairment) of financial instruments. The standard requires prospective application of its hedge accounting requirements for all hedging relationships except the accounting for time value of options and other exceptions.
Korean IFRS 1109 Financial Instruments requires three main areas including: (a) classification and measurement of financial assets on the basis of the entity’s business model for managing financial assets and the contractual cash flow characteristics of the financial assets, (b) a new impairment model of financial instruments based on the expected credit losses, and (c) hedge accounting including expansion of the range of eligible hedging instruments and hedged items that qualify for hedge accounting or change of a method of hedge effectiveness assessment.
An effective implementation of Korean IFRS 1109 requires preparation processes including financial impact assessment, accounting policy establishment, accounting system development and the system stabilization. The impact on the Company’s financial statements due to the application of the standard is dependent on judgements made in applying the standard, financial instruments held by the Company and macroeconomic variables.
With the implementation of Korean IFRS 1109, the Company is preparing for internal management process and beginning to adjust accounting system for financial instruments reporting. Also, the Company is analyzing the financial effects of applying the standard. However, the following areas are likely to be affected in general.
(a) Classification and Measurement of Financial Assets
When implementing Korean IFRS 1109, the classification of financial assets will be driven by the Company’s business model for managing the financial assets and contractual terms of cash flow. The following table shows the classification of financial assets measured subsequently at amortized cost, at fair value through other comprehensive income and at fair value through profit or loss. If a hybrid contract contains a host that is a financial asset, the classification of the hybrid contract shall be determined for the entire contract without separating the embedded derivative.
Business model for the Solely represent payments of All other contractual cash flows principal and interest characteristics
Hold the financial asset for the collection of the contractual Measured at amortized cost1 cash flows Recognized at fair value through Hold the financial asset for the profit or loss2 Recognized at fair value through collection of the contractual other comprehensive income 1 cash flows and sale Recognized at fair value through Hold for sale profit or loss
1 A designation at fair value through profit or loss is allowed only if such designation mitigates an accounting mismatch (irrevocable).
2 Equity investments not held for trading can be recorded in other comprehensive income (irrevocable).
16 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
With the implementation of Korean IFRS 1109, the criteria to classify the financial assets at amortized cost or at fair value through other comprehensive income are more strictly applied than the criteria applied with Korean IFRS 1039. Accordingly, the financial assets at fair value through profit or loss may increase by implementing Korean IFRS 1109 and may result an extended fluctuation in profit or loss.
As at December 31, 2017, the Company owns loans and receivables of \ 4,551,884 million, financial assets held-to-maturity of \ 59,000 million, financial assets available-for-sales of \ 26,805 million and financial assets at fair value through profit or loss of \ 18,009 million.
According to Korean IFRS 1109, a debt instrument is measured at amortized cost if: a) the objective of the business model is to hold the financial asset for the collection of the contractual cash flows, and b) the contractual cash flows under the instrument solely represent payments of principal and interest. As at December 31, 2017, the Company measured loans and receivables of \ 4,551,884 million and financial assets held-to- maturity of \ 59,000 million at amortized costs.
According to Korean IFRS 1109, equity instruments that are not held for trading, the Company can make an irrevocable election at initial recognition to classify the instruments as assets measured at fair value through other comprehensive income, which all subsequent changes in fair value being recognized in other comprehensive income and not recycled to profit or loss. As at December 31, 2017, the Company holds equity instruments of \ 26,805 million classified as financial assets available-for-sale.
According to Korean IFRS 1109, derivative instruments that are not eligible as hedged items or hedging instruments are measured at fair value through profit or loss. As at December 2017, the Company holds derivative instruments classified as financial assets at fair value through profit or loss that amount to \ 18,009 million.
(b) Impairment: Financial Assets and Contract Assets
The new impairment model requires the recognition of impairment provisions based on expected credit losses (ECL) rather than only incurred credit losses as is the case under Korean IFRS 1039. It applies to financial assets classified at amortized cost, debt instruments measured at fair value through other comprehensive income, lease receivables, contract assets, loan commitments and certain financial guarantee contracts.
Under Korean IFRS 1109 ‘expected loss’ model, a credit event (or impairment ‘trigger’) no longer has to occur before credit losses are recognized. The Company will always recognize (at a minimum) 12-month expected credit losses in profit or loss. Lifetime expected losses will be recognized on assets for which there is a significant increase in credit risk after initial recognition.
Stage1 Loss allowance 12-month expected credit losses (expected credit losses No significant increase in credit that result from those default events on the financial 1 risk after initial recognition2 instrument that are possible within 12 months after the reporting date) Significant increase in credit risk 2 after initial recognition Lifetime expected credit losses (expected credit losses that result from all possible default events over the life of 3 Credit-impaired the financial instrument)
1 A loss allowance for lifetime expected credit losses is required for a financial instrument if the credit risk on 17 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016 that financial instrument has increased significantly since initial recognition. It is also required for contract assets or trade receivables that are not, according to Korean IFRS 1115 Revenue from Contracts with Customers, considered to contain a significant financing component. Additionally, the Company can elect an accounting policy of recognizing lifetime expected credit losses for all contract assets and/or all trade receivables, including those that contain a significant financing component.
2 If the financial instrument has low credit risk at the end of the reporting period, the Company may assume that the credit risk has not increased significantly since initial recognition.
Under Korean IFRS 1109, the asset that is credit-impaired at initial recognition would recognize all changes in lifetime expected credit losses since the initial recognition as a loss allowance with any changes recognized in profit or loss.
As at December 31, 2017, the Company owns debt investment carried at amortized cost of \ 4,696,543 million (loans and receivables of \ 4,637,543 million, financial asset held-to-maturity of \ 59,000 million). And, the Company recognized loss allowance of \ 85,659 million for these assets.
(c) Hedge Accounting
Hedge accounting mechanics (fair value hedges, cash flow hedges and hedge of net investments in a foreign operations) required by Korean IFRS 1039 remains unchanged in Korean IFRS 1109, however, the new hedge accounting rules will align the accounting for hedging instruments more closely with the Company’s risk management practices. As a general rule, more hedge relationships might be eligible for hedge accounting, as the standard introduces a more principles-based approach. Korean IFRS 1109 allows more hedging instruments and hedged items to qualify for hedge accounting, and relaxes the hedge accounting requirement by removing two hedge effectiveness tests that are a prospective test to ensure that the hedging relationship is expected to be highly effective and a quantitative retrospective test (within range of 80-125%) to ensure that the hedging relationship has been highly effective throughout the reporting period.
With implementation of Korean IFRS 1109, volatility in profit or loss may be reduced as some items that were not eligible as hedged items or hedging instruments under Korean IFRS 1039 are now eligible under Korean IFRS 1109.
As at December 31, 2017, the Company applies the hedge accounting to its liabilities that amount to \ 61,461 million. With applying the hedge accounting, the Company recognized the fair value changes of fair value hedging instruments for \ 69,360 million in profit or loss.
Furthermore, when the Company first applies Korean IFRS 1109, it may choose as its accounting policy choice to continue to apply all of the hedge accounting requirements of Korean IFRS 1039 instead of the requirements of Korean IFRS 1109.
- Enactments to Korean IFRS 1115 Revenue from Contracts with Customers
Korean IFRS 1115 Revenue from Contracts with Customers issued on November 6, 2015 will be effective for annual reporting periods beginning on or after January 1, 2018 with early adoption permitted. This standard replaces Korean IFRS 1018 Revenue, Korean IFRS 1011 Construction Contracts, Interpretation 2031 Revenue- Barter Transactions Involving Advertising Services, Interpretation 2113 Customer Loyalty Programs, Interpretation 2115 Agreements for the Construction of Real Estate and Interpretation 2118 Transfers of assets from customers. The Company must apply Korean IFRS 1115 Revenue from Contracts with Customers within
18 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016 annual reporting periods beginning on or after January 1, 2018, and will elect the modified retrospective approach which will recognize the cumulative impact of initially applying the revenue standard as an adjustment to retained earnings as at January 1 2018, the period of initial application.
Korean IFRS 1018 and other current revenue standard identify revenue as income that arises in the course of ordinary activities of an entity and provides guidance on a variety of different types of revenue, such as, sale of goods, rendering of services, interest, dividends, royalties and construction contracts. However, the new standard is based on the principle that revenue is recognized when control of a good or service transfers to a customer so the notion of control replaces the existing notion of risks and rewards. A new five-step process must be applied before revenue from contract with customers can be recognized:
Identify contracts with customers
Identify the separate performance obligation Determine the transaction price of the contract
Allocate the transaction price to each of the separate performance obligations, and
Recognize the revenue as each performance obligation is satisfied.
As at December 31, 2017, the Company is preparing for internal management process and beginning to adjust accounting system in relation to implementation of Korean IFRS 1115. Also, the Company is analyzing the financial effects of applying the standard. The Company plans to analyze the financial effects of applying the standard and disclose the result of the analysis in the notes on the financial statements as at March 31, 2018. The Company identified the following areas are likely to be affected in general.
(a) A performance obligation is satisfied over time: customized equipment
The shipbuilding and offshore division of the Company builds and sells a large, customized piece of ships and off-shore plants for a customer, and the customized equipment takes about three-years to build. The Company recognizes revenue over time based on costs incurred relative to total estimated costs to determine the extent of progress toward completion. During 2017, revenue from the shipbuilding and offshore division of \ 7,344,449 million is approximately 99% of total revenue recognized.
In accordance with Korean IFRS 1115, the revenue is recognized over time by measuring progress only if the Company’s performance does not create an asset with an alternative use to the Company and the Company has an enforceable right to payment for performance completed to date.
(b) Incremental costs of obtaining a contract
The Company pays sales commissions based on shipbuilding & off-shore plants contracts. During 2017, the Company recognized \ 20,008 million of sales commissions. The sales commission is an incremental cost because it would not have incurred if the contract has not been obtained.
With implementation of Korean IFRS 1115, the Company recognizes as an asset the incremental costs of obtaining a contract with a customer of the Company expects to recover those costs, and costs that are recognized as assets are amortized over the period that the related goods or services transfer to the customer.
19 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
(c) Significant financing components
With implementation of Korean IFRS 1115, in determining the transaction price, if the timing of payments agreed to by the parties to the contract provides the customer or the entity with a significant benefit of financing the transfer of goods or services to the customer, the Company has to recognize revenue at an amount that reflects the price that a customer would have paid for the promised goods or services if the customer had paid cash for those goods or services when they transfer to the customer.
According to Korean IFRS 1115, such significant financing components can change the amount of revenue recognized related to receipt of advance received
2.3 Subsidiaries, Joint Ventures, and Associates
The financial statements of the Company are the separate financial statements prepared in accordance with Korean IFRS 1027 Separate Financial Statements. Investments in subsidiaries, joint ventures and associates are recognized at cost under the direct equity method. Management applied the carrying amounts under the previous K-GAAP at the time of transition to the Korean IFRS as deemed cost of investments. The Group recognizes dividend income from subsidiaries, joint ventures and associates in profit or loss when its right to receive the dividend is established.
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 33). 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 the Company are measured using the currency of the primary economic environment in which each entity operates (the “functional currency"). The separate financial statements are presented in Korean won, which is the 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.
Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, translation differences on non-monetary assets and liabilities such as equities held at fair value through profit or loss are recognized in profit or loss as part of the fair value gain or loss and translation differences on non-monetary assets such as equities classified as available-for-sale financial assets are recognized in other comprehensive income.
20 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
2.6 Financial Assets
(a) Classification and measurement
The Company classifies its financial assets into the following categories: financial assets at fair value through profit or loss, available-for-sale financial assets, loans and receivables, and held-to-maturity financial assets. Regular way purchases and sales of financial assets are recognized on trade-date, the date on which the Company commits to purchase or sell the asset.
At initial recognition, the Company 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. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. And, loans and receivables and held-to-maturity investments are subsequently carried at amortized cost using the effective interest method.
Gains or losses arising from changes in the fair value of financial assets at fair value through profit or loss are recognized in profit or loss within other income or other expenses. Gains or losses arising from changes in the available-for-sale financial assets are recognized in other comprehensive income, and amounts are reclassified to profit or loss when the associated assets are sold or impaired.
(b) Impairment
The Company assesses at the end of each reporting period whether there is an objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred 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 financial asset or a group of financial assets that can be reliably estimated.
Impairment of loans and receivables is presented as a deduction in an allowance account, and that of other financial assets is directly deducted from their carrying amount. The Company writes off financial assets when the assets are determined to be no longer recoverable.
The Company considers that there is an objective evidence of impairment if significant financial difficulties of the debtor, or long-term delinquency in interest or principal payments is indicated.
(c) Derecognition
If a transfer does not result in derecognition because the Company has retained substantially all the risks and rewards of ownership of the transferred asset, the Company continues to recognize the transferred asset in its entirety and recognizes a financial liability for the consideration received.
