Samsung C&T Corporation and Subsidiaries Consolidated Financial Statements December 31, 2017 and 2016 Samsung C&T Corporation and Subsidiaries Index December 31, 2017 and 2016 Pages Independent Auditor’s Report………………………………………..……….............................. 1 - 5 Consolidated Financial Statements Consolidated Statements of Financial Position …….................………………………………… 6 - 8 Consolidated Statements of Comprehensive Income……………………………………………. 9 - 10 Consolidated Statements of Changes in Equity....................................................................... 11 - 12 Consolidated Statements of Cash Flows………………………………………………………….. 13 - 14 Notes to the Consolidated Financial Statements………………………………………………..... 15 – 143 Independent Auditor’s Report (English Translation of a Report Originally Issued in Korean) To the Board of Directors and Shareholders of Samsung C&T Corporation We have audited the accompanying consolidated financial statements of Samsung C&T Corporation and its subsidiaries (collectively referred to as the “Group”), which comprise the consolidated statements of financial position as at December 31, 2017 and 2016, and the consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies and other explanatory information. Management’s Responsibilities for the Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the Republic of Korea (Korean IFRS), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibilities Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with Korean Standards on Auditing. Those standards require that we comply with ethical requirements, and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at December 31, 2017 and 2016, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with Korean IFRS. Emphasis of Matters Without qualifying our opinion, we draw attention to the following area of focus: Auditor’s emphasis on area of focus on construction contracts1 Area of focus on construction contracts in accordance with the Practical Guidance of Auditing Standard 2016-1 are those matters that, in the auditor’s professional judgment and communication with those charged with governance, were of most significance in the audit of the consolidated financial statements of the current period. These matters were addressed in the context of the audit of the consolidated financial statements as a whole, and the auditor does not provide a separate opinion on these matters. We have addressed the result of audit procedures in relation to the area of focus, as attached below, when forming an opinion on the Group’s consolidated financial statements. - Uncertainty of the estimated total contract costs As described in Note 2 to the consolidated financial statements, the Group recognizes contract revenue and contract costs associated with the construction contract as revenue and expense respectively based on the percentage of completion of the contract activity at the end of the reporting period when the outcome of a construction contract can be estimated reliably. The percentage of completion of the contract activity is the proportion of costs incurred to date divided by the estimated total costs of the contract. Also, as described in Note 4 to the consolidated financial statements, total contract costs are estimated based on future expectation of material costs, labor costs, construction period and others. In addition, Note 5 to the consolidated financial statements states that changes in the estimated total contract costs by construction types for the year ended December 31, 2017, amount to \ 98,276 million, which is 104% of changes in the estimated total contract revenue. It also states that impact on profit or loss for the current period and in the succeeding periods amounts to \ (72,269) million and \ (52,841) million, respectively. For a construction contract, it is probable that an unexpected change in the estimated total contract costs may incur due to changes in market price of raw materials, construction delays caused by natural disasters, changes in foreign currency exchange rates, and risks associated with developing a new market and others. Considering the impact of an increase in uncertainty of estimating total contract costs and changes in the estimates on the Group’s profit or loss for the year, we identified the uncertainty of the estimated total contract costs as a significant risk. 1 This paragraph is being included in accordance with the “Practical Guidance of Auditing Standard 2016-1, 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 International Standards on Auditing 700 (Revised). 2 In respect of the uncertainty of the estimated total contract costs on the Group’s consolidated financial statements, we have performed the following audit procedures as at December 31, 2017. With regards to the projects where the estimated total contract costs has changed significantly, made inquiries and inspected related documents on reasons for the significant changes in the estimated total contract costs. With regards to the projects that have been completed during the current period, where there are significant differences between the estimated total contract costs and cumulative actual contract costs, made inquiries and inspected related documents on reasons for the difference. Understood and evaluated the Group’s internal control over approval of initial registration and amendment of estimated total contract costs. Evaluated the Group’s internal control over review process of project performance. - Measurement of percentage of completion As described in Note 2 to the consolidated financial statements, the Group measures the percentage of completion 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. For a construction contract, it is probable that costs that do not reflect the percentage of completion and costs that are not chargeable to the customers may be incurred due to additional costs from change of circumstances, delay in the customer’s progress payment, concentration of costs incurred in certain periods and other reasons. There is a risk that the percentage of completion measured by reference to the costs incurred and the actual construction progress may be significantly different; therefore, we identified the Group’s measurement of percentage of completion as a significant risk. We performed the following audit procedures with regards to estimated total contract costs and cumulative contract costs incurred, which affect the Group’s measurement of percentage of completion. Made inquiries to determine the existence of costs that are not reflected in the percentage of completion, and are excluded from both cumulative contract costs incurred and estimated total contract costs. Made inquiries on how these costs have been accounted for, if any. Inspected related documents whether the contract costs incurred are accurate, are recognized in proper period, and are attributed to an appropriate project. Understood and evaluated whether the process of summarizing contract costs incurred are accurate, and the process of altering costs among projects are appropriate. Recalculated the percentage of completion for each project. Compared the actual construction progress with the percentage of completion measured by reference to the costs incurred, and reviewed the differences.