(d) Offsetting of financial instruments
Financial assets and liabilities are offset and the net amount reported in the separate 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
21 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016 event of default, insolvency or bankruptcy of the Company 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 Company applies fair value hedge accounting for firm commitments.
The Company documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting 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 8. 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 Company only 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)’.
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 merchandise 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.
22 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
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.
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 Company 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
Intangible assets 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.
23 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
The Company 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 Company depreciates investment properties, except for land, using the straight-line method over their useful lives of 25 ~ 50 years.
2.14 Impairment of Non-Financial Assets
Goodwill and intangible assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period.
2.15 Financial Liabilities
(a) Classification and measurement
The Company’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 Company 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.
(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.
2.16 Provisions
Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period, and the increase in the provision due to the 24 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016 passage of time is recognized as interest expense.
2.17 Current and Deferred Tax
The tax expense for the period consists of current and deferred tax. Current and deferred tax is recognized in profit or loss, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively.
The tax expense is measured at the amount expected to be paid to the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.
Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. The Company 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 separate 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 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 Company 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 Company 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 Company recognizes a deferred tax asset for all deductible temporary differences arising from such investments to the extent that it is probable the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis.
2.18 Employee Benefits
(a) Post-employment benefits
The Company operates both defined contribution and defined benefit pension plans.
For defined contribution plans, the Company pays contribution to publicly or privately administered pension insurance plans on mandatory, contractual or voluntary basis. The Company 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
25 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016 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 Company 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 Company issues new shares. The proceeds received, net of any directly attributable transaction costs, are recognized as share capital (nominal value) and share premium.
2.19 Revenue Recognition
Revenue is measured at the fair value of the consideration received or receivable for the sale of goods or rendering of services arising from the normal course of the business. Amounts disclosed as revenue are net of value added taxes, returns, rebates and discounts and after elimination of inter-company transactions.
The Company recognizes revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the Company and when specific criteria have been met for each of the Company’s activities as described below. The Company bases its estimate on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.
(a) Construction contracts
A construction contract is defined by Korean IFRS 1011 Construction Contracts, as a contract specifically negotiated for the construction of an asset.
When the outcome of a construction contract can be estimated reliably and it is probable that the contract will be profitable, contract revenue is recognized over the period of the contract by reference to the stage of completion. Contract costs are recognized as expenses by reference to the stage of completion of the contract activity at the end of the reporting period. When it is probable that total contract costs will exceed total contract revenue, the expected loss on the construction contract is immediately recognized as an expense.
When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognized only to the extent of contract costs incurred that are likely to be recoverable. Variations in contract work, claims and
26 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016 incentive payments are included in contract revenue to the extent that may have been agreed with the customer and are capable of being reliably measured. Contract costs are recognized as an expense in the period in which they are incurred.
The Company uses the ‘percentage-of-completion method’ to determine the appropriate amount to recognize in a given period. The stage of completion is measured by reference to the contract costs incurred up to the end of the reporting period as a percentage of total estimated costs for each contract. Costs incurred in the year in connection with future activity on a contract are excluded from contract costs in determining the stage of completion. These amounts are recognized as inventory, prepaid expenses or other assets.
On the statement of financial position, the Company reports the net contract position for each contract as either an asset or a liability. A contract represents an asset where costs incurred plus recognized profits (less recognized losses) exceed progress billings (due from customers for contract work); a contract represents a liability where the opposite is the case (due to customers for contract work).
(b) Sales of goods
Sales are recognized when control of the products has transferred, being when the products are delivered to the wholesaler.
(c) Interest income
Interest income is recognized using the effective interest method according to the time passed. When a loan and receivable is impaired, the Company reduces the carrying amount to its recoverable amount and continues unwinding the discount as interest income. Interest income on impaired loans and receivables is recognized using the original effective interest rate.
(d) Dividend income
Dividend income is recognized when the right to receive payment is established.
2.20 Approval of Issuance of the Financial Statements
The separate financial statements 2017 were approved for issue by the Board of Directors on January 26, 2018 and are subject to change with the approval of shareholders at their Annual General Meeting.
3. Critical accounting estimates and assumptions
The preparation of financial statements requires the Company to make estimates and assumptions concerning the future. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
(a) Uncertainty of the estimated total contract revenue
Total contract revenue is measured based on contractual amount initially agreed. The contract revenue can be increased by additional contract work, claims and incentive payments in the course of construction, or decreased by the penalty when the completion of contract is delayed due to the Company’s fault. Therefore, this 27 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016 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 changes in contract work, or when it is probable that the Company 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 Company’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, 2017, the maximum amount of damage claims from the delay as the Company was not able to meet the contracted completion date is expected to be \ 65,891 million. The \ 43,070 million of this amount is the best estimate of the damage claim the Company is likely to bear due to its fault and has been deducted from the contract revenue for the year ended December 31, 2017. The amount will be periodically revalued until the completion date. The Company 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 \ 1,253,144 million.
(c) Income taxes
The Company’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 29).
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 Company 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 tax is affected by the tax effects from the new tax system. As the Company’s income tax is dependent on the investments, increase in wages and dividends, there is an uncertainty measuring the final tax effects.
(d) Fair value of financial instruments
The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Company 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 8).
(e) Provision for warranty
The Company 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.
28 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
(f) 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 20).
(g) Provisions
As at December 31, 2017, the Company recognizes provisions for expectation of incentive based on management performance and litigations as explained in Note 21. These provisions are estimated based on past experience.
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, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016
Cash on hand \ 107,716 \ 112,786 Ordinary deposits 2,169,227 3,897,498 Checking account 971 91 Other deposits 312,730,861 925,551,232 \ 315,008,775 \ 929,561,607
5. Restricted Financial instruments
As at December 31, 2017, \ 25 million of long-term financial instruments are restricted to maintain checking accounts (Note 13). Short-term financial instruments of \ 328,556 million are subject to withdrawal restrictions as collateral and others (Note 19).
29 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
6. Construction Contracts
A. Changes in contract balances and recognized construction revenue for the periods ended December 31, 2017 and 2016, are as follows:
2017 Recognized (In thousands of Opening Changes construction Ending Balance Korean won) balance revenue Shipbuilding & offshore \ 8,955,169,655 \ 8,726,604,468 \ 7,344,449,472 \ 10,337,324,651 contracts Construction contracts 105,579,528 5,988,208 52,439,478 59,128,258 \ 9,060,749,183 \ 8,732,592,676 \ 7,396,888,950 \ 10,396,452,909
2016 Recognized (In thousands of Opening Changes construction Ending Balance Korean won) balance revenue Shipbuilding & offshore \ 22,351,669,919 \ (3,583,426,684) \ 9,813,073,580 \ 8,955,169,655 contracts Construction contracts 143,177,396 32,910,442 70,508,310 105,579,528 \ 22,494,847,315 \ (3,550,516,242) \ 9,883,581,890 \ 9,060,749,183
B. At the end of the reporting period, the Company is provided with performance guarantees and warranties of \ 2,210,112 million for the shipbuilding & offshore contracts from several financial institutions including Korea EXIM Bank. The Company is provided with performance guarantees and warranties of \ 231,684 million in relation to the construction contracts from several financial institutions including Construction Guarantee.
C. The following table presents the breakdown of in-progress construction contracts such as recognized construction profit or loss as at December 31, 2017 and 2016:
2017 Accumulative (In thousands of Korean Accumulative Unbilled Overbilled construction won) construction cost amount amount revenue Shipbuilding & offshore \ 28,586,127,428 \ (349,463,409) \ 3,151,519,457 \ 1,419,308,290 contracts
Construction contracts 500,656,920 (60,070,294) 3,575,393 9,897,753
\ 29,086,784,348 \ (409,533,703) \ 3,155,094,850 \ 1,429,206,043
2016 Accumulative (In thousands of Korean Accumulative Unbilled Overbilled construction won) construction cost amount amount revenue Shipbuilding & offshore \ 25,552,840,723 \ (333,115,833) \ 5,039,385,121 \ 1,674,418,793 contracts
Construction contracts 545,773,117 (74,170,935) 15,251,156 25,301,791
\ 26,098,613,840 \ (407,286,768) \ 5,054,636,277 \ 1,699,720,584
30 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
D. Due to the factors causing the rise in shipbuilding & offshore costs in 2017, 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 due from customers for contract work are as follows:
2017 Changes in Changes in Impact on profit Impact on profit Changes in due estimated total estimated total or loss for the or loss for the from customers (In thousands of Korean contract revenue contract costs period succeeding for contract work1 won) period Shipbuilding \ 1,191,096,957 \ 1,292,340,591 \ (162,367,294) \ 61,123,660 \ (162,367,294) & offshore contracts Construction contracts 6,433,620 19,027,462 (12,604,217) 10,374 (12,604,217) \ 1,197,530,577 \ 1,311,368,053 \ (174,971,511) \ 61,134,034 \ (174,971,511)
2016 Changes in Changes in Impact on profit Impact on profit Changes in due estimated total estimated total or loss for the or loss for the from customers (In thousands of Korean contract revenue contract costs period succeeding for contract work1 won) period Shipbuilding \ 1,096,893,252 \ 765,199,269 \ 364,544,356 \ (32,850,373) \ 364,544,356 & offshore contracts Construction contracts 32,248,824 30,362,974 (1,874,712) 3,760,562 (1,874,712) \ 1,129,142,076 \ 795,562,243 \ 362,669,644 \ (29,089,811) \ 362,669,644
1 Changes in due to customers for contract work are included.
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, 2017. Contract costs and contract revenue may change in the future.
31 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
E. Contractual information that contract revenue for the periods ended December 31, 2017 and 2016 is more than 5% of previous revenues, are as follows:
2017 (in thousands of Due from customers for Trade and other receivables Korean won) contract work Percentage Ordering Construction Contract date of Accumulated Provision location due date completion Amount impairment Amount for loss impairment Shipbuilding & offshore contracts Drillship(SN2096) Europe Jun. 7, 2013 Sep. 25, 2017 100% \ - \ - \ - \ - Semi-Rig(SN2097) 1 ------Drillship(SN2100) 2 America Jul. 12, 2013 Mar. 31, 2017 100% 380,408,915 - - - Drillship(SN2101) 2 America Jul. 12, 2013 Mar. 31, 2017 100% 372,059,992 - - - Drillship(SN2109) Oceania Aug. 30, 2013 Jun. 30, 2018 98% 397,542,856 - - - Drillship(SN2119) Oceania Apr. 8, 2014 Jan. 31, 2019 79% 428,655,483 - - - Drillship(SN2120) 3 Oceania Apr. 8, 2014 Jan. 31, 2019 8% - - - - CPF(SN7108) Australia Feb. 10, 2012 Aug. 26, 2018 98% 144,034,722 - 29,953,492 - Jackup Rig(SN7117) Europe Jun. 11, 2013 Dec. 31, 2016 99% - - - - Jackup Rig(SN7118) Europe Jun. 11, 2013 Apr. 30, 2017 99% - - - - FLNG(SN2030) Oceania May. 30, 2011 Apr. 4, 2018 99% - - - - FPSO(SN2089) Africa Jun. 12, 2013 Jun. 26, 2017 97% 196,754,498 - - - FLNG(SN2126) Asia Feb. 14, 2014 Jul. 15, 2020 68% - - - - Platform(SN2190) Europe Jun. 29, 2015 Feb. 13, 2018 89% 23,988,011 - - - Platform(SN2191) Europe Jun. 29, 2015 Dec. 12, 2018 64% - - - - FPU(SN2217) America Jan. 4, 2017 Sep. 30, 2020 8% - - 50,001,580 - FLNG(SN2235) Africa Jun. 1, 2017 Jun. 1, 2022 1% - - - - Platform(SN7115) Europe Dec. 20, 2012 Jul. 15, 2017 95% 74,419,019 - 62,796,479 -
\2,017,863,496 \ - \142,751,551 \ -
1 During 2017, the Company’s customers sent a notice of the cancellation of shipbuilding contract and requested for refund of advance receipts. And, the Company filed for an arbitration with London Maritime Arbitrators Association (LMAA) related to the breach of the contract by the customers and compensation for damages on June 13, 2017. The Company recognized expected loss from the arbitration as provisions. The expected loss can be changed depending on the outcome of the arbitration (Note 21). In addition, related due from customers for contract work was reclassified to inventories due to the notice of the cancellation of the contracts and the Company entered into sales contract with a new customer on January 27, 2018.
2 During 2017, the Company sent a notice of completion of shipbuilding and request of delivery to customers and filed for an arbitration with London Maritime Arbitrators Association (LMAA) related to the completion of shipbuilding on September 7, 2017. The amount of liquidated damage for delay that the Group may be charged with high possibility is \ 22,982 million, which is deducted from contract revenue.
3 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. (Note 35).
32 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
2016 (in thousands of Due from customers for contract Trade and other receivables Korean won) work Percentage Ordering Construction Contract date of Accumulated Provision location due date completion Amount impairment Amount for loss impairment Shipbuilding & offshore contracts Drillship(SN2096) Europe Jun. 7, 2013 Mar. 31, 2019 98% \ 355,735,085 \ - \ - \ - Semi-Rig(SN2097) Europe Jun. 28, 2013 Apr. 19, 2016 86% 450,964,334 (174,823,239) - - Drillship(SN2100) America Jul. 12, 2013 Mar. 31, 2017 97% 427,190,126 - - - Drillship(SN2101) America Jul. 12, 2013 Mar. 31, 2017 96% 415,738,329 - - - Drillship(SN2109) Oceania Aug. 30, 2013 Jun. 30, 2018 93% 402,383,286 - - - Drillship(SN2119) Oceania Apr. 8, 2014 Jan. 31, 2019 48% 221,426,074 - - - Drillship(SN2120) Oceania Apr. 8, 2014 Jan. 31, 2019 8% - - - - CPF(SN7108) Australia Feb. 10, 2012 Jun. 12, 2018 93% 52,402,472 - 68,055,213 - Jackup Rig(SN7117) Europe Jun. 11, 2013 Dec. 31, 2016 94% 556,440,531 - - - Jackup Rig(SN7118) Europe Jun. 11, 2013 Apr. 30, 2017 86% 499,490,259 - - - FLNG(SN2030) Oceania May. 30, 2011 Apr. 1, 2017 95% 138,165,871 - 36,730,617 - FPSO(SN2089) Africa Jun. 12, 2013 Jun. 26, 2017 74% - - - - FLNG(SN2126) Asia Feb. 14, 2014 Jul. 15, 2020 41% - - - - Platform(SN2190) Europe Jun. 29, 2015 Feb. 13, 2018 23% - - 26,221,918 - Platform(SN2191) Europe Jun. 29, 2015 Dec. 12, 2018 12% - - 49,814,108 - Platform(SN7115) Europe Dec. 20, 2012 May. 18, 2017 86% 62,913,477 - - -
\3,582,849,844 \ (174,823,239) \180,821,856 \ -
F. Changes in provision for construction loss for the periods ended December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 Beginning Ending Changes balance balance Shipbuilding & offshore contracts \ 277,313,651 \ (7,337,431) \ 269,976,220 Construction contracts 9,097,135 2,233,074 11,330,209 \ 286,410,786 \ (5,104,357) \ 281,306,429
(In thousands of Korean won) 2016 Beginning Ending Changes balance balance Shipbuilding & offshore contracts \ 724,612,999 \ (447,299,348) \ 277,313,651 Construction contracts 14,578,217 (5,481,082) 9,097,135 \ 739,191,216 \ (452,780,430) \ 286,410,786
33 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
G. Changes in warranty provision for the periods ended December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 Beginning Ending Changes balance balance Shipbuilding & offshore contracts \ 286,780,436 \ 16,639,967 \ 303,420,403 Construction contracts 8,810,456 (1,840,885) 6,969,571 \ 295,590,892 \ 14,799,082 \ 310,389,974
(In thousands of Korean won) 2016 Beginning Ending Changes balance balance Shipbuilding & offshore contracts \ 263,760,278 \ 23,020,158 \ 286,780,436 Construction contracts 13,947,934 (5,137,478) 8,810,456 \ 277,708,212 \ 17,882,680 \ 295,590,892
7. Financial Instruments by Category
A. Categorizations of financial instruments as at December 31, 2017 and 2016, are as follows:
(In thousands of Financial Financial assets Derivative Financial assets Korean won) assets at fair value Loans and instruments for classified as classified as Total through profit receivables hedging available-for- held-to- and loss purpose sale1 2017 maturity1 Cash and cash \ - \ 315,008,775 \ - \ - \ - \ 315,008,775 equivalents Short-term financial - 633,515,521 - - - 633,515,521 instruments
Trade receivables - 249,092,686 - - - 249,092,686 Due from customers for - 3,155,094,850 - - - 3,155,094,850 contract work Derivative financial 18,009,422 - 406,081,514 - - 424,090,936 Instruments Non-current trade - 43,527,216 - - - 43,527,216 receivables Available-for-sale - - - 26,805,060 - 26,805,060 financial assets Other financial assets and - 155,644,982 - - 59,000,000 214,644,982 others \ 18,009,422 \4,551,884,030 \ 406,081,514 \ 26,805,060 \59,000,000 \ 5,061,780,026
1 Available-for-sale financial assets of \ 8,021 million and held-to-maturity financial assets of \ 59,000 million are pledged as collateral for borrowings from Construction Guarantee and Industrial Bank of Korea (Notes 13 and 14).
34 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
Financial liabilities Derivative (In thousands of Korean won) at fair value Financial liabilities instruments for Total through profit and at amortized cost hedging purpose 2017 loss
Trade payables \ - \ 613,320,350 \ - \ 613,320,350
Borrowings - 2,276,886,339 - 2,276,886,339
Current portion of long-term debts 1,389,053,356 - 1,389,053,356
Debentures - 254,517,768 - 254,517,768
Derivative financial Instruments 36,256,052 - 176,503,242 212,759,294
Other financial liabilities and others - 614,502,954 - 614,502,954
\ 36,256,052 \ 5,148,280,767 \ 176,503,242 \ 5,361,040,061
(In thousands of Financial Financial assets Derivative Financial assets Korean won) assets at fair value Loans and instruments for classified as classified as Total through profit receivables hedging available-for- held-to- and loss purpose sale1 2016 maturity1 Cash and cash \ - \ 929,561,607 \ - \ - \ - \ 929,561,607 equivalents Short-term financial - 648,598,224 - - - 648,598,224 instruments
Trade receivables - 297,668,715 - - - 297,668,715 Due from customers - 5,054,636,276 - - - 5,054,636,276 for contract work Derivative financial 87,672,638 - 195,579,948 - - 283,252,586 Instruments Non-current trade - 24,500,208 - - - 24,500,208 receivables Available-for-sale - - - 26,288,658 - 26,288,658 financial assets Other financial - 174,152,885 - - 59,000,000 233,152,885 assets and others \ 87,672,638 \ 7,129,117,915 \ 195,579,948 \ 26,288,658 \59,000,000 \ 7,497,659,159
1 Available-for-sale financial assets of \ 8,021 million and held-to-maturity financial assets of \ 59,000 million are pledged as collateral for borrowings from Construction Guarantee and Industrial Bank of Korea (Notes 13 and 14).
Financial liabilities Derivative (In thousands of Korean won) at fair value Financial liabilities instruments for Total through profit and at amortized cost hedging purpose 2016 loss \ \ \ \ Trade payables - 1,266,189,731 - 1,266,189,731
Borrowings - 3,414,073,128 - 3,414,073,128
Current portion of long-term debts - 1,099,828,242 - 1,099,828,242
Debentures - 499,347,207 - 499,347,207
Derivative financial Instruments 42,858,185 - 828,361,120 871,219,305
Other financial liabilities and others - 614,055,863 - 614,055,863
\ 42,858,185 \ 6,893,494,171 \ 828,361,120 \ 7,764,713,476
35 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
B. Net gains or net losses on each category of financial instruments for the periods ended December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016 Available-for-sale financial assets Gain(loss) on valuation (other comprehensive income) \ 208,243 \ (5,527,793) Gain on disposal (reclassify to profit or loss)1 392,955 307,027 Dividend income - 19,123,454 Gain(loss) on disposal (profit or loss) (254,407) 5,622,435 Loans and receivables Gain(loss) on foreign currency translation \ (220,152,774) \ 94,886,582 Interest income 17,880,026 46,676,999 Impairment loss or reversal of loss 12,578,486 (183,808,686) Held-to-maturity financial assets Interest income \ 11,903 \ 4,707 Assets at fair value through the profit and loss Gain on valuation \ 42,400,813 \ 49,567,854 Gain on transaction 17,701,143 19,649,895 Derivative assets for hedging purpose Gain on valuation \ 482,670,251 \ 131,770,489 Gain on transaction 460,763,128 279,483,504 Liabilities at fair value through the profit and loss Loss on valuation \ (44,656,654) \ (40,339,090) Loss on transaction (42,036,624) (39,711,972) Derivatives liabilities for hedging purpose Loss on valuation \ (201,506,394) \ (453,032,546) Gain(loss) on transaction 97,140,111 (138,502,415) Financial liabilities measured at amortized cost Interest expenses \ (132,260,631) \ (154,578,226) Gain(loss) on foreign currency translation 102,178,060 (39,041,399)
1 The gain on disposal was reclassified from other comprehensive income to profit or loss.
36 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
8. Fair Value
A. Fair Value of Financial Instruments by Category
Carrying amount and fair value of financial instruments by category as at December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016 Carrying amount Fair value Carrying amount Fair value Financial assets1 Available-for-sale financial assets2 \ 13,491,322 \ 13,491,322 \ 13,283,079 \ 13,283,079 Derivative instruments 424,090,936 424,090,936 283,252,586 283,252,586 Financial liabilities1 Derivative instruments \ 212,759,294 \ 212,759,294 \ 871,219,305 \ 871,219,305
1 Financial instruments including trade receivables and payables whose carrying amount is a reasonable approximation of fair value are excluded from fair value disclosures. 2 Equity instruments that do not have a quoted price in an active market are measured at cost because their fair value cannot be measured reliably and excluded from the fair value disclosures.
B. Available-for-sale financial assets Measured at Cost
Details of available-for-sale financial assets measured at cost as at December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016
Unlisted share \ 4,583,477 \ 4,273,658 Other equity investments 8,730,261 8,731,921 \ 13,313,738 \ 13,005,579
The above unlisted shares and equity instruments are measured at cost because the variability of estimated cash flows is significant and the probabilities of the various estimates cannot be reasonably assessed.
C. Fair Value Hierarchy
Assets 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).
37 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
Fair value hierarchy classifications of the financial instruments that are measured at recurring fair value as at December 31, 2017 and 2016, are as follows:
2017 (In thousands of Korean won) Level 1 Level 2 Level 3 Total
Financial assets Derivative financial assets \ - \ 424,090,936 \ - \ 424,090,936 Available-for-sale financial assets 4,341,142 - 9,150,180 13,491,322 Financial liabilities Derivative financial liabilities \ - \ 212,759,294 \ - \ 212,759,294
2016 (In thousands of Korean won) Level 1 Level 2 Level 3 Total
Financial assets Derivative financial assets \ - \ 283,252,586 \ - \ 283,252,586 Available-for-sale financial assets 4,946,559 - 8,336,520 13,283,079 Financial liabilities Derivative financial liabilities \ - \ 871,219,305 \ - \ 871,219,305
D. Valuation Technique and the Inputs
Valuation techniques and inputs used in the fair value of financial instruments categorized as Level 2 and Level 3 of the fair value hierarchy as at December 31, 2017, are as follows:
2017 (In thousands of Korean won) Fair value level Valuation techniques Inputs Perpetual earning growth Discounted cash flow Available-for-sale financial assets \ 9,150,180 3 rate model Pre-tax operation margin Derivative financial assets 424,090,936 2 Present value technique Discount rate Derivative financial liabilities 212,759,294 2 Present value technique Discount rate
E. Valuation Processes for Fair Value Measurements Categorized as Level 3
The Company assesses fair value by obtaining a valuation report from Korean Asset Pricing Co., Ltd. The finance team of the Company 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 Company’s quarterly reporting dates.
38 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
9. Credit Quality of Financial Assets
The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings or to historical information about counterparty default rates as at December 31, 2017 and 2016, follows:
(In thousands of Korean won) 2017 2016 Due from customers for contract work Group 11 \ 2,783,090,804 \ 5,169,819,079 Group 22 16,716,663 18,095,263 \ 2,799,807,467 \ 5,187,914,342
1 Customers of shipbuilding & offshore segment with no defaults in the past 2 Customers of E&I segment with no defaults in the past
(In thousands of Korean won) 2017 2016 Cash at bank and short-term bank deposits1 AAA \ 16,703,924 \ 641,565,535 AA 298,197,136 287,883,286 \ 314,901,060 \ 929,448,821
1 The rest of ‘cash and cash equivalents’ in the separate statement of financial position represents cash on hand.
(In thousands of Korean won) 2017 2016 Short-term financial instruments AAA \ 613,929,959 \ 648,598,224 AA 19,585,562 - \ 633,515,521 \ 648,598,224
(In thousands of Korean won) 2017 2016 Derivative financial instruments AAA \ 271,062,726 \ 283,252,586 AA 153,028,210 - \ 424,090,936 \ 283,252,586
39 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
10. Trade (due from customers for contract work) and Other Receivables
Trade and other receivables, and their provisions for impairment of receivables as at December 31, 2017 and 2016, consist of the following:
(In thousands of 2017 2016 Korean won) Due from Due from
Trade Other Trade Other customers for customers for receivables receivables receivables receivables contract work contract work
Regular receivables \375,573,771 \3,155,094,850 \129,333,828 \416,200,062 \5,229,459,515 \120,604,851 Less: Provision for impairment (82,953,868) - (2,704,717) (94,031,139) (174,823,239) (2,643,365) Trade and other receivables, net 292,619,903 3,155,094,850 126,629,111 322,168,923 5,054,636,276 117,961,486 Less: Non-current receivables (43,527,217) - - (24,500,208) - (415,987)
\249,092,686 \3,155,094,850 \126,629,111 \297,668,715 \5,054,636,276 \117,545,499
The aging analysis of trade (due from customers for contract work) and other receivables as at December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016
Receivables not past due \ 2,799,807,467 \ 5,187,914,342
Past due but not impaired1 Less than six months 763,167,681 1,969,264 Over six months - 4,375,110
763,167,681 6,344,374
Impaired2 97,027,301 572,005,712 \ 3,660,002,449 \ 5,766,264,428
1 Trade receivables past due but not impaired relate to a number of independent customers who have no recent history of default. 2 Provision for impaired receivables amount to \ 85,659 million as at December 31, 2017 (2016: \ 271,498 million). The individually impaired receivables mainly relate to customers, which are in unexpectedly difficult economic situations. It was assessed that a portion of the trade and other receivables is expected to be recovered.
40 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
Movements in provisions for impairment of trade receivables for the periods ended December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016 Due from Due from Trade customers for Other Trade customers for Other receivables contract work receivables receivables contract work receivables
Beginning \ 94,031,139 \ 174,823,239 \ 2,643,365 \128,893,987 \ - \ 2,142,843 Provision for receivables 11,030 - 211,281 12,048,074 174,823,239 876,701 impairment during the year Receivables written-off during the year as uncollectible and (8,217,572) (165,250,144) - (41,405,726) - (262,240) others Unused amounts reversed (2,870,729) (9,573,095) (149,929) (5,505,196) - (113,939) Ending \ 82,953,868 \ - \ 2,704,717 \ 94,031,139 \ 174,823,239 \ 2,643,365
The creation and release of provision for impaired receivables (reversal) have been included in selling and administrative expenses (in case of other receivables, other expenses) in the separate statement of profit or loss.
41 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
11. Derivatives
As at December 31, 2017, the Company have forward exchange contracts with KEB Hana Bank and 14 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) Hedging purpose Gain (loss) on Derivative Gain (loss) on Firm derivative Gain (loss) on financial firm commitment valuation for derivative instrument commitment assets trading valuation assets Short position Long position valuation (liabilities) purpose (liabilities)
USD 38,928 KRW 41,574,935 \ (5,053) \ (77,471) \ 395,088 \ (2,639,723) \ (82,524) USD 9,739,316 KRW 10,813,192,820 40,609,039 479,388,222 (267,479,287) (194,131,774) 418,805,555 NOK 114,274 USD 13,837 - (19,033) (647,071) - (19,033) NOK 124,447 USD 15,607 - 442,703 (451,388) - 442,703 NOK 430,308 KRW 55,643,127 - (236,971) 236,971 - (236,971) NOK 208,937 KRW 28,017,707 - 865,904 (613,587) - 865,904 KRW 4,279,829,184 USD 3,823,634 (43,138,420) (189,931,786) 189,931,786 115,338,150 (198,775,150) KRW 14,392,162 USD 13,490 - 31,660 (31,660) 1,518,847 31,660 USD - SGD - - 1 (1) 22 1 KRW 137,339 SEK 999 - (7,536) 7,536 9,135 (7,536) USD 5,007 NOK 39,968 - (152,436) 152,436 1,653,291 (152,436) USD 444 NOK 3,668 - 3,646 (3,646) 1,963 3,646 KRW 25,441,646 NOK 184,499 - (1,281,413) 1,281,413 1,277,338 (1,281,413) USD 83 JPY 9,207 - (1,573) 1,573 389 (1,573) USD 1 JPY 142 - 10 (10) 28 10 KRW 14,188,825 JPY 1,365,570 (107,179) (824,927) 824,927 959,400 (1,087,638) KRW 85,076 GBP 58 - (1,259) 1,259 714 (1,259) USD 14,907 EUR 12,437 (1,250) (24,592) 24,592 2,541,497 (25,841) USD 137,044 EUR 115,652 1,031,146 905,979 (905,979) 3,955,050 1,937,125 KRW 358,248,850 EUR 266,171 (1,404,752) (8,259,245) 8,259,245 8,615,201 (10,399,769) KRW 112,393,566 EUR 88,394 760,628 1,010,499 (1,010,499) (1,218,223) 1,982,705 USD 6 DKK 39 - 89 (89) (390) 89 USD 1,122 CNY 7,520 - 19,274 (19,274) (64,931) 19,274 KRW 23,294,646 CNY 139,208 - (688,151) 688,151 691,110 (688,151) KRW 503,132 CNY 3,094 - 2,264 (2,264) 31,769 2,264 \ (2,255,841) \ 281,163,858 \ (69,359,778) \ (61,461,137) \ 211,331,642
The Company applies the fair value hedge accounting and is exposed to fluctuations in fair value until May 27, 2022. The realized gain and loss on derivative transactions recognized upon the expiration of contracts during the year ended December 31, 2017, amounted to \ 822,656 million and \ 264,752 million (during the year ended December 31, 2016: \ 432,366 million and \ 291,385 million), respectively. The realized gain and loss on firm commitments recognized during the year ended December 31, 2017 amounts to \ 263,652 million and \ 624,825 million (during the year ended December 31, 2016: \ 273,506 million and \ 384,483 million), respectively.
42 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
12. Inventories
Inventories as at December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016
Work-in-process \ 22,703,895 \ 26,545,537 Raw materials 304,787,854 597,436,959
Materials in-transit 23,488,046 145,525,349 Inventory of construction completed 821,741,589 422,975,000
\ 1,172,721,384 \ 1,192,482,845
The cost of inventories recognized as expense and included in ‘cost of sales’ amounts to \ 3,307,442 million (2016: \ 4,825,708 million).
13. Other Financial Assets and Liabilities
Details of other financial assets and liabilities as at December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016
Current Non-current Current Non-current
Other financial assets
Loans \ 1,493,308 \ 7,492,870 \ 11,751,503 \ 13,226,680
Accrued income 3,123,317 - 9,837,313 -
Guarantee deposits provided 13,087,871 3,793,905 14,002,921 7,348,382 Held-to-maturity instruments 59,000,000 - 59,000,000 -
Long-term financial instruments - 24,600 - 24,600 Other receivables - - - 415,987
\ 76,704,496 \ 11,311,375 \ 94,591,737 \ 21,015,649
Other financial liabilities Guarantee deposits received \ - \ 18,942,062 \ - \ 16,176,000
As at December 31, 2017, \ 59,000 million of held-to-maturity instruments are pledged as securities for borrowings of Industrial Bank of Korea (Note 19). \ 25 million of long-term financial instruments are restricted to maintain checking accounts (Note 5).
14. Available-for-sale Financial Assets
Changes in available-for-sale financial assets for the periods ended December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016
Beginning balance \ 26,288,658 \ 61,143,040 Additions 766,222 3,091,013 Gain (loss) on valuation of available for sale securities 208,243 (5,527,793) Disposal (458,063) (32,417,602) 43 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
Ending balance \ 26,805,060 \ 26,288,658
Details of available-for-sale financial assets as at December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016
Marketable equity \ 3,990,556 \ 4,606,191 Non-marketable equity1,2 22,463,918 21,342,099 Beneficiary certificates 350,586 340,368 \ 26,805,060 \ 26,288,658
1 Among the non-marketable equities, investments in Samsung Venture Investment Corporation and Samsung Economics Research Institute were assessed at \ 9,150 million (2016: \ 8,337 million) by an independent external valuer using reasonable valuation models and appropriate measurements based on professional judgments (Note 8). 2 The fair value of non-marketable equity securities, other than the investments mentioned above are presented at their acquisition cost of \ 13,314 million (2016: \ 13,006 million). In addition, among these securities, \ 8,021 million is pledged as collaterals for borrowings (Note 19).
Changes in unrealized gain (loss) for the periods ended December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016
Beginning balance \ 4,916,131 \ 23,601,777 Unrealized gain (loss) on valuation of available for sale securities 208,243 (5,527,793) Realized loss on disposal of available for sale securities - (19,123,454)
Tax effects (50,395) 5,965,601
Ending balance \ 5,073,979 \ 4,916,131
15. Investments in Subsidiaries, Associates and Joint Ventures
Details of investments in subsidiaries, associates and joint ventures as at December 31, 2017 and 2016, are as follows:
Percentage Investee Location of ownership 2017 2016 interest (%)
Samsung Heavy Industries (Ningbo) Co., Ltd. China 100 \ 167,810,098 \ 167,810,098
Samsung Heavy Industries (Rongcheng) Co., Ltd. China 100 163,647,755 163,647,755
Rongcheng Gaya Heavy Industries Co., Ltd. China 100 47,690,483 47,690,483
Samsung Heavy Industries Brazil Brazil 100 392,570 392,570
Samsung Heavy Industries India Pvt.Ltd. India 100 3,537,966 3,537,966
Camellia Consulting Corporation USA 100 2,473,656 2,473,656
SVIC 13 New Technology Business Investment Korea 99 7,383 7,383
Samsung Heavy Industries (M) Sdn.Bhd Malaysia 100 184,531 184,531
SHI Brazil Construction Brazil 100 24,711 24,711
Samsung Heavy Industries Nigeria Co. Ltd. Nigeria 100 95,730,850 95,730,850
SHI Mozambique LDA 3 Mozambique 100 55,883 -
44 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
Daejung Offshore Wind Power Co., Ltd.1 Korea 50.1 5,210,400 5,010,000
Offshore 1 Consulting Corporation3 USA 51 - 831,479
\ 486,766,286 \ 487,341,482
1 All joint arrangements, an arrangement where in the Company has joint control, are structured through a separate entity and classified as joint ventures as parties with joint control on the joint arrangements have rights on the net assets of the arrangements.
2The Company disposed of Offshore 1 Consulting Corporation during 2017.
3The Company acquired SHI Mozambique LDA during 2017.
Changes in ownership interests in subsidiaries, associates and joint ventures as at December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016 Beginning balance \ 487,341,482 \ 498,009,881 Acquisition of subsidiaries, associates and joint ventures 256,283 524,845 Disposal and transfer of subsidiaries, associates and joint ventures (831,479) (3,626,620) Impairment of subsidiaries, associates and joint ventures - (7,566,624) Ending Balance \ 486,766,286 \ 487,341,482
16. Property, Plant and Equipment
Changes in property, plant and equipment for the periods ended December 31, 2017 and 2016, are as follows:
2017 Tools, Construction- Machinery (In thousands of Land Building Structures Machinery Vehicles furniture and Total in- progress in-transit Korean won) fixtures Beginning net book amount \1,922,577,617 \1,054,524,477 \1,359,875,315 \ 776,661,142 \318,320,468 \198,784,365 \108,669,195 \ - \ 5,739,412,579
Acquisition - - - - - 82,560 66,557,086 - 66,639,646
Disposal (7,140,436) (4,993,250) (6,597) (3,901,931) (189,649) (1,435,463) - - (17,667,326)
Depreciation - (28,792,210) (38,614,547) (73,488,923) (21,173,550) (80,284,797) - - (242,354,027)
Transfer1 7,037,751 6,041,912 60,902,798 15,626,495 7,025,721 17,873,245 (145,948,421) - (31,440,499) Ending net book amount \1,922,474,932 \1,026,780,929 \1,382,156,969 \ 714,896,783 \ 303,982,990 \ 135,019,910 \ 29,277,860 \ - \ 5,514,590,373
Acquisition cost \1,922,474,932 \1,344,472,839 \1,833,757,301 \1,653,532,654 \507,191,853 \ 640,783,184 \ 29,277,860 \ - \ 7,931,490,623 Accumulated depreciation - (317,691,910) (451,600,332) (937,326,832) (203,181,176) (505,749,767) - - (2,415,550,017) Accumulated impairment loss - - - (1,309,039) (27,687) (13,507) - - (1,350,233) Net book amount \1,922,474,932 \1,026,780,929 \1,382,156,969 \ 714,896,783 \303,982,990 \135,019,910 \29,277,860 \ - \ 5,514,590,373
45 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
2016 Tools, Construction- Machinery (In thousands of Land Building Structures Machinery Vehicles furniture and Total in- progress in-transit Korean won) fixtures Beginning net book amount \ 825,033,143 \ 979,450,032 \ 1,238,757,640 \ 801,102,757 \337,923,063 \228,994,014 \395,614,891 \ 324,113 \ 4,807,199,653 Acquisition ------148,100,378 - 148,100,378 Disposal (35,206,399) (35,924,351) (1,002,308) (9,475,857) (267,168) (3,000,082) - - (84,876,165) Depreciation - (28,683,315) (36,455,821) (75,791,656) (22,940,342) (87,813,561) - - (251,684,695) Reversal of impairment loss - - - 714,829 - - - - 714,829 Transfer1 (18,032,045) 139,682,111 158,575,804 60,111,069 3,604,915 60,603,994 (435,046,074) (324,113) (30,824,339) Gain on reevaluation 1,158,926,764 ------1,158,926,764 Loss on reevaluation (8,143,846) ------(8,143,846) Ending net book amount \1,922,577,617 \1,054,524,477 \1,359,875,315 \ 776,661,142 \ 318,320,468 \ 198,784,365 \108,669,195 \ - \ 5,739,412,579 Acquisition cost \1,922,577,617 \1,344,702,413 \1,772,861,340 \1,655,086,226 \ 502,406,575 \638,363,243 \108,669,195 \ - \ 7,944,666,609 Accumulated depreciation - (290,177,936) (412,986,025) (877,116,045) (184,058,420) (439,565,371) - - (2,203,903,797) Accumulated impairment loss - - - (1,309,039) (27,687) (13,507) - - (1,350,233) Net book amount \1,922,577,617 \1,054,524,477 \1,359,875,315 \ 776,661,142 \318,320,468 \198,784,365 \108,669,195 \ - \ 5,739,412,579
1 \ 31,440 million (2016: \ 30,824 million) was transferred to intangible assets (Notes 18).
Depreciation expense of \ 205,618 million (2016: \ 212,873 million), \ 3,440 million (2016: \ 4,376 million) and \ 33,296 million (2016: \ 34,435 million) has been charged to ‘cost of sales’, ‘research and development’ and ‘selling and administrative expenses’, respectively.
For the year ended December 31, 2017, increase in construction-in-progress includes capitalized borrowing costs amounting to \ 1,332 million (2016: \ 1,012 million) on construction-in-progress. The capitalization rate of borrowings used to determine the amount of borrowing costs eligible for capitalization is 3.49% (2016: 3.09%).
Details of property, plant and equipment provided as collaterals in relation to borrowings and advance receipt refund guarantee as at December 31, 2017, are as follows
(In millions of Korean won) Book Secured Related Collaterals Related item Secured party amount amount amount Land \485,008
Building 177,403 1,214,600 335,351 Korea Exim Bank Structures 510,014 Machinery 184,669 Vehicles 132,638 Borrowings and others Land 1,013,138 (Note 19 and
Building 28,689 Korea Development 900,000 21) 651,676 Structures 61,406 Bank Machinery 29,435 Land 38,519 Korea Investment 110,500 85,000 Building 85,102 Capital
46 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
17. Investment Properties
Details of investment properties as at December 31, 2017 and 2016, are as follows:
(In thousands of 2017 2016 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 (223,022) 6,100,091 6,323,113 (96,676) 6,226,437
\ 16,936,237 \ (223,022) \ 16,713,215 \ 16,936,237 \ (96,676) \ 16,839,561
Changes in investment properties for the periods ended December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016
Land Building Total Land Building Total Beginning balance \ 10,613,124 \ 6,226,437 \ 16,839,561 \ 3,840,791 \ 3,140,995 \ 6,981,786 Acquisition - - - 10,470,933 6,109,826 16,580,759 Disposal - - - (3,698,600) (2,883,107) (6,581,707) Depreciation - (126,346) (126,346) - (141,277) (141,277) Ending balance \ 10,613,124 \ 6,100,091 \ 16,713,215 \ 10,613,124 \ 6,226,437 \ 16,839,561
There is no rental income from investment properties during the year ended December 31, 2017, and operating expenses (including repairs and maintenance) of \ 73 million (2016: \ 43 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.
18. Intangible Assets
Changes in intangible assets for the periods ended December 31, 2017 and 2016, are as follows:
2017 (In thousands of Korean won) Other
Memberships intangible assets Total Beginning net book amount \ 23,833,517 \ 69,760,931 \ 93,594,448 Acquisition1 - 31,440,499 31,440,499 Amortization - (34,492,012) (34,492,012) Disposal (1,350,000) - (1,350,000) Ending net book amount \ 22,483,517 \ 66,709,418 \ 89,192,935 Acquisition cost \ 25,570,887 \ 267,218,272 \ 292,789,159 Accumulated depreciation and impairment loss (3,087,370) (200,508,854) (203,596,224) Net book amount \ 22,483,517 \ 66,709,418 \ 89,192,935
47 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
2016 (In thousands of Korean won) Other
Memberships intangible assets Total Beginning net book amount \ 26,932,160 \ 67,847,356 \ 94,779,516 Acquisition1 - 30,876,084 30,876,084 Amortization - (28,910,765) (28,910,765) Disposal (3,098,643) (51,744) (3,150,387) Ending net book amount \ 23,833,517 \ 69,760,931 \ 93,594,448 Acquisition cost \ 26,920,887 \ 235,777,773 \ 262,698,660 Accumulated depreciation and impairment loss (3,087,370) (166,016,842) (169,104,212) Net book amount \ 23,833,517 \ 69,760,931 \ 93,594,448
1 The amount includes \ 31,440 million (2016: \ 30,824 million) transferred from construction-in-progress (Note 16).
Amortization of \ 34,492 million (2016: \ 28,911 million) is included in the ‘selling and administrative expenses’.
The Company recognized research and development expenses totaling of \ 60,361 million (2016: \ 71,459 million) for the year ended December 31, 2017.
19. Borrowings and Debentures
Details of book amount of borrowings as at December 31, 2017 and 2016, are as follows:
Annual interest (In thousands of Korean won) rate (%) December 31, 2017 2017 2016
Debentures
Unsecured debenture 2.5-4.6 \ 591,744,814 \ 1,099,175,449 Less : current portion (499,932,356) (599,828,242)
91,812,458 499,347,207 Long-term borrowings denominated Korean
won Facility loans2 2.3-4.2 385,000,000 300,000,000 General loans 4.5 100,000,000 -
Production finance 3.6-3.9 453,875,000 500,000,000 Exchange equalization fund 2.5-2.7 401,775,000 543,825,000
Less : current portion (889,121,000) (500,000,000)
451,529,000 843,825,000 Short-term debentures Unsecured debenture 3.9-4.1 162,705,311 - 162,705,311 -
Short-term borrowings
General loans1,2,3 3.2-4.5 607,000,000 1,507,000,000
Operation loans of housing construction 4 1.4 8,593,000 8,593,000 Banker’s usance2 0.3-2.2 175,863,267 411,157,120
48 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
Shared growth loan 3.5-3.8 474,444,698 - Term loan - - 120,850,000 CP 4.0 40,000,000 - Electronic short-term debenture 3.3-3.5 400,000,000 - Invoice loan 1.0-2.1 108,422,374 153,400,008 Production Finance2 2.6 11,034,000 369,248,000
1,825,357,339 2,570,248,128
Current maturities of long-term debts Current portion of debentures 499,932,356 599,828,242
Current portion of long-term borrowings 889,121,000 500,000,000 1,389,053,356 1,099,828,242 Total Borrowings \ 3,920,457,464 \ 5,013,248,577
1Short-term financial instruments are provided as collateral for borrowings from Industrial and Commercial Bank of China (Note 5). 2 Certain property, plant and equipment are provided as collaterals for borrowings from Korea Exim Bank and Korea Development Bank (Note 16). 3 Held-to-maturity instruments are provided as collaterals for borrowings from Industrial Bank of Korea (Note 13). 4 Available-for-sale financial assets are provided as collaterals for borrowings from Construction Guarantee (Note 14).
Details of debentures as at December 31, 2017 and 2016, are as follows:
Annual interest rate (%) (In thousands of Korean won) 2017 2016 December 31, 2017
The 89-2nd unsecured debenture 4.4 \ - \ 399,933,507
The 90-2nd unsecured debenture 3.3 - 199,894,735 The 91st unsecured debenture 2.5 499,932,356 499,347,207 The 92nd unsecured debenture 3.9 59,912,413 - The 93-1st unsecured debenture 4.2 61,879,123 - The 93-2nd unsecured debenture 4.4 9,979,025 - The 93-3rd unsecured debenture 4.6 9,978,152 - The 94th unsecured debenture 3.9 53,899,334 - The 95th unsecured debenture 3.9 19,958,782 - The 96-1st unsecured debenture 4.1 28,934,781 - The 96-2nd unsecured debenture 4.6 9,976,158 -
754,450,124 1,099,175,449 Less : current portion (499,932,356) (599,828,242) Less: short-term debentures (162,705,311) - \ 91,812,457 \ 499,347,207
49 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
Details of issue of debentures as at December 31, 2017, are as follows:
The 89-2nd unsecured debenture The 90-2nd unsecured debenture The 91st unsecured debenture
Face amount \400,000 million \200,000 million \500,000 million
Issuing cost \1,543 million \670 million \1,716 million
Interest rate 4.4% 3.3% 2.5% Payment of credit every three Payment of credit every three Payment of credit every three Interest payment months after issued date months after issued date months after issued date
Issued date February 14, 2012 September 26, 2012 February 12, 2015
Maturity date February 14, 2017 September 26, 2017 February 12, 2018
The 92nd unsecured debenture The 93-1st unsecured debenture The 93-2nd unsecured debenture
Face amount \60,000 million \62,000 million \10,000 million
Issuing cost \151 million \156 million \25 million
Interest rate 3.9% 4.2% 4.4% Payment of credit every three Payment of credit every three Payment of credit every three Interest payment months after issued date months after issued date months after issued date
Issued date July 28, 2017 August 28, 2017 August 28, 2017
Maturity date July 28, 2018 February 28, 2019 August 28, 2019
The 93-3rd unsecured debenture The 94th unsecured debenture The 95th unsecured debenture
Face amount \10,000 million \54,000 million \20,000 million
Issuing cost \25 million \136 million \50 million
Interest rate 4.6% 3.9% 3.9% Payment of credit every three Payment of credit every three Payment of credit every three Interest payment months after issued date months after issued date months after issued date
Issued date August 28, 2017 September 28, 2017 October 26, 2017
Maturity date February 28, 2020 September 28, 2018 October 26, 2018
The 96-1st unsecured debenture The 96-2nd unsecured debenture
Face amount \29,000 million \10,000 million
Issuing cost \73 million \25 million
Interest rate 4.1% 4.6% Payment of credit every three months after issued Payment of credit every three months after Interest payment date issued date
Issued date November 23, 2017 November 23, 2017
Maturity date November 23, 2018 November 23, 2019
50 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
20. Net Defined Benefit Liabilities
The defined benefit pension plan that the Company 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 separate statements of financial position as at December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016 Present value of funded defined benefit obligations \ 458,902,757 \ 472,024,532 Present value of unfunded defined benefit obligations 14,388,040 27,652,105 473,290,797 499,676,637 Fair value of plan assets1 (432,779,744) (398,371,746) Liability in the separate statement of financial position \ 40,511,053 \ 101,304,891
1 The contributions to the National Pension Fund of \ 586 million are included in the fair value of plan assets as at December 31, 2017 (2016: \ 605 million).
Changes in the defined benefit obligations for the periods ended December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016 Beginning balance \ 499,676,637 \ 578,178,129 Current service cost 68,817,688 78,867,372 Interest expense 14,923,330 15,972,880 Past service costs and gains and losses on settlement - (10,372,284) Remeasurements: Actuarial gain and loss from change in financial assumptions (16,796,565) - Others (11,148,612) (52,080,617) Payments from plans: Benefit payments (83,077,973) (110,888,843) Transfer from and to related companies 896,292 - Ending balance \ 473,290,797 \ 499,676,637
Changes in the fair value of plan assets for the periods ended December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016 Beginning balance \ 398,371,746 \ 402,253,752 Interest income 11,773,665 11,653,227 Remeasurements: Return on plan assets (excluding amounts included in interest income) (7,318,549) (7,022,763) Contributions: Employers 93,555,249 96,542,650 Payments from plans: Benefit payments (63,602,367) (105,055,120) 51 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
Ending balance \ 432,779,744 \ 398,371,746
Plan assets as at December 31, 2017 and 2016, consist of as follows:
2017 2016 (In thousands of Korean won) Composition Composition Quoted price Quoted price (%) (%)
Cash and cash equivalents \ 432,193,539 99.9 \ 397,766,831 99.8
Others (National Pension Fund) 586,205 0.1 604,915 0.2
\ 432,779,744 100 \ 398,371,746 100.0
The significant actuarial assumptions as at December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016 Discount rate 3.5% 3.2% Salary growth rate 3.7% 4.0%
The sensitivity of the defined benefit obligations as at December 31, 2017, 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% 6.4% decrease 7.3% increase Salary growth rate 1.0% 7.3% increase 6.6% 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 separate 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 Company 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, 2018, are \ 73,324 million and the weighted average duration of the defined benefit obligations is 6.95 years.
Expected maturity analysis of undiscounted pension benefits as at December 31, 2017, is as follows: (In thousands of Korean Between 1 and 2 Between 2 and 5 won) Less than 1 year years years Over 5 years Total Pension benefits. \ 64,353,974 \ 70,687,928 \ 168,526,460 \ 288,889,704 \ 592,458,066
52 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
21. Provisions, Contingent Liabilities and Commitments
A. Provisions
Details and changes in provisions for liabilities for the periods ended December 31, 2017 and 2016, are as follows:
(In thousands of Korean Reference January 1, 2017 Increase (decrease) December 31, 2017 won)
Long-term Incentives (A) \ 8,438,508 \ - \ 8,438,508
Litigations (B) 340,849,361 93,848,864 434,698,225
\ 349,287,869 \ 93,848,864 \ 443,136,733
(In thousands of Korean Reference January 1, 2016 Increase (decrease) December 31, 2016 won) Long-term Incentives (A) \ 8,438,508 \ - \ 8,438,508 Litigations (B) 391,327,088 (50,477,727) 340,849,361 \ 399,765,596 \ (50,477,727) \ 349,287,869
(A) The Company has a long-term incentive plans for its executives based on three-year management performance criteria and recognized estimated amounts payable within and after one year from December 31, 2017, as ‘provisions’ and ‘other provisions’, respectively.
(B) As at December 31, 2017, the Company has a pending lawsuit amounting to \ 82,836 million against the Company for claiming additional payments of wages related to general wages. The Company recognizes the best estimate which is expected to be paid as provisions. The final liability of the Company is subject to change from the estimated amount depending on the outcome of this case. In addition, the Company has accrued warranty provision for the estimated costs of future repair, based on the historical data and others, and the corresponding amount is recognized as warranty expenses.
B. Contingent liabilities
(A) As at December 31, 2017, the Company is named as a defendant in 32 legal cases, excluding the case and the arbitration on which the Company recognized provision. The aggregate amounts of claims as a defendant amounted to approximately \ 103,144 million. The said case is still pending in court and as at December 31, 2017, the outcome of these cases is uncertain. Accordingly, the ultimate effect of these matters on the financial position of the Company cannot be determined.
(B) As at December 31, 2017, the Company provides guarantees to the ship-owners vessels finance amounting to USD 58 million.
(C) The Company provides performance guarantees of USD 351 million to the ship-owners in relation to the shipbuilding & offshore contracts (Note 34).
(D) The Company provides payment guarantees for subsidiary’s refund guarantee of USD 288 million and borrowings up to CNY 1,253 million (Executed amount: CNY 1,067 million) and USD 144 million (Executed amount: USD 140 million). And the Company provides guarantees of USD 54 million for a subsidiary’s currency forward contracts. (Note 34). 53 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
C. Commitments
(A) As at December 31, 2017, the Company has technical assistance agreements with three foreign companies for manufacturing machines, shipbuilding and others.
(B) As at December 31, 2017, the Company is provided with refund guarantee of USD 3,456 million from Korea Exim bank and others. The ships under construction are pledged as collaterals for the guarantees provided by the financial institutions.
(C) Commitment limits made with financial institutions are as follows:
(In millions of Korean won) Financial institution Contract limit Overdrawn account Woori Bank and others \ 36,000 Trade finance KEB Hana Bank and others 686,497 General loan, others Korea Exim Bank and others 2,634,574 Purchase card Nonghyup and others 132,000
22. Share Capital and Share Premium
The Company’s total number of authorized shares is 500 million shares and the par value per share is \ 5,000. As at December 31, 2017, total number of shares issued is 390,114,845 shares, including 114,845 shares of preferred share, and share capital is \1,950,574 million.
Number of shares outstanding Share capital and premium (In millions of Korean (in shares) (in thousands of Korean won) Ordinary Preferred Share Share won) Total1 Total shares shares capital premium
January 1, 2016 204,910,957 114,845 205,025,802 \1,154,951,155 \ 417,172,244 \ 1,572,123,399
Capital increase 159,124,614 - 159,124,614 795,623,070 334,845,851 1,130,468,921
December 31, 2016 364,035,571 114,845 364,150,416 \ 1,950,574,225 \ 752,018,095 \ 2,702,592,320 December 31, 2017 364,035,571 114,845 364,150,416 \ 1,950,574,225 \ 752,018,095 \ 2,702,592,320
1 The Company holds 25,964,429 shares of its ordinary shares (Note 23).
23. Accumulated Other Comprehensive Income and Other Components of Equity
Changes in accumulated other comprehensive income for the periods ended December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 Increase Beginning Ending (decrease) Change in the fair value of available-for-sale financial assets \ 4,916,131 \ 157,849 \ 5,073,980 Reevaluation reserves 868,518,307 (2,006,049) 866,512,258
\ 873,434,438 \ (1,848,200) \ 871,586,238
54 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
(In thousands of Korean won) 2016 Increase Beginning Ending (decrease) Change in the fair value of available-for-sale financial assets \ 23,601,777 \ (18,685,646) \ 4,916,131 Reevaluation reserves - 868,518,307 868,518,307
\ 23,601,777 \ 849,832,661 \ 873,434,438
Changes in accumulated other comprehensive income represent net of tax effect amounts.
Other components of equity as at December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016 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, 2017, the 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.
24. Retained Earnings
Retained earnings as at December 31, 2017 and 2016, consist of:
(In thousands of Korean won) 2017 2016 Legal reserves1 \ 103,100,000 \ 103,100,000 Discretionary reserves2 3,274,437,967 3,361,894,404 Unappropriated retained earnings (319,965,459) (87,456,437) \ 3,057,572,508 \ 3,377,537,967
1 The Commercial Code of the Republic of Korea requires the 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).
2 The 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.
The appropriation of retained earnings for the year ended December 31, 2017, is expected to be appropriated at the shareholders’ meeting on March 22, 2018. The appropriation date for the year ended December 31, 2016, was March 24, 2017.
The appropriation of retained earnings for the periods ended December 31, 2017 and 2016, is as follows:
55 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
(In Korean won) 2017 2016
Unappropriated retained earnings carried over from prior year \ - \ - Loss for the period (337,606,491,056) (134,734,538,838) Remeasurements of net defined benefit liabilities 15,634,984,119 34,153,853,319 Revaluation reserve 2,006,048,088 13,124,248,736 Research and development reserves 40,000,000,000 65,000,000,000 Reserve for facilities 279,965,458,849 22,456,436,783 - -
Appropriation of retained earnings - - Unappropriated retained earnings to be carried forward \ - \ -
25. Breakdown of Expenses by Nature
Breakdown of expenses by nature for the periods ended December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016
Changes in inventories \ 135,700,033 \ (75,859) Raw-materials and supplies used 3,171,741,732 4,825,783,969 Employee benefit expense 1,016,826,008 1,311,085,193 Depreciation and amortization 276,846,038 280,595,460 Service fees 206,388,978 288,799,758 Outsource expenses 2,235,346,706 2,645,159,320 Others 846,409,373 713,955,222 \ 7,889,258,868 \ 10,065,303,063
26. Selling, General and Administrative Expenses
Details of selling, general and administrative expenses for the periods ended December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016
Employee benefit expense \ 92,175,801 \ 118,943,442 Service fees 59,661,286 83,324,359
Warranty expense (4,119,359) (20,242,999)
Impairment loss (12,259,425) 181,366,117 Depreciation and amortization 67,787,888 63,346,215
Research and development 60,117,424 71,194,964
Taxes and dues 6,735,197 10,443,463 Others 34,645,097 45,160,624
\ 304,743,909 \ 553,536,185
56 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
27. Other Income and Expenses
Details of other income and expenses for the periods ended December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016 Other income
Gain on foreign currency transaction \ 56,789,560 \ 62,538,260
Gain on foreign currency translation 48,916,069 96,424,226
Gain on valuation of derivatives 507,350,525 131,929,894 Gain on derivative transactions 822,655,684 432,366,268
Gain on firm commitment valuation 225,511,878 379,257,019
Gain on firm commitment transactions 263,652,069 273,506,260 Others 69,169,220 175,452,374
\ 1,994,045,005 \ 1,551,474,301
Other expenses
Loss on foreign currency transaction \ 253,672,073 \ 76,660,093
Loss on foreign currency translation 250,889,861 21,003,083
Loss on valuation of derivatives 226,186,667 453,191,951 Loss on derivative transactions 264,752,445 291,385,180
Loss on firm commitment valuation 294,871,656 131,909,764
Loss on firm commitment transactions 624,825,500 384,482,751 Others 61,645,112 76,504,953
\ 1,976,843,314 \ 1,435,137,775
28. Finance Income and Costs
Details of finance income and costs for the periods ended December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016
Finance income Interest income \ 14,160,749 \ 18,555,101 Currency transaction differences 24,081,168 13,394,054 Currency translation differences 93,785,144 12,394,351 Gain from derivative valuation 17,782,252 49,590,608 Gain from derivative transactions 79,437,612 51,746,941 \ 229,246,925 \ 145,681,055 Finance costs Interest expense \ 36,593,189 \ 44,314,400 Currency transaction differences 13,356,378 3,737,811 Currency translation differences 9,786,067 31,970,311 Loss from derivative valuation 20,038,094 40,361,845 Loss from derivative transactions 103,773,092 71,809,018 \ 183,546,820 \ 192,193,385
57 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
29. Income Tax Expense (Benefit)
Income tax expense (benefit) for the periods ended December 31, 2017 and 2016, consists of:
(In thousands of Korean won) 2017 2016 Current tax on profits for the year \ (10,448,555) \ (41,086,900) Origination and reversal of temporary differences (90,192,334) 64,681,795 Deferred tax due to tax loss carryforwards 8,779,259 (757,334) Total tax effect \ (91,861,630) \ 22,837,561 Income tax expense (benefit) \ (91,861,630) \ 22,837,561
Reconciliation between profit (loss) before tax and income tax expense (benefit) for the periods ended December 31, 2017 and 2016, is as follows:
(In thousands of Korean won) 2017 2016 Loss before tax \ (429,468,121) \ (111,896,978) Income tax based on statutory tax rate \ (103,931,285) \ (27,079,069) Adjustments 12,069,655 49,916,630 Tax deduction (1,014,127) (10,550,720) Permanent differences and others (1,554,566) (21,284,553) Unrecognized deferred tax assets 14,638,348 81,751,903 Income tax expense (benefit) \ (91,861,630) \ 22,837,561 Effective tax rate1,2 - - 1 Income tax expense / profit or loss before income tax 2 As income tax benefit is occurred, the Company did not calculate effective tax rate.
Changes in the temporary differences and related deferred tax assets and liabilities are as follows:
2017 Temporary differences Deferred tax assets (liabilities) (In thousands of Korean won) Increase Beginning Ending Beginning Ending (decrease)
Post-employment benefit obligation \ 64,378,446 \ (42,214,524) \ 22,163,922 \ 15,579,584 \ 5,363,669
Accrued interest (3,850,522) 1,489,991 (2,360,531) (931,826) (571,248)
Inventories 4,537,407 (144,293) 4,393,114 1,098,052 1,063,133
Property, plant and equipment (244,638,862) 19,140,976 (225,497,886) (59,202,605) (54,570,488) Subsidiaries, associates and joint ventures (117,865,908) - (117,865,908) (3,462,406) (3,462,406)
Impairment loss on investment 1,016,610 4,150 1,020,760 246,020 247,024 Provision for impairment of receivables 301,401,068 (163,931,094) 137,469,974 71,160,541 31,484,254 Gain (loss) on foreign currency translation (63,517,340) 170,271,302 106,753,962 (15,371,196) 25,834,459
Accrued expenses 421,168,572 5,634,009 426,802,581 31,742,794 28,266,225 Due to customers for contract work and others 582,001,679 9,694,725 591,696,404 140,844,406 143,190,530 Provisions 349,287,869 93,848,864 443,136,733 84,527,664 107,239,089
Derivatives 180,018,979 (335,175,944) (155,156,965) 43,564,593 (37,547,985)
58 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
Reserve for research and human resource development (60,000,000) 40,000,000 (20,000,000) (14,520,000) (4,840,000) Unused tax losses 1,581,779,496 465,936,248 2,047,715,744 382,790,638 495,547,210
Others (76,668,009) 128,161,692 51,493,683 (26,358,980) 4,656,147
\ 2,919,049,485 \ 392,716,102 \ 3,311,765,587 \ 651,707,279 \ 741,899,613
Deferred tax charged directly to (deducted from) shareholders' equity \ (1,181,389,232) \ (18,188,369) \ (1,199,577,601) \ (285,896,194) \ (290,297,779)
Tax deduction 22,434,864 (8,779,259) 13,655,605 12,641,478 3,862,219 \ 378,452,563 \ 455,464,053
2016 Temporary differences Deferred tax assets (liabilities) (In thousands of Korean won) Increase Beginning Ending Beginning Ending (decrease)
Post-employment benefit obligation \ 117,208,178 \ (52,829,732) \ 64,378,446 \ 28,364,379 \ 15,579,584
Accrued interest (11,133,041) 7,282,519 (3,850,522) (2,694,196) (931,826)
Inventories 19,400,712 (14,863,305) 4,537,407 4,694,972 1,098,052
Property, plant and equipment (245,033,110) 394,248 (244,638,862) (59,298,013) (59,202,605) Subsidiaries, associates and joint ventures (125,432,532) 7,566,624 (117,865,908) (5,293,529) (3,462,406)
Impairment loss on investment 1,512,460 (495,850) 1,016,610 366,015 246,020 Provision for impairment of receivables 241,509,245 59,891,823 301,401,068 58,445,237 71,160,541 Gain (loss) on foreign currency translation (41,111,809) (22,405,531) (63,517,340) (9,949,058) (15,371,196)
Accrued expenses 423,010,206 (1,841,634) 421,168,572 102,368,470 31,742,794 Due to customers for contract work and others 1,016,899,427 (434,897,748) 582,001,679 246,089,661 140,844,406 Provisions 399,765,596 (50,477,727) 349,287,869 96,743,274 84,527,664
Derivatives 14,869,680 165,149,299 180,018,979 3,598,463 43,564,593 Reserve for research and human resource development (125,000,000) 65,000,000 (60,000,000) (30,250,000) (14,520,000) Unused tax losses 1,282,470,371 299,309,125 1,581,779,496 310,357,830 382,790,638
Others (67,893,112) (8,774,897) (76,668,009) (27,154,430) (26,358,980)
\ 2,901,042,271 \ 18,007,214 \ 2,919,049,485 \ 716,389,075 \ 651,707,279
Deferred tax charged directly to (deducted from) shareholders' equity \ (15,180,110) \ (1,166,209,122) \ (1,181,389,232) \ (3,673,587) \ (285,896,194)
Tax deduction 11,884,144 10,550,720 22,434,864 11,884,144 12,641,478 \ 724,599,632 \ 378,452,563
Income tax related to components of other comprehensive income for the periods ended December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016 Loss on valuation of available-for-sale financial assets \ (1,619,925) \ (1,569,530) Remeasurements (12,034,099) (7,042,455) Revaluation of land (276,643,755) (277,284,209) \ (290,297,779) \ (285,896,194) 59 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
Details of unrecognized deductible (taxable) temporary differences as deferred tax assets (liabilities) as at December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016 Remark
Interests in subsidiary \ (19,561,949) \ (19,561,949) No plan for disposal
Donation and others 76,803,479 71,958,517 Uncertainty of future taxable profit
Tax credit carry forwards 1 9,793,386 9,793,386 Uncertainty of future taxable profit
1 The maturity of tax credit carryforwards is as follows:
(In thousands of Korean won) 2017 2020 \ 9,793,386
Since it is probable that future taxable profit will be available against which the unused tax losses can be utilized, the Company recognized the related deferred tax assets.
The analysis of deferred tax assets and liabilities as at December 31, 2017 and 2016, is as follows:
2017 2016 (In thousands of Korean won) Within 1 year After 1 year Within 1 year After 1 year Deferred tax assets \ 77,205,263 \ 926,524,903 \ 51,874,764 \ 855,056,113 Deferred tax liabilities (5,411,248) (542,854,865) (21,143,023) (507,335,291) \ 71,794,015 \ 383,670,038 \ 30,731,741 \ 347,720,822
30. 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 Company by the weighted average number of ordinary shares in issue during the year excluding ordinary shares purchased by the Company and held as treasury shares.
Basic loss per ordinary share for the periods ended December 31, 2017 and 2016, is as follows:
(In millions of Korean won except per share amount) 2017 2016
Loss attributable to ordinary equity holders of the Company1 \ (337,500) \ (134,692) Weighted average number of ordinary shares in issue (in thousands of shares)2 364,036 249,792
Basic loss per share (in Korean won) \ (927) \ (539)
60 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
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 Company is holding at December 31, 2017.
Diluted loss per ordinary share for the periods ended December 31, 2017 and 2016, is as follows:
(In millions of Korean won except per share amount) 2017 2016
Loss used to determine diluted loss per ordinary share1 \ (337,500) \ (134,692) Weighted average number of ordinary shares for diluted loss per share (in thousands of shares)2 364,036 249,792
Diluted loss per share (in Korean won) \ (927) \ (539)
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 Company by the weighted average number of preferred shares in issue during the year excluding preferred shares purchased by the Company and held as treasury shares.
Basic loss per preferred share for the periods ended December 31, 2017 and 2016, is as follows:
(In millions of Korean won except per share amount) 2017 2016
Loss attributable to preferred equity holders of the Company1 \ (106) \ (43) Weighted average number of preferred shares in issue (in thousands of shares)2 115 115
Basic loss per preferred share (in Korean won) \ (927) \ (370)
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 Company is holding at December 31, 2017.
Diluted loss per preferred share for the periods ended December 31, 2017 and 2016, is as follows:
(In millions of Korean won except per share amount) 2017 2016
Loss used to determine diluted loss per preferred share1 \ (106) \ (43) 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) \ (927) \ (370)
1 Profit (loss) attributable to ordinary equity holders of the Company and profit (loss) attributable to preferred equity holders of the Company for the periods ended December 31, 2017 and 2016, are as follows:
61 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
(In millions of Korean won) 2017 2016
Loss attributable to equity holders of the Company \ (337,606) \ (134,735)
Adjustments 106 43
Loss attributable to ordinary equity holders of the Company \ (337,500) \ (134,692) Loss attributable to preferred equity holders of the Company \ (106) \ (43)
2 Weighted average number of ordinary shares and preferred shares in issue and those for diluted earnings (loss) for the periods ended December 31, 2017 and 2016, are as follows:
(In millions of Korean won except per share amount) 2017 2016 Ordinary shares
Beginning \ 364,036 \ 204,911
Issue of share capital - 44,881
Weighted average number of ordinary shares in issue \ 364,036 \ 249,792 Preferred shares Beginning \ 115 \ 115 Weighted average number of preferred shares in issue \ 115 \ 115
31. Cash Generated from Operations
Details of cash generated from operations for the periods ended December 31, 2017 and 2016, consist of the following:
(In thousands of Korean won) 2017 2016 Loss before income tax \ (429,468,121) \ (111,896,978) Adjustments for: Post-employment benefit obligations 71,967,353 72,814,740 Provisions for impairment of receivables (reversal) (12,578,487) 183,808,684 Loss on disposal of subsidiaries, associates, and joint ventures 437,565 8,434,406 Impairment loss on subsidiaries, associates, and joint ventures - (580,166) Loss on disposal of available-for-sale financial assets 254,407 91,846 Gain on disposal of available-for-sale financial assets - (24,837,735) Gain on foreign currency translation (142,701,214) (108,818,576) Loss on foreign currency translation 260,675,928 52,973,394 Depreciation 242,354,026 251,684,695 Gain on disposal of property, plant and equipment (4,411,444) (23,813,117) Loss on disposal of property, plant and equipment 4,357,035 18,812,625 Loss on revaluation of property, plant and equipment - 8,143,846 Reversal of impairment loss on property, plant and equipment - (714,829) Amortization 34,492,012 28,910,765 Gain on disposal of intangible assets - (1,757,134) Loss on disposal of intangible assets - 89,330 Gain on disposal of investment property - (11,440,161) Loss on disposal of investment property - 716,234 Loss (gain) from derivative transaction and valuation (812,475,775) 191,114,282 Loss (gain) from firm commitment transaction and valuation 430,533,209 (136,370,763)
62 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
Interest income (17,891,929) (46,681,706) Interest expense 132,260,631 153,566,563 Dividend income (392,955) (307,027) Donation 3,286,786 - Other expense 126,346 141,278 190,293,494 615,981,474 Changes in assets and liabilities: Trade receivables 75,115,996 (32,301,873) Due from customers for contract work 1,399,028,736 (937,944,701) Due to customers for contract work (271,088,389) (968,674,618) Other receivables (9,774,348) (91,616,967) Advance payments 160,420,802 534,842,916 Prepaid expenses 63,917,314 60,654,529 Inventories 464,103,912 228,634,558 Other current financial assets 257,417 (8,992,394) Other current assets 22,463,817 (28,695,434) Long-term prepaid expenses (64,527,200) (36,593,955) Trade payables (641,242,230) (123,083,665) Other payables 5,453,562 7,052,319 Advance receipts (214,621,598) (624,368,266) Accrued expenses 4,925,832 (4,783,572) Other current liabilities (1,372,912) (2,235,867) Net defined benefit liabilities (112,134,562) (102,376,372) Provisions (97,930,205) (54,681,378) Derivative financial instruments 13,177,414 (129,617,248) Firm commitment (41,875,256) 252,655,402 Other non-current financial liabilities 2,766,062 (4,035,026) 757,064,164 (2,066,161,612) Cash generated from (used in) operations \ 517,889,537 \ (1,562,077,116)
The Company’s separate statements of cash flows are prepared using the indirect method. The significant non- cash transactions for the periods ended December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016
Transfer of current portion of long-term borrowings \ 1,007,934,000 \ 500,000,000 Transfer of current portion of debentures 499,347,207 599,828,242 Transfer of construction in-progress to other property, plant
and equipment 145,948,421 335,259,187
63 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
Changes in liabilities arising from financial activities for the year ended December 31, 2017, are as follows:
Net cash inflow (outflow) from (in thousands of Korean At January 1, financing Non-cash inflow At December 31, won) 2017 activities (outflow) 2017
Short-term borrowings \ 2,570,248,128 \ (718,523,116) \ (26,367,673) \ 1,825,357,339 Short-term debentures - 162,590,930 114,381 162,705,311 Current-portion of long- term debts 1,099,828,242 (1,218,813,000) 1,508,038,113 1,389,053,355 Debentures 499,347,207 91,769,120 (499,303,869) 91,812,458 Long-term borrowings 843,825,000 675,645,500 (1,067,941,500) 451,529,000 \ 5,013,248,577 \ (1,007,330,566) \ (85,460,548) \ 3,920,457,463
32. Financial Risk Management
The Company’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 Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s financial performance. The Company 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 Company treasury identifies, evaluates and hedges financial risks in close co-operation with the Company’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.
32.1 Market risk
(a) Foreign exchange risk
The Company 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.
Management has set up a policy to require Group companies to manage their foreign exchange risk against their functional currency.
The Company’s risk management policy is to hedge of anticipated cash flows and it qualify as firm commitment for hedge accounting purposes.
The Company 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.
64 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
(b) Price risk
The Company is exposed to equity securities price risk because of investments held by the Company and classified on the separate statement of financial position as available-for-sale. The market values for the Company’s listed equity investments as at December 31, 2017 and 2016, are \ 3,991 million and \ 4,606 million, respectively.
If there is change in price of equity investment by 30%, the amount of other comprehensive income changes for the periods ended December 31, 2017 and 2016, would be \ 907 million and \ 1,047 million, respectively.
(c) Interest rate risk
The Company’s cash flow interest rate risk arises from borrowings. Borrowings issued at variable rates expose the Company 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 Company to fair value interest rate risk.
The Company 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 Company 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 \ 3,920 million (2016: \ 5,013 million) of increase or decrease impact on the profit or loss.
32.2 Credit risk
Credit risk is managed on a group basis. 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 and committed transactions. For banks and financial institutions, only independently rated parties with a minimum rating of ‘A’ are accepted.
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.
Accordingly, credit exposure to the Company is expected to be restricted. 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 \ 420,993 million \ 742,455 million relating to the financial guarantee contract and performance guarantees provided, respectively.
32.3 Liquidity risk
The Company monitors rolling forecasts of the Company’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 Company does not breach borrowing limits or covenants (where applicable) on any of its borrowing facilities. Such forecasting takes into consideration the Company’s debt financing plans, covenant compliance, compliance with internal financial ratio targets and, if applicable external regulatory or legal requirements – for example, currency restrictions.
65 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
The analysis of the Company’s liquidity risk as at December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 Less than More than 1-2 years 1 year 2 years Derivative financial assets \ 328,088,495 \ 73,569,001 \ 22,433,440 Borrowings 1,865,754,181 376,699,477 87,631,041 Current portion of long-term debts 1,399,594,365 - - Debentures 171,277,007 83,416,651 10,052,509 Trade payables and other financial liabilities 1,208,881,241 18,942,062 - Derivative financial liabilities 146,666,498 52,662,638 13,430,158 Payment guarantee contracts and others1 1,111,323,299 30,346,277 21,778,511
1 Payment guarantee contracts present maximum amount to be paid upon principal debtor’s claim (Note 21).
(In thousands of Korean won) 2016 Less than More than 1-2 years 1 year 2 years Derivative financial assets \ 203,020,422 \ 77,154,070 \ 3,078,094 Borrowings 2,618,129,365 849,652,091 - Current portion of long-term debts 1,115,263,699 - - Debentures 12,565,000 501,480,260 - Trade payables and other financial liabilities 1,864,069,594 16,176,000 - Derivative financial liabilities 768,487,498 87,307,536 15,424,271 Payment guarantee contracts and others1 1,270,617,751 285,232,818 47,720,574
1 Payment guarantee contracts present maximum amount to be paid upon principal debtor’s claim (Note 21).
Details of the Company’s recognized financial assets and liabilities subject to enforceable master netting arrangements as at December 31, 2017, are as follows:
Presented in the separate (In thousands of Korean won) Amounts not statement of financial Net amount offset position Derivative financial assets \ 345,201,414 \ - \ 345,201,414 Derivative financial liabilities 197,255,649 - 197,255,649
32.4 Capital risk management
The Company’s objectives when managing capital are to safeguard the Company’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 Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.
The Company 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
66 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016 in the separate statements of financial position) less cash and cash equivalents. Total capital is calculated as ‘equity’ as shown in the separate statement of financial position plus net debt. The gearing ratios as at December 31, 2017 and 2016, are as follows:
(In thousands of Korean won) 2017 2016 Total borrowings (Note 19) \ 3,920,457,463 \ 5,013,248,577 Less: cash and cash equivalents (Note 4) 315,008,775 929,561,607 Net debts 3,605,448,688 4,083,686,970 Total equity 5,667,854,921 5,989,668,580 Total capital \ 9,273,303,609 \ 10,073,355,550
Gearing ratio 38.88% 40.54%
33. Operating 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.
General information by business segments
Sales Sales Segment Product and Services Main Customer Type ratio (%) Shipbuilding Foreign ship-owners, Product Drillship, LNG, off-shore platform, others 99.3 & offshore others Construction business E&I Product Engineering works, construction, others 0.7 owners, others
100.0
Financial information by business segments
(In thousands of Korean won) 2017 Shipbuilding & offshore E&I Total Sales Gross sales \ 7,344,449,472 \ 63,334,832 \ 7,407,784,304 Inter-segment sales - (10,895,354) (10,895,354) Net sales \ 7,344,449,472 \ 52,439,478 \ 7,396,888,950
Operating loss \ (444,610,096) \ (7,002,276) \ (451,612,373) Property, plant and equipment & intangible assets 5,585,699,117 18,084,191 5,603,783,308 Depreciation & amortization 276,790,870 55,168 276,846,038
(In thousands of Korean won) 2016 Shipbuilding & offshore E&I Total Sales Gross sales \ 9,813,073,580 \ 108,627,626 \ 9,921,701,206 Inter-segment sales - (38,119,316) (38,119,316) Net sales \ 9,813,073,580 \ 70,508,310 \ 9,883,581,890
67 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
Operating loss \ (117,387,917) \ (15,300,705) \ (132,688,622) Property, plant and equipment & intangible assets 5,814,870,056 18,136,971 5,833,007,027 Depreciation & amortization 280,490,643 104,817 280,595,460 Since most of the debts are jointly utilized debt, the Company's management does not separately report with segment liabilities.
Reconciliation between segment operating loss and operating loss
(In thousands of Korean won) 2017 2016
Total segment operating loss \ (451,612,372) \ (132,688,622) Internal income/expense and other operating income/expense between segments - - Undistributed selling and administrative income/expenses (40,757,546) (49,032,552) Operating loss per statement of profit or loss \ (492,369,918) \ (181,721,174)
Undistributed selling and administrative expenses are not distributed to segments since they are centrally incurred costs.
34. Related Party Transactions
The subsidiaries as at December 31, 2017 and 2016, are as follows:
Percentage of ownership (%) 2017 2016 Samsung Heavy Industries (Ningbo) Co., Ltd. 100 100 Samsung Heavy Industries (Rongcheng) Co., Ltd. 100 100 Rongcheng Gaya Heavy Industries Co., Ltd. 100 100 Samsung Heavy Industries India Pvt. Ltd. 100 100 Camellia Consulting Corporation 100 100 Samsung Heavy Industries(M) SDN.BHD 100 100 SVIC 13 New Technology Business investment 99 99 Samsung Heavy Industries Brazil 100 100 SHI Brazil Construction 100 100 Samsung Heavy Industries Nigeria Co. Ltd. 100 100 SHI-MCI FZE 70 70 SHI Mozambique LDA1 100 -
1Established during 2017.
Details of associates and other related parties that have sales and other transactions with the Company or have receivables and payables balances as at December 31, 2017 and 2016, are as follows:
68 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
2017 (In thousands of Korean won) Sales Purchase Receivables Payables Subsidiaries Samsung Heavy Industries (Ningbo) Co., Ltd. \ 10,154,122 \ 52,018,601 \ 1,664,676 \ 4,000,019 Samsung Heavy Industries (Rongcheng) Co., Ltd. 1,299,989 113,595,648 14,931,276 1,099,528 Rongcheng Gaya Heavy Industries Co., Ltd. 27,596 12,448,177 28,214 50,140 Samsung Heavy Industries India Pvt. Ltd. - 3,356,186 - - Camellia Consulting Corporation - 2,347,097 - - Samsung Heavy Industries Nigeria Co. Ltd. 571,478,115 - 251,661,082 - SHI-MCI FZE 289,796 - 3,521,353 - Others 1 Samsung C&T Corporation and others 123,644,144 218,889,669 437,158,738 29,580,487 \ 706,893,762 \ 402,655,378 \ 708,965,339 \ 34,730,174
1 Although the entity is not the related party of the Company 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 customers for contract work amount to \ 2,592 is deducted 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.
2016 (In thousands of Korean won) Sales Purchase Receivables Payables Subsidiaries Samsung Heavy Industries (Ningbo) Co., Ltd. \ 7,704,569 \ 110,819,182 \ 18,107,614 \ 7,085,481 Samsung Heavy Industries (Rongcheng) Co., Ltd. 2,648,736 155,136,855 16,437,249 18,406,169 Rongcheng Gaya Heavy Industries Co., Ltd. 144,185 12,982,385 654,785 1,274,577 Samsung Heavy Industries India Pvt. Ltd. - 5,224,478 - - Samsung Heavy Industries(M) SDN.BHD - 28,646 - - Samsung Heavy Industries Nigeria Co. Ltd. 874,281,895 - - - SHI-MCI FZE 1,813,598 - 3,701,560 - Others 1 Samsung C&T Corporation and others 82,299,853 307,997,266 417,529,994 45,497,770 \ 968,892,836 \ 592,188,812 \ 456,431,202 \ 72,263,997
1 Although the entity is not the related party of the Company 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 customers for contract work amount to \ 12,126 is deducted 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.
69 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
The Company newly invested \ 56 million in SHI Mozambique LDA during 2017. The Company invested additional \ 200 million in Daejung Offshore Wind Power Co., Ltd.. in 2017 and \ 275 million in Samsung Heavy Industries India Pvt.Ltd. in 2016.
Details of payment guarantees and collateral provided by the Company for the funding sources of the related parties as at December 31, 2017, are as follows, and no collateral and payment guarantees are provided by the related parties:
Payment guaranteed provided by the Company
(in thousands of US dollars, Chinese yuan) Guaranteed by Guaranteed amount Remark
Subsidiary SHI-MCI FZE ING USD 67,500 CNY - Borrowings Samsung Heavy Subsidiary SC 3,519 88,907 Industries (Ningbo) Co., Ltd. DGB Daegu bank1 24,000 240,000 Borrowings Woori Bank - 249,600 (shanghai)1
Subsidiary Samsung Heavy SC 49,000 - Industries (Rongcheng) Co., SC - 337,375 Ltd. KEB Hana bank - 80,000 Borrowings DGB Daegu bank1 - 132,000
Korea Development - 125,000 Bank
1Short-term financial instruments are pledges as collateral for subsidiary borrowings from DGB Daegu bank and Woori Bank (Note 5).
Other than the payment guarantees above, the Company provides performance guarantees of USD 351 million to the ship-owners and payment guarantee for subsidiary’s refund guarantee of USD 288 million to the financial institutions in relation to shipbuilding & offshore contracts and provides guarantees to the financial institutions up to USD 54 million in relation to currency forward contracts.
Associate
A major associate of the Company as at December 31, 2017, is Daejung Offshore Wind Power Co., Ltd.
Key Management Compensation
For the year ended December 31, 2017, key management compensation consists of \ 926 million (2016: \ 1,678 million) in short-term benefits and \ 515 million (2016: \ 684 million) in long-term, severance and other 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 Company.
70 Samsung Heavy Industries Co., Ltd. and Subsidiaries Notes to the Separate Financial Statements December 31, 2017 and 2016
35. Events After the Reporting Period
The Company determined to increase its capital for operating funds through the Board of Directors after the reporting period, on January 26, 2018. The estimated amount of capital increase is \ 1,408,800 million (240,000,000 shares of ordinary shares) and the date of payment of shares is April 20, 2018.
After the reporting period, on February 11, 2018, as the notice of resumption was not received due to customer’s situation, the shipbuilding contract of a drillship was terminated in accordance with the contract on April 8, 2014 (Note 6).
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Report on Independent Accountants' Review of Internal Accounting Control System
To the President of Samsung Heavy Industries Co., Ltd.
We have reviewed the accompanying management’s report on the operations of the Internal Accounting Control System (IACS) of Samsung Heavy Industries Co., Ltd. (the Company) as at December 31, 2017. The Company’s management is responsible for designing and operating IACS and for its assessment of the effectiveness of IACS. Our responsibility is to review the management’s report on the operations of the IACS and issue a report based on our review. The management’s report on the operations of the IACS of the Company states that “based on its assessment of the operations of the IACS as at December 31, 2017, the Company’s IACS has been effectively designed and is operating as at December 31, 2017, in all material respects, in accordance with the IACS standards.
Our review was conducted in accordance with the IACS review standards established by the Korean Institute of Certified Public Accountants. Those standards require that we plan and perform, in all material respects, the review of management’s report on the operations of the IACS to obtain a lower level of assurance than an audit. A review is to obtain an understanding of a company’s IACS and consists principally of inquiries of management and, when deemed necessary, a limited inspection of underlying documents, which is substantially less in scope than an audit.
A company’s IACS is a system to monitor and operate those policies and procedures designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the Republic of Korea. Because of its inherent limitations, IACS may not prevent or detect a material misstatement of the financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on our review, nothing has come to our attention that causes us to believe that management’s report on the operations of the IACS, referred to above, is not presented fairly, in all material respects, in accordance with the IACS standards established by IACSOC.
Our review is based on the Company’s IACS as at December 31, 2017, and we did not review management’s assessment of its IACS subsequent to December 31, 2017. This report has been prepared pursuant to the Acts on External Audit for Stock Companies in Korea and may not be appropriate for other purposes or for other users.
Samil PricewaterhouseCoopers March 14, 2018
72
Report on the Operations of the Internal Accounting Control System
To the Board of Directors and Audit Committee of Samsung Heavy Industries Co., Ltd.
I, as the Internal Accounting Control Officer (IACO) of Samsung Heavy Industries Co., Ltd. (the Company), assessed the status of the design and operations of the Company’s internal accounting control system (IACS) for the year ended December 31, 2017.
The Company’s management including IACO is responsible for designing and operating IACS. I, as the IACO, assessed whether the IACS has been effectively designed and is operating to prevent and detect any error or fraud which may cause any misstatement of the financial statements, for the purpose of establishing the reliability of financial reporting and the preparation of financial statements for external purposes. I, as the IACO, applied the IACS standard for the assessment of design and operations of the IACS.
Based on the assessment on the operations of the IACS, the Company’s IACS has been effectively designed and is operating as at December 31, 2017, in all material respects, in accordance with the IACS standards.
January 26, 2018
Hae Kyu Jeong, Internal Accounting Control System Officer
Joon Ou Nam, Chief Executive Officer and President
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